Module 5 Flashcards
1.1 Define the term “governance” in the context of pension plans
Governance is the formal framework that defines how the tasks and duties involved in the operation, management and oversight of a pension plan will be carried out in order to meet the fiduciary and other obligations of the plan
identify the three main activities of effective plan governance.
(a) Administration and communication—Includes establishing programs, addressing regulatory compliance and establishing the processes, systems and technologies required to administer contributions and benefits
(b) Financial management—Includes determining whether to secure benefit obligations, how and in what amounts to accumulate funds, and how to measure and recognize pension costs in the plan sponsor’s financial statements
(c) Investment management of fund assets.
1.2 Outline some risks of poor governance
class action and other lawsuits, regulatory audits, fines and other costs related to correction of errors
1.2 Outline the benefits of effective governance.
increased appreciation and confidence from plan members, a higher likelihood of members receiving their full benefits, evidence of compliance and “due diligence,” evidence of exercising one’s fiduciary duty, improved efficiency/reduced risk of loss, well-organized training materials for successors on the pension committee or board of trustees as well as for directors and employees working on administrative tasks, and reduced risk of regulator intervention.
1.3 List the operational responsibilities of a pension plan sponsor, which if met along with adherence to fiduciary principles, can constitute pension plan governance and provide sound management of the plan.
The operation of a plan requires meeting certain responsibilities such as:
(a) Defining the roles and responsibilities of all parties involved in the operation of the plan
(b) Ensuring that the persons delegated with those responsibilities have the interest, availability, education and skills required to perform their duties
(c) Selecting and monitoring service providers
(d) Completing the regulatory requirements
(e) Maintaining complete plan documentation
(f) Communicating with employees
(g) Managing the fund assets.
1.4 List entities that are commonly involved in the administration of a pension plan
(a) Plan administrator (including the board of directors when the employer is a private sector corporation)
(b) Pension committee
(c) Bargaining agent
(d) Plan fund trustees
(e) Actuaries and auditors
(f) Third-party benefits administrator
(g) Other external service providers
(h) Regulators.
2.1 Identify the fiduciary responsibilities of a pension plan administrator.
(a) Treating members and beneficiaries impartially
(b) Acting with the care, skill and diligence of a prudent person
(c) Interpreting the plan terms fairly, impartially and in good faith
(d) Managing conflicts of interest
(e) Within the scope of such duties and its authority, ensuring that members and beneficiaries receive promised benefits.
Fiduciary responsibilities cannot be delegated by the fiduciary. Duties may be delegated, but the responsibility for proper and complete fulfillment of those duties remains with the original identified holder of the fiduciary duty.
2.2 Explain the “two-hats” theory and its significance for corporate employers that sponsor a pension plan.
When a corporate employer sponsors a pension plan, it must recognize that there will be times when decision making by its board of directors will be done in the board’s role as the plan sponsor, and other times decisions will be made in the board’s role as the plan administrator.
2.3 Describe the fiduciary responsibilities of the sponsor of a Group Registered Retirement Savings Plan (Group RRSP).
Anyone who is responsible for managing the assets of another person is considered a fiduciary at common law. In this case, the fiduciary responsibility is implied by the situation, not through legislation.
It is generally agreed that the extent of a Group RRSP sponsor’s fiduciary responsibilities depends largely on how it defines its role as agent to the employees. The scope of the fiduciary responsibilities of a Group RRSP sponsor depends on how it defines its role. An employer that takes an active role in the oversight and management of the Group RRSP has a higher fiduciary duty of care. If the employer communicates that it is simply facilitating payroll deduction and requires the employee to make all other decisions, it has a lesser fiduciary duty of care.
So an employer may be able to reduce its fiduciary risk in a Group RRSP by clearly communicating that its role is simply to act as an agent. However, employers that limit their role in this way, removing themselves from plan oversight and management, may increase the risk that the Group RRSP will not perform as expected.
The best way for a capital accumulation plan (CAP) sponsor to ensure its fiduciary duties are met, related risks are properly managed and member outcomes are maximized is to develop and implement effective plan governance. This includes adhering to best practices regarding proper oversight, communication and education, providing choices, monitoring fees and encouraging independent advice.
3.1 Outline the entities that pension standards legislation generally allow to act as the legal plan administrator
Pension standards legislation defines who can be the administrator—This generally includes:
(a) The employer
(b) A pension committee comprising one or more representatives of the employer or any person required to make contributions under the plan and, possibly, members of the plan
(c) A pension committee comprising representatives of members of the plan (in some cases, this may include former or retired members)
(d) The insurer guaranteeing the benefits provided under the plan
(e) A replacement administrator appointed by the pension standards regulator
(f) In the case of a multi-employer or collectively bargained plan, a board of trustees or pension committee constituted in accordance with the terms of the plan or collective agreement
(g) A board, agency or commission appointed or established by an act of the legislature.
3.1 Outline the requirements of the two jurisdictions where requirements are different when allowing who can be pension administrator.
Québec and Manitoba. Québec legislation requires that a pension committee be appointed to administer the plan. Single employer plans registered in Manitoba that have 50 or more members must establish a pension committee to be plan administrator.
3.2 Define prudence and explain how the prudent person rule applies to the administrator of an RPP.
Prudence refers to the decision-making process that leads to impartial consideration of outcomes by a fiduciary. Prudence demands caution, attentiveness and care. The intent is to make the right decisions for the specific situation and the specific group of people. A decision that is prudent for one situation and one group of people may not be prudent for another situation or group of people.
The prudent person rule demands that the administrator act fairly and honestly without conflict of interest and with consideration for the best interests of the plan members, beneficiaries and the plan. When considering decisions made around pension plan administration, prudence dictates that if an administrator does not have the expertise to advise in certain situations, that administrator should obtain qualified professional advice.
3.3 Describe the duties of pension advisory committees generally outlined in pension standards legislation and outline the conditions that require the establishment of pension advisory committees.
Individuals on advisory committees are mainly involved in an information-sharing activity. Therefore they do not have any fiduciary obligations.
(a) Promoting awareness and understanding of the pension plan
(b) Making recommendations for improvements in the pension plan
(c) Reviewing/monitoring the administrative aspects of the pension plan
(d) Attending to any other matters as requested by the employer.
In some jurisdictions (e.g., federal, British Columbia, Newfoundland and Labrador and Saskatchewan), in plans with a minimum number of 50 members, if the majority of plan members request a pension advisory committee, the employer must establish one.
In Ontario and Nova Scotia, if the administrator is a pension committee and that committee includes at least one member appointed by plan members, there is no legislated right to form an advisory committee. If this is not the case, the majority of members and former members may establish an advisory committee by majority vote.
3.4 Describe how some Canadian pension jurisdictions require legislative governance to plan sponsors relating to plan
Quebec, Manitoba, British Columbia and Alberta all require certain governance activities by plan sponsors. Ontario and New Brunswick have proposed a requirement to have written governance material but have not put their requirements into force.
For those jurisdictions with legislated requirements, their general approaches can be summarized as follows:
(a) Québec requires that each plan administrator adopt a written set of internal bylaws that address prescribed governance-related topics.
(b) Manitoba requires that pension committees establish rules of procedure and governance that must be reviewed at least once every three years.
(c) British Columbia and Alberta have almost identical regulations relating to governance policies. These jurisdictions require that plan administrators establish governance policies, ensure that the plan be administered in accordance with these policies, and regularly assess and document the administration of the plan. Minimum requirements of the governance policies are prescribed.
3.5 Describe how some Canadian pension jurisdictions with risk-based approaches to overseeing pension plans recognize pension plan governance
Governance has become a key consideration for many pension regulators as they concentrate more time and resources on dealing with plans that are considered at risk of failing. Regulators in the federal jurisdiction, Ontario and British Columbia all implemented risk-based approaches to overseeing pension plans that generally consist of three related processes: risk monitoring, risk assessment and risk response.
4.1 Identify nonlegislative governance guidance that is available to plan administrators
The Canadian Association of Pension Supervisory Authorities (CAPSA) has developed several guidelines related to the governance of pension and other retirement savings plans. These include the Guidelines for Capital Accumulation Plans (CAP Guidelines) and the Pension Plan Governance Guideline and related Self-Assessment Questionnaire.
4.2 Describe why a plan administrator may want to comply with the CAPSA Governance Guideline and CAP Guidelines.
Compliance with both the CAPSA Governance Guideline and the CAP Guidelines is voluntary; there is no legislative requirement to comply with these two sets of guidelines.
Compliance with both the CAPSA Governance Guideline and the CAP Guidelines is voluntary; there is no legislative requirement to comply with these two sets of guidelines.
Compliance with them can be an effort to manage the risks related to administering a pension plan and a desire to improve plan performance, increase efficiencies and help CAP participants. The guidelines give plan administrators a clearer picture of what they can and should do with respect to the governance of their programs.
Should a plan be subject to litigation, the reasonableness of the administrator’s actions will depend on the documented policies and processes that are in place and compliance with those policies and processes. It would seem increasingly difficult, absent some very unusual circumstances, for a plan administrator to argue that they are acting with the care, skill and diligence of a prudent person in administering their plan should they have completely ignored the advice of leading authorities on what good governance is for people in their situation.
4.3 Identify why administrators of DC pension plans that are CAPs should consider both the CAPSA Governance Guideline and CAP Guidelines within their governance activities
In DC plans, it is clearly the members who bear the investment risk and who are usually given investment options. This factor can increase the potential liability faced by a DC plan administrator and can also create additional administrative responsibilities. The CAP Guidelines are in addition to, not a replacement for, the CAPSA Governance Guidelines.
4.4 Describe the objectives and application of the CAP Guidelines.
The objectives of the CAP Guidelines are to:
(a) Outline and clarify the responsibilities of CAP sponsors, service providers and CAP members
(b) Ensure that CAP members have the information and assistance they need to make investment decisions in a CAP
(c) Ensure that there is a similar regulatory result for all CAP products and services, regardless of the regulatory regime that applies to them.
The CAP Guidelines apply to all tax-assisted plans that have member-directed investments, including most DC pension plans, deferred profit-sharing plans (DPSPs), Group RRSPs, hybrid plans and flexible DB plans. They do not apply to CAPs where the member has no investment choice.
4.5 Identify and outline the general purpose of other governance guidelines published by CAPSA.
CAPSA has issued four additional governance guidelines that relate to RPPs:
(1) Guideline No. 5: Guideline on Fund Holder Arrangements—Identifies the permitted type of fund holder arrangements and describes the roles and responsibilities of the key players and other parties to these arrangements in the context of what a pension standards regulator will look for when reviewing the fund holder arrangement
(2) Guideline No. 6: Pension Plan Prudent Investment Practices Guideline—Intended to help plan sponsors demonstrate the application of prudence to the investment of plan assets
(3) Guideline No. 7: Pension Plan Funding Policy Guideline—Offers guidance on the development of funding policies for DB pension plans, with a focus more on the plan liability side rather than the plan investment or asset side
(4) Guideline No. 8: Defined Contribution Pension Plans Guideline—Builds on the guidelines and documents related to DC plans previously released by CAPSA, with additional content relating to the provision of information to members about the payout phase to allow them to make informed decisions regarding their retirement benefits. This includes recommendations about the provision of estimated final account balances and retirement incomes as well as increased fee disclosure.
5.1 Identify the eleven principles of the CAPSA Governance Guideline
The CAPSA Governance Guideline recommends that the plan administrator do the following or cause the following to be done.
(a) Understand its fiduciary responsibilities to plan members and beneficiaries. The plan administrator may have other responsibilities to other stakeholders.
(b) Establish and document a governance framework for the administration of the plan.
(c) Clearly describe and document the roles, responsibilities and accountabilities of all participants in the pension plan governance process.
(d) Establish and document performance measures to monitor the performance of participants in the governance and administration of the plan.
(e) Directly, or with delegates, apply the knowledge and skills needed to meet the plan administrator’s responsibilities.
(f) Establish and document a process to obtain and provide to governance participants appropriate information to meet fiduciary and other responsibilities.
(g) Establish and document a framework and ongoing processes, appropriate to the pension plan, to identify and manage the plan’s risks.
(h) Establish and document appropriate processes to ensure compliance with legislative requirements and pension plan documents.
(i) Establish and document a communication process with the aim to be transparent and accountable to plan members, beneficiaries and other stakeholders.
(j) Establish and document a code of conduct, incorporating a policy to manage conflicts of interest.
(k) Establish and document a process for the regular review of the pension plan’s governance framework and processes.
5.2 Identify how a CAP sponsor may wish to incorporate the CAP Guidelines into a governance structure.
A CAP sponsor may wish to consider the creation of the following documents when designing a governance structure for a CAP:
(a) Notice of member responsibilities
(b) Document/record retention policy
(c) Certificate of compliance for service providers
(d) Policy on selection and supervision of service providers
(e) Policy on selection and retention of investment options
(f) Policy on responding to member/employee questions.
5.3 Identify CAP-related activities covered by the CAP Guidelines.
The CAP Guidelines cover the following activities:
(a) Introduction and setting up a CAP
(b) Investment information and decision-making tools for CAP members
(c) Introducing the plan to CAP members
(d) Ongoing communication to members
(e) Maintaining a CAP
(f) Termination (of the CAP and/or a member’s participation in the CAP).
5.4 Describe how most CAP administrators provide investment information to plan members and any shortcomings of this approach
Most plan administrators provide investment information to members, either directly or through their recordkeepers or investment managers. Some of this is general information on investment basics, and some is specific data on the characteristics and past performance of each of the investment options.
They may also make certain tools available, such as self-assessment questionnaires that members may use to determine their risk tolerance and make their investment choices.
The dissemination of all of this information has one thing in common: In the vast majority of cases, it is provided to members, who can decide whether or not to use it. The problem is that a good proportion of the membership (in many cases more than half) will not make use of the information and therefore will not be qualified to make investment decisions.
