Pension funds draft policies for related-party transactions in their governance guidelines

Brazilian pension funds are adding Related-Party Transactions (RPTs) in their governance policies, as the country’s most prominent institutions took the lead in elaborating specific guidelines for this kind of transaction.

As part of those that have joined the trend, there is the pension fund Fundação dos Economiários Federais (Funcef), which manages the resources of state-owned bank Caixa Econômica Federal’s employees, and Previ, the pension fund of state-owned bank Banco do Brasil. They are, respectively, the biggest and third-biggest pension funds in Brazil.

Funcef’s Managing Director, Antonio Augusto de Miranda, explains that the funds’ policy for  RPTs was inspired by the Brazilian Institute of Corporate Governance (IBGC) guidelines to mitigate corporate governance risks. “We tried to avoid problems seen in the past regarding conflicts of interest with the plan sponsor. It was unclear whether such transactions benefitted the pension funds and its members,” he notes.

The fact that Funcef’s sponsor is a financial institution adds further concern when they hire the group’s financial services. That’s why the policy establishes that Caixa’s fees must be equivalent to the market prices, ensuring that the services follow market conditions.

Funcef has also decided that the management is responsible for RPT-related decisions, which must be advertised, especially for more relevant transactions and those involving its sponsor.

The document replicates a few policies adopted by Previ. The fund says RPTs should happen diligently and impartially. The fund must also formalize contracts in written documents including the main details of the transaction. Transactions that do not follow market conditions are not allowed. Moreover, the fund must publish RPTs in balance sheet notes and in the annual report.

Although the sector reckons the relevance of RPTs and somehow points out best practices, policies and guidelines still rely on individual efforts. “Even though there is no specific rule, we decided to foster this initiative to leave our management’s mark,” says Mr. Miranda.

He says that creating a policy is part of a broader effort to improve the fund’s governance, such as joining the Brazilian Stewardship Code (CBS). The code is a joint initiative by Amec and CFA Society Brazil to foster institutional investors’ engagement with invested companies.