In an earlier blog post, we discussed some of the risks to sponsors and administrators of registered pension plans. In this post, we discuss governance audits, a risk management strategy that plan sponsors and administrators can adopt.

What is a governance audit?

A governance audit is a tool used to determine: (i) whether the documents that create and support the pension plan (e.g., plan text, funding agreement, statement of investment policies and procedures) comply with applicable law; (ii) whether the plan is being administered in accordance with its terms, applicable law and best practices; and (iii) whether the board and governance structure are performing in a way that will allow the plan sponsor and administrator to meet key pension objectives and goals.

What does a governance audit involve?

A governance audit involves a review of a pension plan by an independent third party (e.g., counsel or consultant) and can include a review of any or all of the following:

  • governing documents, operating procedures and practices;
  • administrative structure and oversight mechanisms;
  • investment management structure;
  • service provider services and documentation;
  • record keeping procedures;
  • disclosure and communication materials;
  • regulatory filings;
  • investment policies and other plan policies;
  • benefits processing; and
  • special situations, such as threatened or filed law suits.

When should a governance audit be done?

A key element of good pension plan governance is the regular review of that governance. Plan administrators should engage in regular self-assessments of plan governance. Such self-assessments may, however, lack impartiality and independence.

Periodic governance audits by an independent third party are, therefore, key to good governance. In a governance audit conducted by an independent third party, the third party can review plan documents and structures with a fresh set of eyes. Ideally, that third party should not currently be involved in the administration of the plan.

Beyond the periodic audit, it is also helpful to engage a third party to conduct a governance audit in special circumstances, such as when a plan is being converted or merged, the plan sponsor becomes insolvent or a plan is acquired as a result of a corporate acquisition.

Why do a governance audit?

A governance audit is part of overall good governance. Wilful blindness is not an excuse for poor governance; if a plan administrator wants to ensure good governance, it should regularly review the administration and governance of the plan.

There are three main purposes of a governance audit: (i) to ensure that the plan is in compliance with applicable laws; (ii) to minimize the risks of legal claims against the plan sponsor and administrator; and (iii) to improve the overall administration of the plan.

By conducting regular governance audits of a pension plan, problems with plan administration can be identified and corrected at an early stage. Common problems in plan administration include plan document issues, such as member communication materials that are out-of-date or inconsistent with the plan text, and funding issues, such as missed or late contributions. Identification of such issues at an early stage can reduce the risk of plan sponsor and administrator liability and improve administration of the plan.