The Cayman Islands Chamber of Commerce Pension Plan is the first pension organisation in the Cayman Islands to confirm compliance with the CFA Institute Code of Conduct for members of a pension scheme governing body. Robert Dannhauser from the CFA Institute says by adopting the code the Chamber plan is leading its profession.
Compliance with the code requires that pension providers commit to following a set of fundamental ethical principles, which are universally applicable for all types of pension plans. The code includes the requirement of board members to act with prudence and reasonable care, to act with skill, competence and diligence, and to maintain independence and objectivity by, among other actions, avoiding conflicts of interest, refraining from self-dealing and refusing any gift that could reasonably be expected to affect their loyalty. It also requires to deal fairly, objectively and impartially with all participants and beneficiaries and to communicate with participants, beneficiaries and supervisory authorities in a timely, accurate and transparent manner.
Bill Fleury, the Chamber Pension Plan’s COO and general manager explains that taking on the code is important to show how the Chamber Pension Plan is committed to the highest levels of oversight.
“How we govern our pension schemes here in the Cayman Islands has the potential to significantly affect the lives of all employees who are dependent on their pensions,” he says. “It is therefore a responsibility that we at the Chamber Pension Plan take extremely seriously, hence our decision to take on the CFA Institute’s Code of Conduct for members of a pension scheme governing body.”
Fleury says the code represents best practice in the industry internationally, and requires the pension plan to demonstrate its commitment to serving the best interests of participants and beneficiaries. “In addition, it provides an ethical framework for governing board members to follow while executing their responsibilities to the plan,” he says. “At its core are 10 fundamental ethical principles for pension fund trustees, providing guidance for those who oversee the management of such plans. Such principles include acting in good faith and in the best interests of scheme participants, acting with prudence and reasonable care and acting with skill, competence and diligence.”
Adopting such a rigorous and comprehensive code of conduct is a challenge the Chamber Pension Plan is prepared to meet, Fleury adds.
The code of conduct represents a new focus area for the CFA Institute, an association of investment professionals, consisting of portfolio managers, security analysts, investment advisers and other financial professionals. The CFA has always been concerned with the ethical conduct of its members and made it a mission of its organisation to promote ethics in the investment profession. As such it is an important part of the curriculum for the CFA charter exams and members have to affirm their commitment and willingness to abide by the code of ethics each year as they renew their dues.
“What has changed a little bit over the last couple of years is that largely at the behest of our members there has been a lot of interest in extending the same sort of ethical commitment, that the individuals already make, to the institutional level,” says Robert Dannhauser, the head of standards of practice and outreach of the CFA Institute. The CFA responded to this by developing a two code of ethics for pension trustee boards and asset managers.
The global financial crisis and the public’s lack of trust in the financial services industry and investment professionals also contributed to the motivation for developing the codes, which are very bottom line oriented, Dannhauser says.
“To the extent that there is not great trust in the market, the cost of capital tends to go up, particularly in a time of economic decline or a recession. We just don’t need that kind of headwind. Anything that we can do to reduce the drag by giving people confidence that the market is fair and provides equal opportunity for everyone that participates in it, just makes good business sense.”
The CFA Institute supports pension trustee boards and asset management firms in the implementation of the codes by providing guidance on how to apply their principles and values to the specific circumstances of each organisation.
“We have taken a pretty deliberate approach not to be prescriptive, because we recognise that there are so many different business models and unique circumstances. It is tough to say one unique way of upholding the principle is the right way for all firms. We think that the principles are robust and support a number of different implementation paths.”
Compliance with the code is not monitored or audited, but Dannhauser notes that in the past other standards endorsed by the CFA, such as the global investment performance standard, lead to the development of a cottage industry of firms that certify an asset manager’s compliance with the GIP standard.
“We are a little early in the process but we expect that a similar phenomenon will happen with asset manager compliance certainly; and it may be a little bit longer path for pension trustee code compliance.”
In addition the CFA has an entire body within its organisation that investigates allegations of wrongdoing and conducts disciplinary proceedings. Based on those investigations there is a variety of sanctions that can be implemented, ranging from a private censure where the member is held to account with CFA, to a public sanction where they are named and shamed through CFA Magazine, all the way to revoking the right to use the CFA charter or the CFA trademark, which has real commercial consequence, says Dannhauser.
In adopting the code of conduct the Chamber of Commerce Pension Plan is leading its profession, says Dannhauser. “It is a bit unusual for pension trustees to make that commitment. Historically pension trustees have been a little bit insular; they have tried to do things in their own particular way. So for a fund like the Chamber of Commerce to reach out and adopt industry best practices like this in an area that typically has not received a whole lot of attention speaks really to their commitment to doing right by their pension investors and doing right by the current standards of conduct that they are required.”
Dannhauser hopes other pension providers will follow the Chamber plan and subscribe to the code of conduct. “We are trying to use them as a shining example of trustee boards doing the right thing,” he says.