Pension plan administrators in Canada have the challenging task of selecting appropriate investments for pension plans, and reporting and monitoring such investments. The Canadian Association of Pension Supervisory Authorities recently released Guideline No. 6: Pension Plan Prudent Investment Practices Guideline along with a companion self-assessment questionnaire. The Guideline and questionnaire should assist administrators in deciding how to select, report and monitor investments for defined benefit and defined contribution pension plans. While the Guideline and questionnaire are guidelines and not legal requirements, they can assist plan administrators in meeting their fiduciary duties with respect to the investment of the plan's assets.

PRUDENT INVESTMENT PRACTICES GUIDELINE

The Guideline provides plan administrators guidance on the application of prudence to the investment of pension plan assets. Plan administrators have a fiduciary duty to ensure the pension fund's assets are invested in a prudent manner. Special considerations apply where an employer is both a plan administrator and plan sponsor. A clear understanding of which role the employer is carrying out in its various functions is important in such cases. In its plan administrator role, the employer must act in a fiduciary capacity, ensuring that its actions and decisions take into account the best interests of the pension plan beneficiaries. In its role as plan sponsor, the employer is entitled to act in its own best interests but may be subject to an implied duty of good faith.

The Guideline elaborates on "prudent investment principles" for plan administrators, which include the following:

  • Prudent Processes. Prudence focuses on plan administrators' behaviours and processes rather than requiring particular outcomes. The prudent person rule is an objective standard of conduct which refers to the actions of a prudent person. The Guideline suggests that plan administrators should make decisions based on proper consideration of adequate information, and document the final decision, the reasons for the decision, and the circumstances that were considered. It is also important to have a good governance structure, deliberate decision-making, appropriate documentation, and record keeping. Appropriate documentation includes documenting processes, policies, and procedures.
  • Statement of Investment Policies & Procedures (SIP&P) and Investment Policy. Plan administrators are required to establish a written SIP&P. The Guideline suggests that pension plans may decide to have a broader "investment policy". Such a policy could: reflect the investment objectives of the pension plan; set out investment principles, strategic asset allocation, performance objectives, risk tolerances, processes for regular monitoring and review of the objectives and tolerances, the persons delegated responsibilities for the administration and investment of the assets, and established processes; and include a process for selecting and replacing asset managers, monitoring and reviewing performance, and changing asset allocation.
  • Prudent Delegation and Monitoring. Plan administrators should assess the extent to which they have the right internal structures, processes, resources, skills, knowledge and expertise to effectively perform their investment duties. Where a plan administrator requires assistance in such areas, it may be advisable to delegate such tasks to appropriate individuals or organizations. The Guideline suggests that if delegation is to occur, the written governance documents of the plan should set out the authority to delegate, the requirement of the delegate to report back, and the obligation of the plan administrator to monitor the delegate. Further, the delegation documents should set out the terms of delegation, the delegate's obligations to report back, and whether the delegate has the authority to subdelegate. Activities by delegates should also be monitored and reviewed.

The Guideline also contains a discussion on the "prudent investment principles" of investment objectives, risk tolerances, asset allocation, and investment selection and due diligence.

The companion self-assessment questionnaire, largely modeled on the prudent investment principles described in the Guideline, contains questions and considerations that plan administrators can use to evaluate their practices.

Each defined benefit and defined contribution pension plan has its own unique considerations. The Guideline and the questionnaire can be used to assist in assessing whether a plan administrator is acting in compliance with its fiduciary duties with respect to the investment of the plan's assets. Other considerations, such as statutory requirements and case-specific considerations, may need to be considered.

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