If you are administering a pension fund, there are lots of things that can trip you up. The nature of administering pension plans is such that problems tend to remain hidden or unknown for years, often decades, before finally surfacing. These lurking administration dangers are usually difficult to remedy after the passage of so much time, and may result in litigation against the plan sponsor (the organization), the administrator, and anyone else involved in the management of the plan.
As the pension industry matures, there will inevitably be an increase in these types of administration problems and possible litigation. Troubles can arise in a number of ways: misunderstanding an earnings definition, improperly indexing pensions for plans with partial indexing formulas, an improper conversion of pensions to lump sums or optional forms, etc. It is increasingly important for plan administrators to take proactive steps to mitigate the liability that might arise through any sort of real or perceived improper action, oversight or negligence.
Properly administering a pension plan entails establishing good processes to calculate, check, and review the work done. It also entails establishing a good governance structure — a set of processes to support efficient and effective decision-making and plan management.
Contrary to what often seems to be the common approach, establishing a good governance structure isn’t just a matter of documenting what is currently in place. Bad governance – even when documented – is still bad governance. There are good procedures and not so good procedures, strong controls and weak controls. The good procedures are the ones that best achieve the objectives of the pension plan. One common approach is to have an outside party review a plan’s administration practices and make recommendations or catch something before it develops into a much larger issue.
Of course, a general outline of what should be done to administer a pension plan tends to be too high-level. It’s sometimes more instructive to examine specific situations where something might go wrong.
Essentially, plan administrators can get in trouble in two different ways. For want of better terms, we will call them pratfalls and pitfalls. Pratfalls are the most obvious errors. These are the sins of commission, where the plan administrator, or its delegates, acts in ways contrary to their basic duty. Pitfalls are more common, and more insidious. These are the sins of omission, where to fulfill its duty, the plan administrator needs to act, or have its delegates act, and instead does nothing, or not enough.
While the task may seem daunting for some plan administrators, especially when managing the pension plan isn’t the main focus of the organization, plan administrators may take comfort in the fact that pension plan management, like politics, is a matter of practicing the art of the possible. Perfection is not expected. What is expected is that anyone administering a pension plan is acting properly and exercising a reasonable level of care, and has the paper trail to demonstrate it.