Lesson 9

Question 1

9.1.1 Explain in general terms, how investments of a RPP are regulated across the various pension jurisdictions in Canada

Answer 1

Investments in an RPP must comply with the federal PBSA or provincial PBA. AB, BC, MB, ON, and SK have adopted the federal PBSA.

NL, NS have their own rules similar to the PBSA.

NB and QC have written their own rules on investment.

PEI has no operating pension standards legislation so the ITA calls for the application of the federal PBSA.

Other than QC and NB there is much similarity across Canada

Question 2

9.1.2 Describe the quantity restrictions on a pension fund’s investments under federal pension standards legislation.

Answer 2

Under federal legislation a pension fund may not invest more than:

A) A max of 10% of market value of assets (at the time of investment) in any one person or entity with the exception of:

i) Investments in issues guaranteed by the federal or provincial government
ii) insured deposits
iii) Mutual funds that themselves comply with federal regulations
iv) a fund that replicates the composition of a widely recognized index of a broad class of securities traded on an organized market.

B) a max on 30% holding volume of the voting shares of any corporation with some exemptions for real estate, resource, and investment corporations under certain conditions

Question 3

9.1.3 Outline the 3 exemptions allowed under the prohibition of transactions with related parties under federal pension standards legislation

Answer 3

Regulations under the federal pension standards legislation prohibits related party transactions including loans to EEs with three exceptions

1) The transaction is required for the operation of the pension plan and its terms and conditions are not less favourable than market terms and conditions.
2) Investments of the securities of a related party if the securities are held in an investment fund or segregated fund in which the investors other than the administrator and its affiliates may invest and that comply with certain quantitative limits set out in the federal pension regulations.
3) The value for the transaction is nominal, or the transaction is immaterial to the plan.

Question 4

9.1.4 Outline the general approach to securities lending by pension plans under federal and provincial pension standards legislation.

Answer 4

All pension jurisdictions allow securities lending through a pension plan’s custodian since the securities market has low default risk.

PBSA and some provincial PBAs are silent on specifics. Some have specific requirements such as collateral.

Regardless it is generally recommended that 105% of any loan be held as collateral and that some sort of indemnity clause be included in the lending contract with the custodian (the custodian guarantees against any losses due to default)

Loans may be recalled without prior notice requiring coordination between the investment manager and custodians lending out stocks. Gov’t of Canada bonds and actively traded stocks of large corporations are the most commonly lent out securities.

Question 5

9.1.5 Describe restrictions placed on securities lending within North America as outlined in OSFI Guideline B-4, Securities Lending

Answer 5

Eligible collateral should be readily marketable and is restricted to the following assets in CAD or USD:

i) Cash
ii) Widely traded debt instruments with A or higher rating
iii) Acceptances of bank and trust loan companies whose short term deposits are rates A-1 or R-1
iv) High quality common and preferred shares

Unconditional letters of credit from banks/trust companies with A-1 or R-1 ratings may also be accepted.

Convertible preferred shares and convertible debt instruments may be taken as collateral when they are immediately convertible into the underlying security.

Question 6

9.1.6 define soft dollars and describe the regulatory environment that created them

Answer 6

Historically fund managers directed their trades to brokerage firms for both trade execution and research. Brokers accommodated research requests in order to gain access to order flow. Regulations fixed commission rates and this encouraged the practice since brokers couldn’t compete on price, they competed by returning a portion of their commissions from fund managers in the form of additional research services. This was called soft dollars.

As assets grew so did offered services. When negotiable brokerage fees appeared in the 1980’s soft dollars continued as industry practice.

National Instrument 23-102 Use of Client Brokerage Commissions provides guidance about disclosure.

Question 7

9.1.7 Outline some of the requirements of National Instrument 23-102 Use of Client Brokerage Commissions

Answer 7

National Instrument 23-102 Use of Client Brokerage Commissions indicates that an advisor who directs and brokerage transaction involving client brokerage commissions to a dealer or third party, in return for the provision of order execution goods and services or research goods and services by the dealer or third party must ensure that certain criteria are met including:

1) the advisor ensures the goods or services are used to assist with investment or trading decisions or with executing securities transactions on behalf of the client
2) That a good-faith determination is made that the client receive reasonable benefit from both how the goods or services are used and the amount of client brokerage commission paid

Question 8

9.2.1 Identify the most significant investment provisions covered by ITA and its regulations (2)

Answer 8

1) Conditions under which a plan remains registered under ITA and its regulations, including investment rules to follow where a plan doesn’t fall under provincial or federal legislation
2) The kinds of property that constitute qualified investments for trusts governed by RRSPs, RESPs and RRIFs

Question 9

9.2.2 Describe the most significant investment provisions included in ITA and its regulations that apply to RPPS (3) - a pension plan will be revocable if:

Answer 9

A pension plan will become revocable if it fails to comply with:

1) A pension plan is not allowed to invest in shares of the employer unless they are listed on a prescribed stock exchange
2) A pension plan must comply with certain regulations regarding loans
3) A pension plan must conform to the investment rules set out under the applicable pension legislation.

Question 10

9.2.3 Outline the investments that qualify for a group RRSP under ITS (6)

Answer 10

1) Bonds, debentures, notes, mortgages, hypothecs or similar obligations issued or guaranteed by gov’t or a crown corp
2) Securities listed on a designated stock exchange
3) GICs issued by a trust company under the laws of Canada or a province
4) Bonds, debentures, notes, or other obligation issued a corporation listed on a designated stock exchange or issued by an authorized foreign bank and payable by a Canadian Bank
5) A unit of a mutual fund trust
6) An annuity contract issued by a licensed annuities provider that meets certain requirements

Question 11

9.2.4 Outline the investments that qualify for a deferred profit sharing pension plan under the ITA (4)

Answer 11

1) Bonds, debentures, notes, mortgages, hypothecs or similar obligations issued or guaranteed by gov’t or a crown corp
2) Bonds, debentures, notes, or other obligation issued a corporation listed on a designated stock exchange (other than those of the employer who makes contributions or a corporation the employer doesn’t deal with at arms length) - restriction is targeted at debt obligations of the ER
3) Shares listed on a designated stock exchange, including those of the ER or corporation who the ER doesn’t deal with at arms length
4) A contract with a licensed annuities provider for an annuity payable to an EE who is a bene of the DPSP beginning no later than the year the EE turns 71 and with a Guarantee term no greater than 15 years

Question 12

9.3.1 Identify who may have a fiduciary relationship with a pension fund (4)

Answer 12

1) Pension committee
2) Trustee or custodian
3) Appointed administrator or recordkeeper
4) Consulting professionals

Question 13

9.3.2 Identify who may have a fiduciary responsibility under a group RRSO or DPSP as outlined in CAPS guideline No 3

Answer 13

The CAP guidelines produce a significant extension of fiduciary like duties for CAP sponsors, particularly for group RRSPs and DPSPs (which aren’t subject to min pension standards legislation)

In broad terms the fiduciary responsibility is the plan sponsor’s legal responsibility to watch over and act in the best interests of the plan members, including investment management, even though actual delivery may come from a third party.

Question 14

9.3.3 Describe when an individual is considered in breach of his or her fiduciary duties regarding retirement plan investment management

Answer 14

A breach of fiduciary relationship is presumed where the fiduciary acts out of self interest. It could also result where a fiduciary fails to meet its high standard of care in providing information or counselling.

Question 15

9.3.4 Describe the prudent person rule as it typically applies to pension plan activities as outlined in CAPSA guideline No 6, Pension Plan Prudent Investment Practices Guideline.

Answer 15

The prudent person rule is intended to lead to balanced decision making. A fiduciary is expected to discharge duties with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use.

Application of the prudent person rule requires individuals with responsibility for managing a pension fund’s assets to do so in a professional manner with regard to the best interests of pension plan beneficiaries.

In the pension investment context a key element is that the fiduciaries exercise due diligence. Including making decisions based on proper consideration of adequate information, documenting final decisions, reasons for the final decisions, and the circumstances considered.

Question 16

9.3.5 Describe the fiduciary standard of care when an ER acts as a plan administrator as outlined in CAPSA guideline No 6, Pension Plan Prudent Investment Practices Guideline.

Answer 16

While the ER retains certain rights and powers with respect to the pension plan when the ER acts as plan sponsor, while acting as plan administrator, the employer is a fiduciary whose actions and decisions must be in the best interests of the pension plan’s beneficiaries.

In the plan administrator role the ER is responsible for ensuring the pension fund is administered prudently in accordance with the SIP&P, other pension plan documents and applicable legislation.

Question 17

9.4.1 Describe the responsibilities of the plan sponsor as outlined in CAPSA guideline No 6, Pension Plan Prudent Investment Practices Guideline. (5)

Answer 17

1) Determining the design of the pension plan
2) Setting the benefit structure for plan members
3) establishing, amending, and terminating the pension plan
4) determining the level and nature of pension benefits
5) Developing and adopting a funding policy for the pension plan

Question 18

9.4.2 Describe the responsibilities of the plan administrator as outlined in CAPSA guideline No 6, Pension Plan Prudent Investment Practices Guideline and the CAPSA Self-Assessment Questionaire on Prudent Investment Practices (3)

Answer 18

The plan administrator has a fiduciary responsibility to ensure the pension fund’s assets are invested in a prudent manner and should establish, implement and adhere to policies and procedures that support its responsibilities. Including:

1) Managing the pension fund
2) Establishing a written SIP&P
3) Investing the pension fund’s assets in accordance with the plans’ SIP&P, other pension plan documents and applicable legislation

Question 19

9.4.3 Describe the principles that assist in ensuring a prudent approach to the investment of pension plan funds as outlined in CAPSA guideline No 6, Pension Plan Prudent Investment Practices Guideline. (9)

Answer 19

1) Adhering to the prudent person rule
2) Prudent delegation of plan administrator tasks
3) Setting well defined investment objectives
4) Identifying and managing the risks associated with plan investments within the plan’s risk tolerances
5) Establishing and implementing an investment policy / SIP&P
6) Allocating assets in accordance with the pension plan’s investment policy
7) Applying due diligence in selecting investments
8) Establishing effective plan monitoring and disclosure practices
9) Documenting processes, policies and procedures

Question 20

9.4.4 Explain how a pension plan administrator can demonstrate a prudent approach to delegation as outlined in CAPSA guideline No 6, Pension Plan Prudent Investment Practices Guideline.

Answer 20

If the plan administrator doesn’t have the right internal structures, processes, resources, skills, knowledge, and expertise to effectively perform its duties it is prudent for them to delegate tasks to parties who do.

If it is determined that certain activities are to be delegated to external service providers, internal committees or staff then written governance documents of the plan should clearly set out the authority to delegate and reporting requirements as well as monitoring the delegate.

The plan administrator remains responsible for the delegated activities and should monitor those activities to ensure they have been clearly and prudently carried out

Question 21

9.4.5 Describe how a plan administrator can demonstrate a prudent approach to documenting decisions and activities related to the pension plan’s investments as outlined in CAPSA guideline No 6, Pension Plan Prudent Investment Practices Guideline.

Answer 21

The plan administrator can set up a process for documenting decisions and activities and have documented policies and procedures to help demonstrate the prudent person rule had been applied.

Any key decisions should be well documented, including reasons and circumstances considered. The CAPSA Self assessment questionnaire can be used as a tool in this process.

Question 22

9.4.6 Identify the general elements normally included in an investment policy statement under PBSA and PBAs (5)

Answer 22

`1) A description of the nature of the pension commitment and the goals of the sponsor.

2) A description of allocation of responsibilities
3) A benchmark portfolio identifying the long term asset allocation of the fund in reference to capital market indexes.
4) Quantitative objectives and constraints
5) Qualitative objectives and constraints

Question 23

9.4.7 Describe the general requirements for SIP&Ps as outlined in pension standards legislation

Answer 23

All jurisdictions require SIP&Ps for DB plans and DC plans that don’t provide for members to exercise investment choice. Most DB SIP&Ps must be provided to the plan actuary.

Many specify that the SIP&P for a DB plan must account for factors that may affect the funding and solvency of the plan and the ability to meet financial obligations. As well as how those factors relate to the plan’s investment policy

DC plans that allow members investment control and are regulated by federal PBSA and AB, BC, and SK aren’t required to prepare a SIP&P. All other jurisdictions require one. Regardless most jurisdictions stipulate requirements for the structure of the plan’s investment options.

Ontario requires that if the SIP&P takes into account ESG factors it be identified along with how they are considered.

ON also requires the SIP&Ps be files with FSCO.

Question 24

9.5.1 Identify factors CAP sponsors consider when choosing investment options investment options including default options (8)

Answer 24

1) Purpose of the CAP
2) Number of investment options to be made available
3) Fees associated with the investment options
4) CAP sponsor’s ability to periodically review options
5) Diversity and demographics of CAP members
6) Liquidity of investment options
7) Level of risk associated with investment options.

Liquidity and level of risk are particularly relevant for CAPs established for retirement.

Question 25

9.5.2 Identify the types of investment options for CAP sponsors to consider including in a CAP as outlined in the CAP guidelines (7)

Answer 25

The CAP guidelines identify:
1) GICs
2)Investment Funds
3) Annuity Contracts
4) Employer securities
5) Government Securities
6) Other securities and;
7) Cash
as types of investment options

Question 26

9.5.3 Identify factors CAP sponsors consider when choosing investment options if one of the options includes an investment fund as outlines in the CAP guidelines

Answer 26

If the investment options chosen by the CAP sponsor include investment funds the CAP guidelines suggest the following factors be taken into account:
1) Attributes of the investment funds such as investment objectives, investment strategies, investment risks, the fund manager, historical performance and fees
2) Whether the investment fund(s) selected provide members with options that are diversified in their style and objectives.
If investment funds are offered in a CAP that is an RPP the funds must comply with the investment rules under applicable pension benefits standards legislation

If the investment fund is a mutual fund under securities law it must comply with the rules that govern conventional public mutual funds

Question 27

9.5.3 Identify 3 factors a CAP sponsor must comply with if one of the investment options chosen by a CAP sponsor is an insurance product

Answer 27

1) Investment rules applicable to individual variable insurance contracts
2) Investment rules that govern conventional public mutual funds or
3) Investment rules under applicable pension benefits standards legislation