That legislation and regulation have a significant impact is something no one in the pension sector needs to be told. Although pension funds outsource a large part of their activities, they remain ultimately responsible for complying with many legal requirements. A great deal of attention is given to integrity risks. But how can funds continuously meet the requirements of DORA, and does decision-making guidance already align with the latest regulations? These are challenges that many pension fund directors face.
An external compliance officer who understands the pension sector and has broad knowledge of relevant requirements can assist pension fund boards. After all, the pension transition already comes with enough other challenges.
Pension funds are not required to establish a compliance function. But how can they manage this effectively while keeping operational costs low? How much time does it take to set up a second-line compliance function? And if the function is managed internally, how can sufficient independence be ensured?
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:
For pension funds where a board member or an employee of the administrative office combines the compliance role, independence can often be compromised in practice. This is because the individual also holds another role within the pension fund. For an employee of the administrative office or a board member, this could mean having to give negative advice on a colleague’s additional role or declining certain invitations. This creates a potential conflict of interest.
In practice, the time spent on compliance varies between funds and is largely related to the size of the pension fund and the number of associated individuals. Since a significant portion of a pension fund’s activities are outsourced, the compliance function is generally not a full-time position. However, it is crucial that the compliance function is available when needed, such as in the case of incidents. Some tasks may require additional capacity during specific periods (e.g., compliance reviews of the Code of Conduct or the SIRA).
The advantage of appointing an external compliance officer is that availability can be scaled and adjusted according to specific tasks.
The legislation and regulations for pension funds are extensive. There are many rules regarding ethical business conduct, but also requirements in areas such as sustainability. This broad scope makes it challenging to consolidate all necessary knowledge within a single officer. Having an external compliance officer connected to an organisation with multiple specialisations provides advantages. For specific issues, the compliance officer can consult other experts.
At many pension funds, monitoring compliance with the Code of Conduct is a key focus for the compliance officer. However, the legal requirements for pension funds extend far beyond integrity alone. If we consider the obligations under the Future Pensions Act (Wtp) and the ongoing transition, it becomes clear that compliance oversight covers much more than just the Code of Conduct.
In practice, pension funds often seek to define the compliance officer's role clearly. This is understandable. However, limiting the mandate to the Code of Conduct and the SIRA carries risks. In our agreements with pension funds, we pay close attention to these concerns. This ensures predictability and allows us to support pension fund directors in fulfilling their responsibilities effectively.
Internally filling the compliance function can often be challenging in practice. The distribution of time for a compliance officer is not always even, which can quickly lead to issues. Outsourcing the compliance function has the advantage of allowing flexible agreements on the allocation of hours per month. If additional time is required, this can usually be accommodated.
This approach helps ensure continuity during critical periods. By outsourcing to a sufficiently large partner, the risk of the compliance officer becoming unavailable for an extended period is minimised. Moreover, with access to a broader pool of specialists, support is always available in the event of unexpected absences or increased capacity needs.
However, outsourcing does introduce a level of dependency. This risk can be mitigated by establishing clear agreements regarding data transfer, ensuring a smooth transition to an internal role or another external provider when needed.
Keeping operational costs under control is a key responsibility for pension fund directors. A fair comparison between the time investment and costs of an internal solution versus an external compliance officer is a good starting point.
The main dilemma with an external compliance officer is cost control. This can be managed effectively through clear agreements, such as creating an annual plan and defining the scope of the role. Additionally, it is advisable to budget for both requested and unsolicited advice, as well as for incident management. An annual plan without room for these types of activities would prevent the compliance officer from fully executing their role.
With a well-defined compliance charter, a concrete annual plan, and provisions for proactive and unforeseen tasks, compliance costs can be effectively managed and monitored. Furthermore, if there is no work for the external compliance function, no costs are incurred.
The Dutch Central Bank (DNB) has highlighted the importance and added value of a compliance officer in the pension sector through its publication of a good practice guide on compliance functions. This publication outlines several best practices for effectively implementing this second-line role. It also identifies key elements to ensure compliance with regulations and mitigate integrity risks.
For more information on DNB and AFM guidelines and the role of the compliance function in pension funds, you can read our article:
Would you like to learn more about our vision on compliance and how we structure the external compliance role? Our compliance specialists are happy to discuss this with you. Feel free to contact us for a no-obligation consultation.
