Lesson 1

Question 1

1.1.1

Explain the broad impact of legislation on retirement plans

Answer 1

Governments regulates retirement plans from two perspectives:

1) By limiting the tax deferral available through the federal ITA
2) For DB and DC plans by controlling the terms and operations of the plan through pension standards legislation in order to provide security of pension benefits

Question 2

1.1.2.a Describe the purpose of retirement plan governance

Answer 2

Retirement plan governance refers to the structure and processes for overseeing managing and administering a plan to ensure that the fiduciary and other obligations of the plan are met

Question 3

1.1.2.b What key areas does effective governance establish roles and responsibilities for? (3)

Answer 3

1. Administration and communication. This includes establishing plans and addressing regulatory compliance establishing the range of processes, systems and technologies required to administer the plan contributions; and determining benefits.
2. Financial management. Depending on the plan type, this includes determining whether to secure the benefit obligations, how and what amounts to accumulate funds, and how to measure and recognize tension costs in the plan sponsor’s financial statements
3. Investment management of funds assets

Question 4

1.1.3.a Outline the purpose of a defined benefit pension plan funding policy

Answer 4

Funding requirements promote benefit security

The goal of funding a defined benefit pension plan is to ensure sufficient assets will be accumulated to deliver the promised benefits on an ongoing basis and to protect pension benefits in situations that involve employer insolvency or bankruptcy.

The purpose of the funding policy is to establish a framework for funding the plan. The policy should support the decision making process and be consistent with the purpose and goals of the pension plan and the plan sponsor.

Question 5

1.1.3.b What are factors that can be relevant in the development of a funding policy for a defined benefit pension plan? (9)

Answer 5

1. Benefit security
2. Stability and/or affordability of contributions
3. The sponsors financial position and competing organizational demands for cash
4. The demographic characteristics of those persons with entitlements under the plan
5. The minimum funding requirements under pension standards legislation
6. The financial position of the pension plan
7. The terms of the plan documents and any related documents such as collective agreements
8. Maximum contribution limits applicable to the plan under the income tax act
9. Legislative requirements and plan provisions relating to the utilization of funding excess

Question 6

1.1.4 Outline advantages of developing a funding policy identified in CAPSA guideline number seven (4)

Answer 6

1. The exercise of developing a funding policy improves the identification, understanding and management of the risk factors that affect the variability of funding requirements and the security of benefits
2. The adoption of a funding policy could increase the plan sponsors discipline around funding decisions. This could increase predictability
3. Having a written summary of the funding policy that is accessible to pension plan beneficiaries should help improve transparency and understanding of pension funding issues
4. Having a funding policy may also provide guidance to the pension plans actuary when selecting actuarial methods and assumptions in accordance with actuarial standards of practice

Question 7

1.1.5 Outline the key elements of a DB pension plan funding policy identified in CAPSA guideline number seven (11)

Answer 7

1. An overview of the plan
2. Funding objectives and how they integrate with investment policy
3. Key risks and their effects on the security of plan benefits
4. Factors affecting funding volatility and management of risk
5. Funding target ranges and relation to specific objectives
6. Cost sharing mechanisms between EE and ER
7. Utilization of funding access
8. Guidance to the actuary for assumptions and margins based on risk management
9. Standards for valuation frequency
10. Documentation of roles responsibilities and oversight for the funding policy
11. A plan for communication of the funding policy to plan beneficiaries

Question 8

1.1.6 Describe the special considerations that apply to establishing a funding policy for MEPPs identified in CAPSA Guideline No 7 (4)

Answer 8

1. Include the approach followed to set benefit levels and address issues relating to the use of fixed contributions
2. Document to the respective decision-making rules of trustees, employers and collective bargaining agents [as applicable]
3. Discuss how to apply and evenhanded treatment of beneficiaries both current and future generations
4. Discussed the policy on benefit reductions and restructuring

Question 9

1.1.7 Describe the responsibilities of a fund holder as identified in CAPS a guideline No. 5 (7)

Answer 9

1. Holding funds in a manner that meets the requirements of pension standards legislation and ITA

2 acting under the terms of a fund holder agreement that meets the requirements of legislation

3. Reporting omissions or delays in contribution remittances were required
4. Meeting the responsibilities for reporting and recordkeeping set out in the fund holder agreement
5. Acting on direction from the admin, or delicate, in accordance with legislation and the SIP&P
6. Ensuring the pension funds assets are kept separate and apart from the employers and fund holders
7. Ensuring the pension funds assets are held exclusively for the pension plan and with the front holder has clear accurate and up-to-date records

Question 10

1.1.8a Identify the requirements under pension legislation and the ITA regarding who may be the fund holder of a pension plan [4]

Answer 10

1. An insurance company licensed to do business in Canada under an insurance contract
2. A trust, that is governed by a written trust agreement, with a trust corporation in Canada
3. A group of individual trustees
4. Any other party permitted by pension legislation

Question 11

1.1.8.b What are the requirements for a group of individual trustees to act as a fund holder of a pension plan [3]

Answer 11

1. There are three or more individuals
2. At least three of these trustees reside in Canada
3. At least one trustee is not a connect in person, a partner of the employer or a proprietor of the employers business

Question 12

1.1.9.a In the context of pension plan assets to find the term custodian

Answer 12

A financial institution that hold some or all of the pension funds assets pursuant to an agreement with the plans fund holder is a custodian. Although the custodian is not a fund holder, the fund holder may also be a custodian

Question 13

1.1.9.b Describe the responsibilities of custodians and outline the relationships that can exist between custodians and fund holders

Answer 13

Because sodium his responsibilities are generally solely related to the safekeeping and servicing of the pension funds assets.

The custodian is responsible for holding these assets in accordance with the terms of a custodial agreement and must be capable of segregating the pension plans assets as well as meeting the reporting and recordkeeping requirements of the custodial agreement.

A custodian does not have legal title to the assets and does not have tax reporting obligations. The custodian is retains to a contract and all his duties only to the party that retained it’s services

Question 14

1.1.10 Outlined some of the reasons a pension plan may utilize more than one fund holder [3]

Answer 14

1. The plan may provide benefits under both DB and DC provisions and engage a different fund holder for each provision
2. There may have been a merger of pension plans, each with its own fund holder

3 the plan maybe large and complex, needing more than a single fund holder in order to meet it’s investment needs

Question 15

1.1.11 Outline the five key steps in the defined benefit pension plan investment cycle

Answer 15

1. Set investment objectives and constraints
2. Determine long-term investment strategy
3. Determine investment manager structure and rules
4. Select investment managers
5. Monitor investment results against objectives

Question 16

1.1.12 Outlined the five key steps in the capital accumulation plan investment cycle

Answer 16

1. Set investment objectives and constraints
2. Determine service provider structure and select providers
3. Select specific investment alternatives
4. Provide investment information to members
5. Monitor investment results against objectives

Question 17

1.1.13 Describe the key differences between the DB pension plan investment cycle and the CAP investment cycle (3)

Answer 17

1. In a DB pension plan
   The plan sponsor is aiming for full funding of the plan. While in a CAP the plan sponsor is aiming to meet its responsibilities by providing members with appropriate options
2. In a DB pension plan the governance committee makes decisions regarding the ass that mix and specific investment options. While in a CAP the governance committee makes decisions regarding investment options for the plan as a whole and each member besides their own personal mix
3. In a DB pension plan, education requirements relate to the benefit provisions under the plan. In a CAP education requirements relate to the investment decision process.

Question 18

1.1.14 Outline information regarding rights and responsibilities of CA P plan members that the guidelines for capital accumulation plans recommend be provided by plan sponsors (5)

Answer 18

1. Members right to access information about the nature in features of the plan
2. Right to request paper copies of their members statements if the statement is normally provided in another format

3 members responsibilities for making investments decisions and that Those decisions will affect the amount of money accumulated by the plan

4. Responsibility for informing them selves about the plan using the documents information and tools available to them
5. Recommendation the members on to obtain investment advice from an appropriately qualified individual in addition to using information provided by the sponsor

Question 19

1.2.3 Outline the key policy areas that influence the overall financial performance of a DB pension plan, the assets available for benefits and accrued pension benefits, and whether the plan is in a funding access or funding deficiency position at any given fiscal year

3

Answer 19

The overall financial performance is determined by the following key policy areas

1. Benefits policy. Level and type of benefit entitlements of active members and retirees
2. Funding policy. Nature and timing of contributions
3. Investment policy. Mix of investment vehicles and risk exposure of the plan.

Question 20

1.2.2 Explain why it is critical to coordinate the benefits, funding and investment policies of a defined benefit pension plan.

Also list three things sponsor objectives typically include.

Answer 20

The benefit, funding, and investment policies must be coordinated so the financial performance of the plan can be managed toward the specific objective set by management and, once set, monitored to ensure policies are consistent with objectives.

While objectives vary by plan sponsor, they typically include:

• target funding levels,
• level and volatility of pension expenses, and
• level and volatility of cash contributions.

Changing economic conditions and business needs may trigger the need to refine objectives or modify policies

Question 21

1.2.3

Explain the importance of investment returns to a defined benefit pension pension plan

Answer 21

Investment returns contribute to the asset level.

An excess may allow plan sponsor to increase benefits or reduce contributions

A deficit may necessitate greater contributions or implants that allow for it result in decreased benefits.

In most single employer plans responsibility for ensuring the plan is fully funded rests with the plan sponsor

Since plan membership and benefit levels are normally fixed the actuaries are required to follow their professional and regulatory standards in the determination of plan liabilities the investment management becomes key

Question 22

1.3.1 Describe the various ways that pension funds participate a security holders within Canadian financial markets (4)

Answer 22

1. Shareholders. Pension funds hold corporate shares directly and through financial intermediary such as mutual funds
2. Bondholders. Pension funds typically hold significant amounts of debt securities.
3. Unit holders. Pension funds often invest in investment corporations and mutual funds and as such our unit holders.
4. Limited partners. Some limited partnerships involve pension funds as one of a number of limited partners

Question 23

1.3.2 Outline how pension funds can exercise shareholder rights if the pension fund owns shares acquired by investing in a pooled fund such as a mutual fund

Answer 23

When usual funds invest in shares of a corporation, the fund itself is the legal owner of the shares. The pension fund is the beneficial owner, and dividends and capital gains from shares accrue to it as the beneficial owner.

It is possible for the beneficial owner to exercise shareholder rights such as voting at meetings of shareholders if an arrangement is established between the intermediary, the mutual fund, and the beneficial owners

Question 24

1.4.1 Briefly describe the reasons behind the establishment of capital markets and the two primary types of securities and financial instruments used to raise capital

Answer 24

Companies need capital in order to expand and purchase physical assets and may not have sufficient funds to make all the investments required for their growth. As a result they raise capital.

To obtain capital companies that have more funds that are required for their immediate needs can invest insecurities and build capital for later consumption, those with a deficit is issue securities that are bought by those with excess funds.

Two primary types of securities are stocks and bonds

Question 25

1.4.2 Compare real assets and financial assets and provide examples of each

Answer 25

Real assets include land buildings, machines and knowledge necessary to produce goods together with the workers and their skills in operating these resources.

Financial assets are tangible liquid assets that derive value because of contractual ownership rights. Stocks and bonds are financial assets. Financial assets do not directly contribute to the productive the capacity of the economy but facilitate the transfer of funds.

Real assets only appear on the ass outside of the companies balance sheet. Financial assets appear for the security owner as an asset and as a liability for the organization that issue the security

Question 26

1.4.3 Explain how financial assets and the markets they trade-in help to officially allocate capital within the economy

Answer 26

1. Providing information about promising economic sectors and companies.
2. Enabling individuals to time their consumption by separating decisions about current consumption from constraints that would otherwise be imposed by current earning levels.
3. Providing a means for separation of ownership from management.

Question 27

1.4.4 Identify the three essential types of participants in Canadian financial markets, and describe their roles

Answer 27

1. Households are typically net suppliers of capital through savings activity
2. Firms that are net demanders of capital require capital to pay for investments implant and equipment, would you generate returns for investors who purchase securities
3. Governments, which typically can either supply or demand capital, depending on the relationship between tax revenue and government expenditures.

Question 28

1.4.5 Outline the basic decision involved in establishing and updating an investment portfolio (3)

Answer 28

1. Asset allocation
2. Security selection
3. Updating or rebalancing

Question 29

1.4.6 Contrast a top down strategy of portfolio construction with a bottom up strategy

Answer 29

A top down strategy involves investors making asset allocation decisions first followed by security selection within each asset class

A bottom up investor constructs their portfolio from securities that seem attractive like priced, before considering broad asset allocation divisions

Question 30

1.4.7.a Describe the various financial intermediaries active in the Canadian financial market (4)

Answer 30

1. Banks, credit unions and insurance companies
2. Investment companies, such as mutual fund operators, that pool and manage the money of many investors
3. Investment bankers, also known as investment dealers, that our institutions hired by corporations to sell their securities to investors
4. Hedge funds and private equity groups

Question 31

1.4.7.b Describe that financial intermediaries in Canada have evolved to do (30

Answer 31

1. To bring lenders and borrowers together
2. To provide economies of scale for small investors who otherwise would be unable to spread their investment funds across a wide variety of securities
3. To sell the securities issue by corporations, governments and other entities to investors

Question 32

1.5.1.a Describe the impact of globalization on the investment environment

Answer 32

Globalization has resulted in the removal of certain regulatory constraints and improvements in communication technology.

This has enhanced the ability of Canadian investors to participate in non-Canadian investment markets

Question 33

1.5.1.b Describe the impact of advances in financial engineering on the investment environment

Answer 33

Financial in the engineering using mathematical models and computer based training technologies has resulted in new financial products.

An example is the principal protected equity linked note. These are securities issued by financial intermediaries that guarantee a minimum fixed return plus an additional amount that depends on the performance of some specified stock index

Question 34

1.5.1.c Describe the impact of securitization on the investment environment

Answer 34

Securitization has enabled conversion of previously non-marketable assets into traded securities, resulting in a new class of negotiable securities.

These include mortgage back securities and credit default swaps

Question 35

1.5.1.c Describe the impact of computer networking on the investment environment

Answer 35

The Internet and other advances in computer networks have enabled online trading, offering lower transaction costs, investor access to data, and investment tools as well as analysis reports previously available only to investment professionals.

It has also allowed direct trading among investors, matching up orders of traders without the use of an intermediary

Question 36

1.5.2 Outline the premise of the agency problem as it relates to participants in investment markets and describes implications for investors

Answer 36

The agency problem relates to the principal agent relationship between owners and employees such as management. The problem exists when the agent tends to further their own interests rather than those of the principal or owner.

This may results in directors acceptance of inappropriate executive actions, in accurate reporting on financial results and low levels of questioning of managements financial projections which intern impact shareholders.

Recognizing the agency problem exists, regulators and the security industry have taken steps to define and monitor ethical behaviour

Question 37

1.5.3 Describe the investment trend of socially responsible investing as it applies to pension funds

Answer 37

Ethical investment criteria generally addressed such issues as human rights, child labor, the environment, employment and labour issues, military issues, nuclear issues, animal rights and political contributions

Objectives may be chosen for many reasons to encourage corporate activity regarding social goals, to seek green practices or avoid sin businesses.

Broadly the social and corporate policies adopted by pension funds are geared towards disclosure obligations, policy development and governments best practises rather than out right requirements or prohibitions. This trend has begun to be reflected in pension regulatory standards. Additionally there are now securities issued specifically to achieve these outcomes

Question 38

1.5.4.a What are the two strategies that pension funds have generally adopted for enforcing the security holder rights

Answer 38

1. Engaging with corporations in which the pension fund invests
2. Engaging in securities litigation, particularly class proceedings. Many pension funds have established or are considering developing securities monitoring and litigation policies

Question 39

1.5.4.b How do pension funds that are in forcing their security holder rights by engaging with corporations in which the pension fund invests do so [6]

Answer 39

1. Establishing engagement priorities such as ESG objectives
2. Establishing a procedure to identify markets, sectors, and corporations with which to engage
3. Establishing procedures to engage informally with target investments, setting out concerns, objectives, and solutions
4. Establishing procedures for partnering with other shareholders or interested parties
5. Voting at shareholder meetings
6. Filing shareholder resolutions

Question 40

1.5.4.c How do pension funds that are enforcing their security holder rights by engaging insecurities litigation do so [4]

Answer 40

1. Monitoring portfolio procedures and engagement for service providers
2. Allocating responsibility for participation in recovery procedures
3. Developing procedures for identifying securities in a funds portfolio that are or may be subject to litigation
4. Establishing decision-making thresholds for one to participate in securities litigation