The world in which pension organizations operate is undoubtedly becoming more and more complex. Not only have organizations had to adapt to low interest rates and changes in capital markets since the financial crisis, but also the need to navigate within the framework of climate change and sustainability. This is even before considering the impact of the COVID-19 pandemic.
Pension organizations must constantly adapt to these changing conditions in order to be successful over the long term. Stakeholders are right to be concerned about an organization’s ability to innovate and be successful over the long term. These concerns can be addressed through transparent communication.
Examining the disclosures of 75 global pension organizations for the Global Pension Transparency Benchmark (GPTB) found that only 36 percent of organizations made public disclosures about their organizational strategy that went beyond disclosures of economic conditions and performance. market and the impact on the performance of their investments. It is clear that it is possible to improve the communication of key business activities to stakeholders. This article explores some of the ways that funds can achieve this.
About the Global Pension Transparency Benchmark
The Global Pension Transparency Benchmark (GPTB), a collaboration between Top1000funds.com and CEM Benchmarking, was launched in 2021. The GPTB is a world first for pension fund disclosure, emphasizing transparency for the purpose of ” improve pension outcomes for members. Public disclosures of key value-generating elements for the top five pension organizations in 15 countries were examined during the inaugural annual assessment.
The GPTB framework examines four high-impact value creation factors: governance and organization, performance, costs and responsible investment, which are rated by evaluating nearly 200 specific components.
Reviews cover fund websites, annual reports, financial statements and various other published documents. Disclosures are scored objectively, primarily using yes / no responses related to what is disclosed / undisclosed.
Disclosures related to performance results are noted, but the relative results themselves are not noted. Obviously, the results are important. However, it is not useful to compare them between funds globally due to differences in plan types, organizational mandates and regulatory frameworks.
In developing the GPTB framework, we recognized that the quality of disclosure cannot be fully understood by simple objective questions. The quality of communication – clarity, consistency, conciseness, simple language, use of infographics – is difficult to measure objectively, but it is essential to ensure that key information is read and understood by stakeholders. This is why we have decided to highlight the quality of communication through our selection of examples of good practice.
The quality of communication varied considerably between funds. Some reviews were downright painful to do due to poor communication quality, even when disclosures and transparency scores were reasonable. In contrast, the quality of communication of some of the documents we reviewed was exceptional. We found that the small group of funds that prepared integrated annual reports were among the best.
Disclosure of organizational strategy: going beyond investment performance
Organizations are generally quite open about their fund’s performance and how it has been affected by external economic factors. The review of GPTB funds revealed that:
- 95 percent of the organizations surveyed provided comments on economic and market conditions; and
- nearly two-thirds of organizations provided forward-looking statements about how they saw economic and market conditions affecting their funds in the future.
While undoubtedly important, how a pension organization navigates economic and market conditions is only one piece of the puzzle.
Pension funds, especially large globally focused pension funds, are best viewed as corporations that need to effectively manage more than their stock of financial capital to be successful in the long run. The integrated reporting framework, or
Financial capital – The pool of funds the organization has available for retirement benefits and for generating returns to meet future obligations. Pension organizations currently concentrate most or all of the information on this capital.
Manufactured capital –In the context of provident organizations, this capital represents the buildings and especially the infrastructure and IT systems used to create value. Organizations need to ensure that their IT systems are fit for risk management and that these systems innovate as new risks emerge or gain importance. This capital also includes the operation of satellite offices to increase the value creation of foreign assets.
Intellectual capital – Organizations must not only ensure adequate physical infrastructure, but they must also ensure that proprietary business, risk and reporting models remain relevant and reflect both current realities and anticipated changes.
Human capital – Pension organizations must ensure that they have the human capital required to implement their investment strategy. This is especially relevant when organizations choose to internalize the management of investments, risks and other functions.
Social and relational capital – This category of capital would include not only disclosure and communications to stakeholders, but also how the organization navigates political realities both in its home jurisdiction and globally. Because of their size and importance in delivering pensions at the national level, pension organizations will often need to work with governments and NGOs to ensure that they are able to create value for both their families. direct stakeholders and society as a whole.
Natural capital – Similar to social and relational capital, there are two lenses for visualizing this capital. First from the point of view of the organization’s natural footprint. Although often viewed as relatively minor, communicating in this regard can help foster better social and relationship capital. More importantly is how the funds manage natural capital through their management and active ownership efforts, ensuring that financial capital continues to generate long-term value.
How large organizations communicate their business strategy
The example below from the PSP Investment Board of Canada shows that effective disclosure of corporate strategy does not need to be long and complex. In just one page, they effectively distill the major elements of their organizational strategy, covering topics such as:
- Managing their human capital through discussions on staff development and retention; and
- Growing their stock of intellectual and manufactured capital by increasing their global footprint and investing in new systems to increase operational efficiency.
Michael Reid is Vice President, Relationship Management at CEM Benchmarking.