Canada: Pension Risk Management: Administration Risks

Our Pension Alert series on risk management have discussed financial risks and investment risks. In this third issue, we discuss administration risks which may expose a plan administrator to law suits and regulatory proceedings, and provide our suggested strategies to reduce or address such risks.

Key Risk – Claims Arising From Breach of Duty of Care and Fiduciary Duties

Pension plan administration risks relate to the risks in administering a pension plan and administering and investing the pension fund.

A plan administrator is subject to the common law duty of care and fiduciary duties. Fiduciary duties include the duty to act in an even-handed manner in respect of plan beneficiaries and members (former and current). This may not be an easy task in some situations. In addition, all pension benefits standards legislation, federal and provincial, also imposes an elevated statutory standard of care which requires the plan administrator to not only use the knowledge and skills it possesses, but also the knowledge and skill that it ought to possess by its business or profession. Such fiduciary duties and standard of care apply to individuals acting as delegates of the plan administrator (e.g., human resources employees who are delegated with administrative tasks) and individual members of a pension committee which is the plan administrator.

The worst fears of a plan administrator are class actions instituted by plan members or beneficiaries for errors or omissions in plan administration arising from an alleged breach of duty of care or fiduciary duties. This is the key administrative risk.

Risk of Regulatory Action

The key responsibility of a plan administrator is to ensure that the plan and the pension fund are administered in accordance with the applicable pension benefits standards legislation.  Most (if not all) pension plans are registered under the Income Tax Act (Canada) ("ITA"). In order to maintain the registration, the plan is required to be administered in accordance with the provisions in the ITA which are applicable to a "registered pension plan".

The pension benefits standards legislation imposes numerous statutory obligations on the plan administrator, including filing and reporting requirements and disclosure requirements with prescribed time-frames and, in some cases, with prescribed forms and/or contents. It is quite possible for a plan administrator to miss a prescribed due date, omit certain prescribed contents or neglect to use a prescribed form.

In addition to statutory obligations, the pension regulators have issued guidelines and policies setting out their expectations of a plan administrator in discharging its duties. Regulatory bodies like the Canadian Association of Pension Supervisory Authorities (an association of pension supervisory authorities) has also issued guidelines for plan administration. Although such policies and guidelines do not have the force of law, they represent industry best practices which are likely used by the court as yardsticks in measuring whether the plan administrator has met the standard of care and discharged its fiduciary duties if there is a dispute before the court.

The complex and detailed statutory and regulatory requirements expose a plan administrator to a risk of committing a technical non-compliance. The regulator may institute proceedings to order compliance. A non-compliance is also a statutory offence. On conviction, penalties (a fine) will be imposed on the plan administrator and individuals (e.g., directors, officers, agents) who permit, participate in or acquiesce in the commission of the offence. If such non-compliance causes losses to plan members and beneficiaries, the plan administrator will likely have to face lawsuits instituted by them.

Risk of Administrative Errors

Obviously, a plan administrator needs to administer the plan according to its terms which requires the plan administrator to interpret plan language. Plan interpretation is not always an easy task. Plan terms can be complicated, particularly if the plan has been in existence for a long time with numerous historical amendments or if the plan covers members who are subject to the pension benefits standards legislation of different Canadian jurisdictions. Such multi-jurisdictional issues are to a certain extent addressed, but not completely removed, by the Agreement respecting Multi-Jurisdictional Pension Plans.

Here are some examples of typical administrative errors: failure to enroll employees after they have satisfied the membership eligibility requirements, making benefits payments to a wrong beneficiary (e.g., "spouses" with competing claims), using defective forms (e.g., defective form of spousal waiver), miscalculation of benefits resulting in overpayment or underpayment of benefits and miscommunication with plan members or beneficiaries.

Administrative errors do not only expose the plan administrator to claims from plan members and beneficiaries. If the errors arise from the failure to administer the plan according to the plan terms as registered with the Canada Revenue Agency ("CRA"), there is a risk that CRA may revoke the plan registration with adverse tax consequences to the plan sponsor and members.

"Fixing" an error can be difficult, particularly if the error was made a long time ago and affects a large group of employees and/or former employees. Sometimes the rectification requires court approval. It is advisable to seek professional assistance before embarking on any action to "fix" an error.

Risks Arising from Delegation Without Proper "Control" Mechanism

In view of the complex technical statutory requirements and administrative tasks, a plan administrator will likely desire to delegate some or all administrative tasks internally or externally to a service provider at some point in time during the course of plan administration. If a plan administrator does not have the required knowledge and skill to administer a plan, it must either acquire such knowledge and skill or delegate the tasks to a service provider that has the required knowledge and skill.

All pension benefits standards legislation permits a plan administrator to delegate almost all administrative tasks but it also requires the plan administrator to exercise the duty of care in selecting the delegates and to supervise the performance of the delegates. The plan administrator will not be "off the hook" by delegating its responsibilities. It can remain liable for the errors and omissions of its delegates.

A common difficulty in delegation to an external service provider is the negotiation of the service contract (particularly if it is a small pension plan) because of the unequal bargaining power. Usually the service provider will ask the administrator to sign its template service contract which typically favours the service provider. It is also common for a service provider to include a monetary limit on its liability. As a result, the administrator has limited recourse against the service provider when sued by plan members or beneficiaries for errors made by the service provider.

Cyber and Privacy Risks

Most plan administrators and their service providers have embraced advanced computer technology one way or the other in plan administration. Electronic means are used in member communications and plan data storage. Plan data includes sensitive information such as social insurance numbers, dates of birth, banking information and details about family members.

Plan administrators have to comply with e-commerce legislation and industry guidelines in using technology in plan administration. Regulators do not object to the use of electronic means in plan administration. Use of technology is definitely part of the modernization of the pension system. However, the use of technology is coupled with cyber risk and data management issues. A cyber attack or the inadvertence of in-house personnel or external service providers could result in wrongful access to plan data and exposing the plan administrator to claims for breach of privacy law.

Strategies to Minimize Administration Risks

A plan administrator is liable to plan members and beneficiaries for an error made in plan administration if it is proved that the administrator fails to meet the standard of care or discharge its fiduciary duties. In addition, the plan administrator may be subject to penalties for failing to comply with the requirements under the pension benefits standards legislation. To minimize the risks, plan administrators should exercise due diligence in all facets of plan administration, which emphasizes the importance of having a good governance structure, a deliberate decision-making process, appropriate documentation and recordkeeping and the monitoring of plan administration. It is also advisable for the plan administrator to document the process for its due diligence defence.

Below is a list of recommended strategies to address or minimize different administrative risks.

  • Set up a sound and effective governance system with a regular periodic review of its appropriateness.
  • Maintain a good checklist of all statutory and regulatory reporting, filing and other requirements, the prescribed time-frames and the individuals having responsibility for compliance with each of such requirements.
  • Maintain a sound policy and practice that safeguards plan data.
  • Select appropriate service providers with a contract that contains reasonable and workable terms with as strong a protection as possible (e.g., regular reporting, compliance certification, service standards, a high standard of care provision, error rectification process and a strong indemnity).
  • Keep proper records of the decision-making process.
  • Designate specific individuals to handle employees' enquiries and complaints, keep proper records of enquiries and complaints and responses and actions in response.
  • Seek professional advice when appropriate.

A plan administrator may also wish to perform compliance audits on a periodic basis to confirm that the plan administration is in compliance with legal requirements. The scope of the audit varies. It can range from an audit of a specific aspect of plan administration (e.g., plan fund investment) or a comprehensive audit (e.g., the entire governance and administration structure). The administrator needs to bear in mind that any gaps or concerns revealed by the audit need to be properly addressed; otherwise it will likely work against the administrator as evidence of the administrator failing to properly administer the plan.

Even with the greatest caution, sometimes an error or member's complaint or law suit is not avoidable. It is highly desirable for a plan administrator to review the situation with professional advice before responding or taking any action. Sometimes a "quick" fix without considering its implications may result in more problems than the problem to be fixed.

Liability Insurance and Other Protection

When a plan administrator suffers a loss in performing its duties in plan administration, it can claim reimbursement by the pension fund. This does not offer "bullet-proof" protection to the plan administrator. The plan administrator may not be able to claim reimbursement from the pension fund if the loss arises from its wrongful act or omission. Sometimes there is an indemnification agreement of the employer in favour of the administrator and its delegates. The employer's indemnification is not meaningful if the employer is the administrator. The effectiveness of the indemnification also depends on the financial condition of the employer.

A plan administrator (including an employer wearing the plan administrator's hat) may wish to consider purchasing fiduciary liability insurance. The scope of coverage varies. It can cover administrative errors, claims brought by plan beneficiaries, claims brought by regulators, etc. Insurance premiums and deductibles may be paid from the pension fund as an administrative expense, depending on the plan terms.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions