Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Pension & Employee Benefits, December 2009
The Canadian Association of Pension Supervisory Authorities (CAPSA) has released a Consultation Paper which is entitled The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment (www.capsa-acor.org/capsa-newhome.nsf/96aacfd085938dff85256c1a0074ccd4/7d07fc4f364d0a748525767e006ce1b0/$FILE/CAPSA%20Consultation%20Paper%20Final.pdf). The Consultation Paper is stated to be "part of CAPSA's strategic initiative to promote consistency in the governance of pension funds and funding". In furtherance of this objective, the purpose of the Consultation Paper is stated to be "to provide guidance and assistance to pension plan sponsors and plan administrators, by making them aware of key issues in pension plan funding and investment". As well, with the Consultation Paper, CAPSA seeks to provide "additional guidance on the application of the prudent person rule to investment processes and best practices for funding activities, to achieve consistent governance".
CAPSA is seeking input from the pension community on the Consultation Paper (a number of specific questions for comment are listed in the Consultation Paper), with a deadline for comments of January 29, 2010. Blakes will make submissions regarding the Consultation Paper.
After the consultation process has concluded, CAPSA has indicated that it plans to develop three guidelines on the best practices that apply to pension plan funding and investment. The first guideline will examine best practices for funding policies, the second guideline will examine best practices for investment policies and the third guideline will deal with the focus of examinations by pension regulators as they apply to funding and investment processes. Appropriate checklists in support of each of the guidelines will also be developed.
The following is an overview of the specific topics referenced in the Consultation Paper.
ROLE OF PLAN SPONSOR VS. PLAN ADMINISTRATOR
As a general matter, the employer performs the role of both plan sponsor and plan administrator in a singleemployer pension plan. Accordingly, the distinction between those circumstances in which an employer is acting as plan sponsor as opposed to those in which it is acting as plan administrator is an important one. In the former situation, the employer is not acting in a fiduciary capacity and, therefore, is able to act in its own self-interest, subject to an implied duty of good faith. Conversely, in the latter situation, the employer is acting in a fiduciary capacity and, as such, is required to act in the best interests of plan beneficiaries. Helpfully, the Consultation Paper lists a number of examples of both "sponsor" functions and "administrator" functions. Examples of "sponsor" functions include plan design, plan amendment, plan merger, plan split and plan termination. Examples of "administrator" functions include ensuring contributions to the pension fund are made within prescribed timelines, ensuring investments are made in accordance with prescribed requirements, selecting and monitoring administrative service providers, adopting and regularly reviewing a SIP&P and filing actuarial valuations.
PROCEDURES AND PROCESSESFOR FUNDING AND INVESTMENT
In the Consultation Paper, CAPSA expresses the view that "plan administrators need more detailed information on prudent governance practices to improve their funding and investment processes. In particular, each pension plan should have documented processes and standards to comply with plan documents and legislative requirements, such as the prudent person rule". On the basis of this view, the Consultation Paper goes on to provide considerable detail on the "best practices" to be followed by plan sponsors and administrators when performing their investment and funding activities (for example, development of a funding policy, development of an investment policy, development of procedures respecting related party transactions, adoption of processes for the retention and monitoring of qualified experts, and clear documentation of funding and investment processes). The "prudent person" rule (which requires, at its essence, the exercise of prudence and due diligence when managing the pension fund and its assets) is stated to be the underpinning of such "best practices". In the Consultation Paper, CAPSA expresses the view that "the application of the prudent person rule is intended to lead to balanced decision making, rather than dictate particular outcomes. ... The prerequisites associated with the successful implementation of the rule includes an effective governance framework, which consists of supervising and monitoring participants, policies and performance. Since the prudent person rule emphasizes processes, it places a premium on the governance structure, deliberate decision making and appropriate documentation". It will be seen, therefore, that emphasis is placed on the role of good governance in the funding and investment arenas and that the view is expressed that, in the event of regulatory review or litigation, the employer should be judged on the processes which have been implemented and followed as opposed to the results achieved.
Funding and investment is where employer interest and administrative duty intersect. The Consultation Paper implicitly focuses attention on the connection between the two in contributing to an environment of good pension plan governance and positive pension plan performance. As such, it invites feedback on specific questions relating to the roles of sponsor and administrator as outlined in the Consultation Paper, and the elements to be addressed in funding and investment policies. As stated above, the deadline for comment is January 29, 2010.
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.