Module 5: Establishing Effective Governance Flashcards
Define the term “governance” in the context of pension plans and identify the three main activities of effective plan governance.
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.
Effective governance establishes a documented framework that defines roles and responsibilities for:
(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.
Outline some risks of poor governance and the benefits of effective governance.
There are numerous risks which arise from poor plan governance, including class action and other lawsuits, regulatory audits, fines and other costs related to correction of errors. There are also benefits from doing more than the minimum—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.
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.
List entities that are commonly involved in the administration of a pension plan.
Entities commonly involved in the administration of a pension plan include:
(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.
Identify the fiduciary responsibilities of a pension plan administrator.
Administrators of registered pension plans are considered to stand in a fiduciary capacity in relation to plan members and other beneficiaries in all jurisdictions across Canada, regardless of whether the pension plan is a DB, DC or a hybrid arrangement.
In its fiduciary role, the plan administrator’s responsibilities include:
(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.
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. This inherent conflict has been characterized as the “two hats” doctrine or theory. Since the Indalex decision by the Supreme Court of Canada, there is no longer a straightforward separation between the roles of the employer as sponsor and the employer as administrator. The dual role played by the employer further buttresses the need for good pension plan governance.
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.
Outline the entities that pension standards legislation generally allow to act as the legal plan administrator and describe the requirements of the two jurisdictions where requirements are different.
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.
The two jurisdictions where requirements are different are 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.
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.
The administrator of an RPP is subject to the prudent person rule in a number of jurisdictions. The Ontario Pension Benefits Act (PBA) rule requires the administrator to “exercise the care, diligence and skill in the administration and investment of the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person.”
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.
The legislation in each jurisdiction must be reviewed to determine first if there is a right to form an advisory committee and, if so, what requirements are necessary to establish one, as well as to determine the powers and duties of such a committee. Legislated pension advisory committees do not make any decisions with respect to the administration of the plan, nor are they delegated any administrative activities by the plan administrator. Individuals on advisory committees are mainly involved in an information-sharing activity. Therefore they do not have any fiduciary obligations.
Pension standards legislation relating to pension advisory committees includes such duties for those committee as:
(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.
Describe how some Canadian pension jurisdictions offer legislative guidance to plan sponsors relating to plan governance.
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.
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.
The federal regulator, Office of the Superintendent of Financial Institutions (OSFI), and the Financial Services Commission of Ontario (FSCO) introduced their frameworks in 2011, and the BC regulator BC Financial Institutions Commission (FICOM) introduced theirs in 2014. Pension plan governance is or was, either directly or indirectly, a key consideration under these risk-based regulatory frameworks. The BC Financial Services Authority replaced FICOM and has adopted all FICOM forms, bulletins and guidance. The Financial Services Regulatory Authority of Ontario (FSRA) succeeded FSCO and has replaced the risk-based framework with two guidance (“Approach”) documents that recognize the importance of governance in the administration of pension plans. For example, FSRA states that “FSRA will review the governance framework of actively monitored plans as an essential component of good plan administration. This requires governance practices that ensure that the administrator’s fiduciary duties are being appropriately satisfied.”
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.
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 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.
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.
