Whether your company has a formal retirement governance framework in place or not, retirement programs will occupy a significant space in governance as companies look to mitigate financial risks. Board directors worry about volatile unfunded retirement liabilities and their impact on credit ratings, cost of capital, capacity to borrow and grow, and share price value. Establishing governance procedures is not just mere compliance—it is managing risk, managing costs and avoiding surprises. And good governance addresses concerns not just of internal management (HR, finance, accounting, tax and legal) and auditors, but more recently, the credit analyst, investor and equity analyst.

Aon On the Case

Our case study will show how one company manages its retirement governance framework and illustrate elements and principles that could be useful in establishing a framework or validating an existing one. In the process, we will cover the "five pillars of governance":

• Business planning and strategy
• Investment and financial
• Operational
• Knowledge and understanding
• Measurement and benchmarking

The subject company sought to establish two components of its retirement governance framework: a structure and a process.

Sound Structure: Establishment of a cross-functional retirement governance committee

The first step was to establish a cross-functional retirement governance committee, reporting to the board of directors, with representatives from HR, finance, accounting, legal and tax. A charter was developed that defined the committee's purpose, including its global scope, focus on total rewards, and goals to reduce financial statement volatility and ensure benefit delivery/security. This charter was rather comprehensive, given that the company, as with many global companies, has migrated to a defined contribution retirement strategy, while retaining some legacy/closed defined benefits plans.

The governance structure contained three key elements:

1. Policies and guidelines. The company established key principles and clearly written guidelines on benefit design, competitive positioning, cost, funding principles, investment principles (including investment structure and investment manager selection criteria), employee contributions, liability reduction/transfer, compliance, tax efficiency, consistency, administration, member education, communication, and mergers and acquisitions.

2. Procedures. A number of procedures were set in place to deal with the approval process for new plans or plan modifications, legal and tax compliance, investment review, year-end financial reporting, review of contribution levels and employee participation, and vendor review.

3. Roles/responsibilities/budgets. Responsibilities were assigned to local, regional and headquarters management as deemed appropriate for local compliance, financial reporting, efficiency, administration, vendor selection and cost management.

Note that the company has a "portfolio" of defined benefit (DB) and defined contribution (DC) plans. In fact, assets in the DC plans have exceeded those in the DB plans. Thus, while the company pays close attention to discount rates, mortality improvements, and asset returns of their DB plans and the impact of these on the financial statements, it is focusing equal attention on investment returns, manager selection, capital preservation, employee participation, member education and benefit adequacy of their DC plans.

Of course, there are concerns common to both plans (communication, compliance, maximizing investment returns). In fact, the company is considering pooling some of its largest pension assets to streamline the number of fund managers and reduce investment management and other administrative costs.

In any case, the committee now has to manage various aspects of its retirement portfolio that may present risk to the corporation.

Sound process to Retirement Governance: Control – Monitor – Decide

To successfully implement the guidelines and procedures, the company vigorously follows a process for controlling, monitoring and making decisions.