Module 6: Administering Retirement Arrangements Flashcards
Describe factors that an employer may consider when designing a retirement plan.
The design of a retirement plan must balance constraints with the goals and desires of the plan sponsor and members. There are many different types of plans (pension and non-pension), and an employer that wishes to sponsor a plan will consider its unique situation and goals for the plan before deciding on the type to sponsor. Some plans are more suitable for some employee groups than others.
The average characteristics of the employee group that will be covered by the plan should be considered in plan design, in the areas of:
(a) Type of work
(b) Whether potential plan members are also members of a union
(c) Length of service and average age.
Some of the goals that an employer may attempt to meet through the design of a retirement plan include:
(a) Attracting employees in a competitive marketplace
(b) Retaining certain employees and/or providing incentives for early retirement
(c) Rewarding long-service employees
(d) Deferring compensation for executives and highly paid employees.
Outline plan design considerations that impact the level of plan costs borne by a plan sponsor.
Some plan design factors that impact plan sponsor costs include:
(a) The level of plan benefits (modest or substantial)
(b) Degree of cost sharing with plan members (contributory or non-contributory)
(c) For defined benefit (DB) pension plans, the degree to which pensions payable are indexed to inflation
(d) For DB pension plans, whether enhanced early pensions will be offered to qualifying employees.
Identify factors that may cause an employer to revisit the design of their retirement plan from time to time.
Once a plan is operational, its design should be revisited periodically to reflect changing realities such as:
(a) Changes in the profile of the workforce
(b) Industry competitiveness and trends
(c) Changes in legislation
(d) Financial considerations
(e) New benefit trends, retirement products and technologies
(f) Changes in government programs
(g) Impact of collective bargaining agreements.
Identify steps involved in registering a pension plan.
Steps involved in registering a pension plan are:
(a) The plan sponsor decides to establish a retirement plan (or is required to establish one through collective bargaining)
(b) The plan sponsor selects various service providers to assist in design, registration and implementation of a new plan
(c) The plan text, board resolution, trust agreements and any other applicable documents are drafted and finalized
(d) An application is filed, including appropriate documents and filing fees with regulatory authorities and the Canada Revenue Agency (CRA)
(e) The pension plan is approved by CRA and the appropriate pension jurisdiction.
Identify the documents that must generally be filed with the pension regulatory authorities when an application for registration of a pension plan is made.
Generally, the documents that must be filed with the pension regulatory authorities in support of an application for plan registration are:
(a) A prescribed application form
(b) A certified copy of the plan document
(c) A certified copy of the funding arrangement (i.e., either the trust agreement or insurance contract)
(d) A certified copy of a board of directors’ resolution adopting the plan
(e) A certified copy of the collective agreement with the employees (if any)
(f) A certified copy of any reciprocal transfer agreement related to the plan (if any)
(g) A copy of the plan member booklet
(h) Any other relevant documents relating to the establishment of the plan, such as a declaration of trust
(i) An initial actuarial report (for DB and target benefit plans only)
(j) A statement of investment policies and procedures (SIP&P) for DB, target benefit and DC pension plans that do not offer employees investment choices.
Compare the registration requirements for a pension plan to the registration requirements for a non-pension registered plan.
Establishing a non-pension registered plan includes some activities similar to those described in the Text for pension plans. For example, the employer must decide to establish the plan, or is required to establish a plan that meets the terms of a collective agreement, and then must select service providers for the plan. The required documentation is different. Group RRSPs and DPSPs both require the preparation of certain documentation that meets the requirements of income tax regulations but none of the filings that are required under pension standards legislation.
DPSPs must be registered with CRA by submitting the following documents to that agency:
(a) A certified copy of the resolution of the directors authorizing the application for registration, if the plan sponsor is a corporation
(b) A certified copy of the trust agreement and plan text constituting the terms of the DPSP. The documents must comply with income tax rules concerning DPSPs.
(c) A prescribed application for registration for a DPSP.
For Group RRSPs, the plan sponsor must make an application to an RRSP “issuer” for a contract that follows the issuer’s preregistered “specimen” format.
In the event that a “bundled” approach is used for a non-pension retirement plan—with an insurer acting as recordkeeper, custodian/fund holder and trustee—the insurer will typically prepare the plan documentation and look after the registration process. Those service providers often have “specimen” documents preapproved by CRA that require very little, if any, adjustment to deal with the specific plan design features desired by the plan sponsor. For DPSPs, certain “permitted” variables must be specified. Examples would include the vesting schedule and rules about in-service withdrawals.
Identify the range of external service providers available to assist a plan sponsor in setting up and maintaining a retirement plan.
Depending on their internal resources, plan sponsors may elect to undertake some of the activities needed to set up and maintain a retirement plan. When those internal resources do not exist, or are deemed insufficient, outside service providers will be required. The types of service providers that are required depend upon the type of retirement plan that is being established.
Service providers that might be involved include:
(a) Consultants
(b) Actuaries
(c) Legal counsel
(d) Custodians/fund holders
(e) Insurance companies
(f) Investment managers
(g) Investment advisors for plan members
(h) Administrative service providers
(i) Communication specialists.
Describe the roles of consultants, actuaries and legal counsel in the establishment of a defined benefit pension plan.
Actuaries, consultants and legal counsel can provide assistance to plan sponsors with:
(a) Finalizing the design of the retirement plan
(b) Drafting the plan document and board resolutions
(c) Reviewing trust agreements or insurance contracts
(d) Preparing or reviewing communication material for employees
(e) Selecting other service providers
(f) Preparing submissions for pension regulatory authorities.
Identify some entities generally allowed to act as custodian of a pension plan in Canada.
The entities generally allowed to act as the custodian for a Canadian pension plan are:
(a) A trust in Canada, where the trustee is either a Canadian corporation or a
board of three or more trustees that meet certain residency and independence criteria, or
(b) An insurance contract issued by a company authorized to carry on a life insurance business in Canada.
Describe the role of a custodian/fund holder of a pension plan and the criteria usually considered when selecting a custodian.
Custodial services, also known as fund holder services, are offered by most of the major trust and life insurance companies. The fund holder is the actual holder of the plan assets and is responsible for those assets. Fund holders are entitled to rely on instructions given by the administrator. They are also responsible for providing an accounting to the administrator, showing the income and outflow of the funds and assets, as well as maintaining the integrity of the pension fund.
Selection criteria for custodians include reporting capabilities, service, compatibility with the investment manager selected, financial strength, experience and fees.
Describe the trust-based and insurance-based models for delivering pension and non-pension registered retirement plans.
The trust-based model, which is very common for DB plans, target benefit plans and larger DC plans, is often synonymous with an unbundled approach where the plans administrator selects specialized independent vendors for custodial services and cash management, administration services and investment management. This approach provides plan administrators with access to a very broad range of independent providers, a large range of investment managers, the ability to tailor investments to suit their needs and to negotiate directly with each vendor based on the scale of their plans. Separation of roles minimizes potential conflicts of interest and promotes disclosure and transparency.
In an insurance-based model, the insurer generally offers a prepackaged or bundled solution of services. It is common for small and mid-sized DC plans but rare for DB plans. It can offer the convenience of a one-stop shop for plan sponsors, simplified vendor and contract management, and access to multiple investment managers on the insurer platform, which benefits any plans that do not have the scale to negotiate directly with investment managers. Note that the Text refers to cash management services being provided within an insurance company “bundled” solution. While this is true in the case of a DB plan, cash management is not a needed service for DC pension and non-pension plans.
Describe the service providers that are required for sponsors of DC pension and other Capital Accumulation Plans (CAPs).
Service providers for larger DC pension plans may include trustees, custodians, administration service providers and investment managers—fewer service providers than needed for DB pension plans. For small and mid-sized Capital Accumulation Plans (CAPs), the “bundled” approach available through the Canadian insurance industry further reduces the number of service providers generally required when compared to DB pension plans. The bundled approach normally provides administration (recordkeeping and benefit payment administration), custodial and trustee services within a single package. Typically, that package also provides access to a wide range of investment managers (both proprietary and third-party) that offer their funds within the package.
Since sponsors of CAPs hold fiduciary responsibilities in respect of their plans, those employers without the internal skills and/or capabilities in the areas of plan design and ongoing plan governance should obtain the assistance of appropriately qualified and experienced advisors. In addition to those noted in the Text, some CAP sponsors will retain advisors for the purpose of providing investment advice to plan members.
Describe the plan administrator’s duties in relation to the pension fund and the fund holder.
The administrator’s duties in relation to the pension fund and the fund holder include, but are not limited to:
(a) Ensuring the pension fund’s assets (when held by a fund holder) are held under an agreement that complies with applicable pension legislation. This requires the pension fund’s assets to be held separate and apart from the fund holder’s assets.
(b) Making sure the duties, roles and expectations of all parties to the agreement are clearly set out in the fund holder agreement
(c) Determining whether a trust has been established and, if not, setting up a trust to hold the assets
(d) Monitoring and supervising the fund holder’s activities relating to the delegated functions
(e) Filing true copies of the fund holder agreement, and all amendments or replacements, with CRA and the regulator on a timely basis
(f) Remitting or ensuring proper remittance of contributions to the pension fund
(g) Providing investment direction to the fund holder (if the fund holder is also responsible for investing some or all of the pension fund’s assets) in accordance with provisions of the pension plan’s SIP&P
(h) Giving investment direction to an investment manager (if the investment manager is responsible for making investment choices for some or all of the pension fund’s assets) in accordance with provisions of the SIP&P
(i) Ensuring the administrator, or a third-party service provider acting on behalf of the administrator, has a process in place to monitor the pension fund’s overall investments for compliance with the legislative requirements, the SIP&P and any other policies established by the administrator
(j) Making sure that the pension fund’s investments comply with applicable pension legislation and ITA
(k) Monitoring the activities of the fund holder to ensure that the pension fund’s assets are administered in accordance with the fund holder agreement, the SIP&P and applicable pension legislation
(l) Ensuring the fund holder has sufficient information regarding contribution remittances to perform its duties as required by pension legislation (e.g., contribution reporting is required in Alberta and Ontario)
(m) Directing the fund holder, in accordance with the terms of the pension plan and applicable legislation, regarding payments that need to be made from the pension fund
(n) Executing the fund holder agreement(s)
(o) Maintaining a current record that clearly identifies every investment held on behalf of the pension plan; the name in which the investment is held; and, when appropriate, the name in which the investment is registered.
Outline some considerations by a plan administrator when selecting a pension fund investment manager.
When choosing an investment manager, the plan administrator may wish to consider:
(a) The plan sponsor’s investment beliefs and guiding principles with respect to an investment offering for the plan members
(b) The investment manager’s style, objectives and risk tolerance, and how these will match with the plan’s SIP&P
(c) Whether or not the manager has a well-established, stable organization with solid pension investment experience
(d) Key personnel
(e) Fees.
Identify the plan member records that are kept for DB pension plans and describe plan administration activities that use the information contained within these records.
Records are set up and maintained for active members, disabled members, inactive members, pensioners and survivors of deceased members. These records contain data such as:
(a) Dates of birth, hire, plan entry and retirement
(b) Social Insurance Number (SIN) and employee ID used by the plan sponsor
(c) Contributions, service and earnings history
(d) Special dates, such as periods of leave and disability and whether or not pension credit was earned for the period
(e) Marital status and spouse and beneficiary information, including information on any partition of benefits resulting from a marriage/ spousal relationship breakdown
(f) Member contact information.
The records serve as the source of information for actuarial valuations and various periodic reports required by regulatory authorities, for producing annual member statements and for calculating pension adjustments (PAs), pension adjustment reversals (PARs) and past service pension adjustments (PSPAs). This data is also necessary for calculating pension assets in the event of marriage/spousal relationship breakdown.
