Pension funds are not legally required to establish a compliance function. However, they must comply with extensive laws and regulations, with integrity being a prerequisite. Pension fund boards are responsible for compliance with laws and regulations and for ensuring an ethical operation. But how can this be assured? There is understandable pressure from participants to keep administrative costs low. Many tasks are outsourced, but the responsibility remains with the pension fund itself. How much time does it take to establish a second-line compliance function? And if you establish the function internally, how do you ensure sufficient independence?
Pension fund boards often grapple with these questions. One solution to this issue is the appointment of an external compliance officer. In this article, we outline the pros and cons of an external compliance officer for pension funds based on our clients’ experiences. The key considerations are:
Pension funds where a board member or staff member of the executive office combines roles often find it challenging to maintain adequate independence in practice. The board member or staff member also fulfills another role within the pension fund. For an executive office staff member or board member, this might mean having to advise against a board member’s secondary position or declining an invitation. This easily leads to potential conflicts of interest.
We observe that the time spent on compliance activities varies across different funds and is largely related to the size of the pension fund and the number of associated persons. Since a significant part of a pension fund’s operations is outsourced, the compliance function is not a full-time job. However, it is crucial that the compliance function is available when needed, for example, during incidents. Some activities may require more capacity during specific periods (such as a compliance review of the Code of Conduct or the SIRA).
The advantage of employing an external compliance officer is that availability is scalable and can be tailored to specific tasks.
The laws and regulations for pension funds are extensive. There are many rules concerning ethical business conduct, but there are also rules regarding sustainability, for example. This breadth makes it difficult to combine all this specific and in-depth knowledge into one functionary. Having an external compliance officer affiliated with an organization with various specializations offers benefits. For specific issues, the compliance officer can seek advice from other specialists.
For many pension funds, monitoring compliance with the Code of Conduct is a major focus for the compliance officer. However, the legal requirements for pension funds go much further than just integrity. Considering the obligations under the Wtp and those arising from the transition, it can be stated that the focus area is much broader than just the Code of Conduct.
In practice, we see that pension funds prefer to delineate the role of the compliance officer. This is understandable. Limiting the mandate to the Code of Conduct and the SIRA brings risks. In agreements we make with pension funds, we pay a lot of attention to these concerns. This makes us predictable and allows us to adequately fulfill the responsibilities of pension fund boards.
When filling the compliance function internally, it is often challenging to allocate the necessary time appropriately. Since the time commitment of a compliance officer does not always have a nice even distribution, this can quickly cause problems. Outsourcing the compliance function has the advantage of making flexible arrangements regarding the time commitment per month. And if more time is needed, this can generally be adjusted flexibly.
This ensures continuity at crucial moments. By outsourcing the function to a partner with sufficient scale, the risk is also reduced that the compliance officer is unexpectedly unavailable for a long period. Besides the broad pool of specialists, there is always someone to step in if a compliance officer is unavailable or if extra capacity is needed.
Outsourcing can, however, lead to a certain dependence. This risk can be minimized by making good agreements about data transfer so that, if necessary, you can easily switch to internal fulfillment or another external party.
Keeping operational costs manageable is an important responsibility for pension fund boards. A fair comparison between the time commitment and costs of an internal solution and an external compliance officer is a good starting point.
The dilemma with an external compliance officer is controlling costs. Good agreements by establishing an annual plan and delineating the role can contribute to this. Additionally, it is wise to budget for both requested and unsolicited advice and incidents. An annual plan that does not include room for this type of work results in the compliance officer not being able to fully perform their role. With a clear compliance charter, a concrete annual plan, and room for proactive and unforeseen tasks, the costs for the compliance function can be well managed and monitored. And if there is no work for the external compliance function, no costs are incurred.
A compliance function is not legally required for pension funds. Nor are there any legal requirements for the compliance function. However, pension funds must meet numerous requirements and must ensure ethical operations. Establishing a compliance function could significantly contribute to this.
DNB has recently published a good practice on the compliance function. This publication describes several practices that can adequately fulfill this second-line role. It mentions several key elements to ensure compliance with laws and regulations and to mitigate integrity risks.
For more information on the DNB and AFM guidance on the compliance function in pension funds, you can read our article:
Would you like to learn more about our vision on compliance and how the external compliance role is implemented? Our compliance specialists would be happy to speak with you. Feel free to contact us.
