Being aware of the changing regulatory landscape is a first step to success.
By Ed McCarthy
Pension governance policies continue to gain importance with Canadian legislators, regulators, plan sponsors and participants. Satisfying all parties can be a juggling act, which is why it makes sense to organize your plan’s efforts.
Defining Good Governance
The Canadian Association of Pension Supervisory Authorities (CAPSA) defines governance as “the structure and processes in place for the effective administration of the pension plan to ensure the fiduciary and other responsibilities of the plan administrator are met.” To help plans develop and implement good governance practices, CAPSA published its Guideline No. 4: Pension Plan Governance Guideline in October 2004; the document was updated in December 2016.
According to Guideline No. 4, an effective pension governance system does the following:
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establishes a framework for defining the duties, associated responsibilities and accountabilities for all participants in the governance process,
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covers all facets of pension plan management, including communication, funding, investments and benefit administration, and
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provides careful oversight while enhancing protection for plan members and beneficiaries.
The Guideline also elaborates on CAPSA’s governance principles for plan administrators, which include governance framework, oversight and compliance, transparency and accountability, and governance review, and other principles.
Paul Litner, an attorney and partner with Osler’s pensions and benefits group in Toronto, says that CAPSA’s Guideline No. 4 is still the most widely used high-level source of governance best practices for pension plans. While other CAPSA guidelines also address governance issues and additional best practices, those documents tend to have a narrower focus or cover specific types of pension plans. (The full list of CAPSA Guidelines is available at the CAPSA/ACOR website.)
Multiple Regulatory Frameworks
Paul Litner
In addition to the CAPSA guidelines, Litner notes that several provinces have been developing their own governance regulations. Alberta, British Columbia and Manitoba require a plan administrator to have a written governance policy and the plan must review or amend it at least every three years. However, there is no requirement to file the policy with the regulators and there are no substantive prescribed content requirements for those policies.
In eastern Canada, only New Brunswick requires plan administrators to establish, adopt, and follow a written governance policy—the other provinces don’t have any specific requirements yet.
Ontario previously released Bill 177, which included amendments to the Pension Benefits Act that would require plans to adopt and maintain a governance policy as part of the documents that create and establish the plan. The bill would also require pension plans to file their governance policy, Litner says, although Bill 177 has not been proclaimed in force.
On the federal level, the Office of the Superintendent of Financial Institutions (OSFI) issued its Guideline for Governance of Federally Regulated Pension Plans in 1998. As of May 2019, the OSFI removed that guideline from its website and CAPSA Guideline No. 4 is under review as a replacement.
Regarding the status of governance regulations, Litner says it’s a trend that’s continuing, but slowly, as other jurisdictions follow the western provinces’ lead.
“What we’re not seeing is a lot of specific regulations prescribing the content of governance or requiring specific, filed governance policies or documents,” says Litner. “But we are seeing regulators doing audits as part of their regular review of pension plans which extend to governance. We note that the Ontario regulator is doing governance-related audits of pension plans.”
An Emerging Administrative Model
Another development that Litner mentions is the adoption of jointly governed administration or independent administration models of pension governance. In a jointly governed approach, the employer appoints part of a plan’s board and plan members appoint the other part. With independent administration, a board of trustees or non-profit corporation administers the plan, which can help eliminate potential conflicts of interest that arise when the employer serves as both plan sponsor and administrator.
Steps for Improving Plan Governance
Litner shares several practical suggestions for plans looking to improve their governance policies and procedures. These include the following:
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Get an independent audit or assessment of your current practices. This step can highlight weaknesses and is considered a best practice.
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Recognize the potential for conflicts of interest between the employer function and the administrator function. Develop policies to identify and manage those conflicts.
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Document everything you do involving plan governance. “Prudence is all about process,” Litner says. “If you follow a process and document it, it’s very difficult to criticize what you’re doing.”
To learn more about trends in plan governance, register for the June 8 CAiP Virtual Forum, Pension Fund Operations: Risk, Due Diligence and Governance, which will include a spotlight presentation, “The Rising Importance of Governance: Developing a Strategic & Transparent Plan.”
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
