Air Canada Pionairs

Transcription

Air Canada Pionairs

SUBMISSION
TO
CANADIAN ASSOCIATION OF SUPERVISORY AUTHORITIES
RE
PENSION PLAN PRUDENT INVESTMENT PRACTICES (March 2011)
PENSION PLAN FUNDING POLICY GUIDELINES (March 2011)
SELF ASSESSMENT QUESTIONAIRE ON PRUDENT
INVESTMENT PRACTICES (March 2011)
31 May 2011
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CONTENTS
PART I
Executive Summary
PART II
Pension Plan Prudent Investment Practices Guideline
PART III
Pension Plan Funding Policy Guideline
PART IV
Self-Assessment Questionnaire on Prudent Investment Practices
PART V
Addendum
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I.
EXECUTIVE SUMMARY
The Air Canada Pionairs greatly appreciate the opportunity to make a submission and to
comment with regard to the Canadian Association of Pension Supervisory Authorities
draft guidelines, “Pension Plan Prudent Investment Practices”, “Pension Plan Funding
Policy” and the associated “Self Assessment Questionnaire on Prudent Investment
Practices” issued 1 March 2011. We believe these initiatives should be of assistance to
all Pension Plan stakeholders (Sponsors, Administrators, Regulators, Actuaries and
Beneficiaries) in designing, structuring, maintaining and sustaining major elements of the
fabric of Canadian retirement income systems. CAPSA is to be congratulated on a strong
contribution to the sound governance of pension plans in these documents.
The Air Canada Pionairs is a federally registered not-for-profit organization formed over
30 years ago to promote communications and social activities among Air Canada Retirees
who are dependent on the Air Canada Pension Trust Fund for retirement income. Since
Air Canada’s exit from CCAA in September 2004, Pionairs have monitored Air Canada’s
Trust Fund reports and performance. It communicates issues of concern to the retirees
and takes action as appropriate on their behalf.
There are over 15,000 Pionairs representing more than half of Air Canada’s retirees. It is
part of a growing network of pensioner groups – the Canadian Federation of Pensioners –
that together represent some 150,000 retirees from across Canada.
Both the Investment Guideline and the Funding Guideline draw attention to the fact that
for many pension plans, the employer is both the plan sponsor and the plan administrator.
They also describe that the employer’s responsibilities to the pension plan members differ
in respect of each of these roles. In particular, in its role as administrator, but not in its
role as sponsor, the employer is “a fiduciary whose actions and decisions must be made
in the best interests of the plan’s beneficiaries in an even-handed manner.” The Ontario
Expert Commission on Pensions, in Recommendation 8 – 9, spoke to this issue, noting
the potential for a conflict of interest in respect of these two rules. The commission
recommended explicit actions to provide oversight on potential conflicts of interests,
particularly to provide: representation for members and/or retirees and/or independent
members on the plan’s highest decision-making body.
Throughout the guidelines, emphasis is placed on the role of sponsor and administrator.
This emphasis is well placed; however, there does not appear to be significant guideline
focus on measuring the effectivity of these functions relative to the achievement of a
viable, fully solvent, sustainable pension fund. One of such measurements might be the
achievement by the administrator of its goals versus those of the sponsor. The guidelines
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would provide an extremely valuable tool to the regulators and beneficiaries by
highlighting a process for such measurement.
Though CAPSA has documented many measures that can be expected to strengthen plan
governance, they are presented as “guidelines”, as measures that sponsors and
administrators might consider for implementation. Guidelines do not carry the weight of
requirements; measures that can be considered for implementation can also be rejected.
To strengthen plan governance, it is proposed that the measures outlined in the CAPSA
documents as amended by the comments herein, be required of plan sponsors and
administrators.
While the guidelines define adequately the roles of sponsors, administrators, and
delegations, there is neither recognition nor role definition for the reason a pension fund
exists, namely the role of the beneficiary. CAPSA should recognize, particularly as it
applies to beneficiary contribution plans, and contractual requirements, that such
recognition is required. Development of a guideline outlining the role of the beneficiary
is particularly critical and urgent in these volatile financial times. The guideline should
also include a requirement that sponsors and administrators be cognizant and aware of the
need for participation by the pension recipients particularly when the plan lacks full
solvency. This issue has been recognized in legislation (Bill c-9) wherein the
beneficiaries in a distressed plan negotiation must be a component of the negotiation.
CAPSA, in its previous initiative, guidelines “the Prudence Standard and the Roles of the
Plan Sponsor and Plan Administrator in Pension Funding and Investment (November
2009)”, requested stakeholders participation. However, while there may have been
consultations with some stakeholders, there apparently was little or no effect on the
guidelines to date as a result of submissions by a critical community of stakeholders – the
beneficiaries, pensioners and retirees. We recommend that retiree groups be included in
any advisory group assisting CAPSA in developing the guidelines. Pensioner groups are
often composed of professional, skilled, knowledgeable individuals whose functions prior
to retirement focused on pension development, security, investment, governance, and
those elements critical to the objectives delineated by CAPSA.
In summary the Pionairs would greatly appreciate having the Guidelines revised to;
•
•
•
•
Become Regulations
Ensure full transparency for all elements of the pension plan to the beneficiaries
Acknowledge the critical contributions which can be made by the beneficiaries
Require the establishment of benchmarks so as to ascertain the performance of the
pensions’ guardians
The Air Canada Pionairs are members of the Canadian Federation of Pensioners, which
advocate on behalf of 150,000 retirees of defined benefit plan organizations. The
Pionairs have participated in and fully support the comments provided by the Bell
Pensioners Group and the CFP to CAPSA draft documents.
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II
PENSION PLAN PRUDENT INVESTMENT PRACTICES
1. Prudent Investment Practices
There are a number of DB Plans in which the employees are required to make
contributions, often matched in varying amounts by the Sponsors. Inasmuch as
both the employee and the sponsor provide considerations ( in some cases wage
deducted financial contributions), which are elements of the jointly agreed
employment contract by which the employer agrees to provide an agreed pension
to the employee on retirement. CAPSA may wish to understand the difference
which exists between a contract and a promise and institute provisions in the
guidelines to ensure that the employer/sponsor meets its contractual obligations
relative to governance, investment and funding policies for each type of plan..
In regard to the opportunities provided by the DC Plans, the sponsor/administrator
must be required to carry out extensive due diligence in regard to the investment
supplier. The individual beneficiary should have the most professional investment
guidance and information to make decisions applicable to his best ongoing
interests and livelihood in retirement.
2. Self-Assessment Questionnaire
The Questionnaire contributes to sound pension plan governance by providing a
plan administrator with an effective tool to review its investment practices, and by
providing the relevant pension regulator and the beneficiaries with information
that will allow them to determine whether the administrator is fulfilling its
statutory duty to act in a prudent fashion. It would also be beneficial to these
parties to have a third party audit process of the plan investments.
3. Role of the Plan Administrator
The development by the administrator of SIP&P/SIP&G provides no assurance
that these Policies and Goals are being achieved. CAPSA Guidelines should
include a requirement for regulated and reported plan investment Risk
Assessments and Achievements vs Benchmarks.
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4. Role of Plan Sponsor
Since the Plan Sponsor has the authority and responsibility to set the design and
funding structure of the Plan, and may either be the administrator or the appointee
and selectee of the administrator, the employer/sponsor should be held to the
same fiduciary responsibility as the administrator. This is particularly the case
when a sponsor has a corporate division which sets investment policy and
commitments, while currently employing an administrator. Consequently, the
sponsor should establish an optional process by which the key stakeholder
(beneficiary) is consulted and can provide comment on the investment policy.
Such a process would not transfer any risk from the plan sponsor of relieve it of
its contractual responsibilities.
5. Dual Role of the Employer as Plan Administrator and Plan
Sponsor
Because of the inherent actual or implied conflict of interest which exists when
the plan sponsor (employer) is also the administrator, the guidelines need to
mandate a level of transparency which may not be required when the functions
are separate. This transparency should include full disclosure of SIP’s to the
beneficiaries, setting and achieving benchmarks, confirmation of risk assessment
and such other issues which may impact on the achievement of the beneficiary/
sponsor contract.
6. Communication between Plan Administrator and Plan Sponsor
Generally a contractual agreement involves communications between the
contracting parties. In the draft guidelines there is no such requirement made, but
only a recommendation for two functions, sponsor and administrator, to be in
communication unilaterally with each other, even though they may be conflicted
with regard to the other contributing counter party (contributing beneficiary). In
all fairness and the possibility of a legal requirement, all parties, including the
beneficiaries, need to maintain continuous and acceptable communication in
regard to the operation of the plan funding and investments. The rights of the
beneficiaries to receive and understand these communications should be
prescribed.
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7. Communication with Plan Beneficiaries
Having guidelines which encourage narrow and restricted communications by a
sponsor in a universe of financial volatility and free market strategies where
sponsors are acquired, dissolved for financial gain, often encourages activities
which result in failure or termination of pension plan trust funds regardless of
guidelines or regulations. Often the deliberate creation of pension plan
insolvency by unethical hedge funds results in the best interests of pensioners not
being achieved, particularly when there is a lack of transparency with regard to
the funding and investing in the pension plan and its attendant pension trust fund.
It is essential that communication and transparency be available to those groups
and committees acting on behalf of the retirees and who maintain to the extent
possible, oversight on the pension plan. The current narrowness of the guidelines
permits critical knowledge to often be denied beneficiaries by the
sponsor/administrator. Transparency and communication requirements should be
agreed between the sponsor/administrator and the beneficiaries, particularly with
regard to risk strategies and risk assessment.
8. Prudent Investment Practices Guideline
It is incumbent that the plan beneficiaries, demonstrate ability, professionalism,
skill and knowledge sufficient to provide consistent opinion of the
implementation of this guideline. The representatives should be provided with the
data having sufficient transparency to allow them to evaluate and provide
assistance on the investment practices, and if necessary plan actuaries..
9. Prudent Person Rule
We concur with the principle and would suggest that as part of its implementation
and consultation, professional, skilled, knowledgeable, retiree representatives be
included in any due diligence requirements.
10.Prudent Delegation
No comment.
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11.Investment Objectives
The guidelines correctly consider conflict of interest. In particular, section 1 asks
the administrator to “identify how the pension fund’s investment objectives take
into consideration… the acceptable degree of risk for the pension fund, the plan
sponsor and plan beneficiaries”. This section evinces a confusion about the dual
roles that the employer frequently plays. Though the administrator has to
consider the investment risk faced by the pension fund and its members, if the
administrator also has to consider the investment risk faced by the sponsor, then
the administrator will not be able to act in the best interests of the plan members,
as it is obligated to do. As written, this section reinforces the conflict of interest
rather than mitigating it to the extent possible.
In all instances, the pension plan funding is a result of a contract between two
parties. The beneficiaries and the sponsor should agree on issues relating to the
goals and objectives. These goals and objectives need to be transparent and
available to both parties. Concurrently, it may be of great value if the benchmark
for the goals and objectives are agreed, or at the least made known regularly to
both parties. These bench marks may be more flexible if a plan is fully solvent.
12.Risk Tolerances
While the risk associated with DC Plans inures to the beneficiary, it is well
understood this is not the case for DB Plans. In many instances in the last decade,
sponsors, for various reasons, have not honoured their commitments to
maintaining full solvency. Additionally, sponsors have so enriched the pension
plan that its solvency is in long term doubt. The guidelines should include greater
participation by the beneficiaries in the risk/tolerance and development process
when the plan is not fully solvent and is at risk.
The risk of plan underfunding properly rests with the sponsor, since the sponsor
has contracted with the plan members that their pension benefits will be paid,
irrespective of market performance. As long as the employer remains in business,
investment risk resides with the employer. The Administrator is permitted to
invest in vehicles that are not risk-free because it is understood that (a) strong
market performance is favourable to the plan sponsor and has no negative
implications for the plan's members, and (b) the negative implications of poor
market performance fall to the sponsor who has an obligation to fulfill its
contract. However, should the employer falter and consequently not remain in
business, then the risks of poor investment performance are not felt exclusively by
the sponsor. Rather, if the poor performance has caused there to be plan
underfunding, and the bankrupt sponsor is not capable of making good that
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underfunding, then pensioners face reductions to their pension payments. As an
agent acting in the interests of the plan members, the Administrator has to take
this risk to plan members into account when setting its investment strategy. One
can imagine that an Administrator who sets its investment strategy solely in
consideration of the sponsor's funding risk, may choose from time to time to “take
a flier” in a risky venture with the hope that the sponsor's obligation to contribute
additional funds to the plan might be reduced. Though that may be in the interest
of the sponsor, it is not in the interest of the plan members whose future
livelihoods depend on sound funding of the pension plan, and these livelihoods
may well be challenged should the risky venture prove unsuccessful.
The Investment Guideline states that “the plan administrator needs to achieve a
balance between risk and reward considerations.” It should be stressed, however,
that the rewards accrue to the sponsor only, where the risks are borne by both the
sponsor and the members of its defined benefit plan. The risks to pensioners of
poor investment performance are well understood, and those risks are realized
when the sponsor of an underfunded plan enters bankruptcy. But what are the
rewards to pensioners? Pensioners do not concern themselves with the
hypothetical question of distributing plan surpluses among themselves. Rather,
their concern is with the very real – and all too often experienced – situation
where an underfunded plan is wound-up. The “rewards” of strong plan
performance go to the sponsor, in the form of reduced, or nil, contribution
requirements. Hence, the risk/reward considerations are not the same as those
faced by, say, individual investors. Both the sponsor and its plan's members face
the risks, but the rewards are asymmetrically realized by the sponsor only.
So that greater clarity can be provided regarding the manner in which the
potential for conflict that exists between the sponsor and administrator in respect
of the investment strategy has been addressed, it is proposed that the administrator
be required; a) to articulate its considerations that lead to the balance of risks
that it has adopted, and b) to articulate the considerations that lead it to
conclude that the risks to the plan members should be considered acceptable
13.Investment Policy/Statement of Investment Policies & Procedures
The guidelines for developing the SIP&P appear to suggest that the SIP&P has a
management by objective process. While laudatory, history has confirmed that
unless an appropriate strategy and assessment of the effectiveness of the strategy
is achieved concurrently, the goals and objectives remain unachieved. It is
therefore necessary that in the SIP&P there be included sponsor/administrator
strategies for achievement. On a regular basis the risk assessment of the
effectivity of the strategy must be made, be transparent and communicated to all
stakeholders. This process would result in an ability to make alterations to the
strategy and achieve improvements for the ongoing viability of the plan.
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14.Asset Allocation
The draft guidelines suggest that the level of expertise of individuals entrusted
with this critical function be confirmed in regard to asset allocation, so as to
assure such expertise is inclusive. The consultation with retiree representatives
with skill, knowledge and dedication would, without doubt, enhance the process
as applied to specific sponsors.
15.Investment Selection and Due Diligence
No Comment
16.Monitoring
Provided previous recommendations in regard to transparency and
communications are adhered to, the issues raised are appropriate and should be
available to all stakeholders.
17.Documenting Processes, Policies and Procedures
It is assumed one of the objectives is to provide transparency and objectivity to
investment practices and thereby enable oversight of the contract achievement by
all stakeholders (regulators, sponsors, administrators, beneficiaries).
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III
PENSION PLAN FUNDING POLICY GUIDELINE
1. Pension Plan Funding Principles and Objectives
There are a number of elements pertinent to funding requirements, other than
benefit security. They are often used as issues in Union contractual negotiations,
flexibility in achieving retirement objectives, variability in a sponsor’s business
plan. Nevertheless, in many instances, they are a contractual agreement either
imposed by a sponsor/employer or negotiated during a contract settlement.
Due to the volatility of the plan assets and on occasion, the liability arising from
large numbers of retirements in a short time period, there needs to be continuous
dialogue between the contractual parties and the beneficiaries. The ultimate goal
in our current world is not necessarily the same for the plan sponsor and its
beneficiaries and often may be in conflict.
The sponsor’s desire for certainty is understood, even if it entails plan termination
and wind up. The goal of the beneficiaries is similar in regard to certainty;
however, it also includes sustainability of the contractual agreement. Guidelines
need to be established establishing parity between the two goals, such that
beneficiaries are not penalized. In the context of the principles, the advantage is
clearly to the sponsor since little effort is made to insulate the beneficiaries.
2. Purpose of a Funding Policy
In many instances, the investment incentives of the plan members will coincide
with those of the sponsor. Clearly, both have the ultimate objective that the plan’s
assets are sufficient to cover its liabilities. For pensioners, this objective assures
adherence to the pension contract, even if the sponsor ceases to be a going
concern. For the sponsor, achievement of this objective reduces or eliminates the
need for additional pension plan contributions. In addition, marked fluctuations
in plan financial status over time are unattractive to both plan members and plan
sponsor. Rather, both favour certainty and stability, since an unstable financial
dynamic may quickly turn a fully-funded plan into one requiring additional
funding. The sponsor understandably endeavours to avoid situations which call
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for additional plan contributions; plan members wish to avoid the risk of under
funding, since that would ultimately result in lower pension payments should the
sponsor falter before the plan is brought back to full funding.
The risk of plan under funding properly rests with the sponsor, since it is the
sponsor that has committed to its plan members that their pension benefits will be
paid, irrespective of market performance. One can imagine that an administrator
who sets its investment strategy with, at least in part, consideration of the
sponsor’s funding risk, may choose from time to time to “take a flier” in a risky
venture with the hope that the sponsor’s obligation to contribute additional funds
to the plan might be reduced. Though that may be in the interest of the sponsor, it
is not in the interest of the plan members whose future livelihoods depend on
sound funding of the pension plan, and these livelihoods may well be challenged
should the risky venture prove unsuccessful. As previously mentioned in these
instances there needs to more stringent rules, involving the beneficiaries applied.
In addition to the factors mentioned above, one of great interest to beneficiaries
and for which there is implied attention is the issue of objectivity and
sustainability. As indicated, the guidelines relate to the issues relevant to the
sponsor. These often are conflicting and an equitable balance needs to be
established with consideration for those of the beneficiaries who are one of the
contracting parties.
3. Role of the Plan Sponsor
See 5 below
4. Role of the Plan Administrator
See 5 below
5. Dual Role of the Employer as Plan sponsor and Plan
Administrator
There is an issue lacking in this guideline in that it focuses on the role of the Plan
Sponsors, Administrator or both jointly. However, inasmuch as the critical
stakeholder is missing, the guideline is incomplete. There must be a role for the
beneficiaries who, at the very least, are being viewed as silent stakeholders, but
more frequently than not, are signatories to a contract with no voice.
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At a minimum the “Role of the Beneficiary” is to be a participant in determination
of the plan design structure and to have rights on a regulated basis to be consulted
on investment and funding strategies. The responsibilities of the beneficiaries are
to assist the sponsor/administrator in performing their roles while providing
counsel and guidance on issues pertinent to plan sustainability. Depending on the
terms of the contract, the beneficiaries may be required to monitor the extent to
which the sponsor is asserting a fiduciary standard of care and alert the regulators
to the impact of any sponsor delinquencies. Such involvement however would not
transfer any risk from the plan sponsor.
While the regulator requires actuarial reviews, in too many instances the actuaries
may be tempted to utilize data or calculations such as interest rates, to bias the
conclusions in favour of the sponsor. The inclusion of beneficiaries having some
oversight can mitigate this practice, and access to the plan actuaries is critical.
6. Developing a Funding Policy
To be successful, a pension plan policy and strategy requires cooperation by two
parties – the sponsor and the beneficiary. Both parties have provided
considerations to achieve a contractual agreement, on occasion forming part of an
employment agreement. The beneficiaries have equal rights with the sponsor to
accept or reject the contract; however, for several decades sponsors have
employed mandatory pension conditions as an employment condition. The
guidelines have an opportunity to rectify one of the key elements which have
often led to pension plan failure. The employer needs to be tasked with involving
beneficiary representatives in plan development strategies and funding so as to
mitigate the existing imbalance without in any way reducing his responsibilities.
7. Element of a Funding Policy
The list of elements is indeed very commendable. In reality, however, few
sponsors are measured with regard to their achievement of, or adherence to, all of
the elements. Further, few if any, identify benchmarks and it is left to the
regulators to monitor sponsor performance. While the regulators’
accomplishment of their task has been exceptionally noteworthy, one need only
review the last decade of pension trust fund terminations and wind ups with major
solvency deficiencies and thousands of beneficiaries bereft of their livelihoods
without recourse, to ascertain the need for timely benchmarks. There is a critical
need for guidelines to enforce the elements, as well as to ensure that sponsors
provide adequate funding (similar to Bank and Insurance Corporations) of their
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contractual obligations. These measures need to be transparent and
communicated to all stakeholders including beneficiaries.
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IV
SELF-ASSESSMENT QUESTIONNAIRE
ON
PRUDENT INVESTMENT PRACTICES
CAPSA has developed a very useful Self-Assessment Questionnaire. The use of the
recommendations identified in the Addendum would significantly strengthen the
document and increase the transparency of the reporting. . The Pionairs also believe one
additional section would greatly benefit and and recognize the need for retiree
involvement in CAPSA’s initiative to promote consistency in the governance of pension
funds and funding.
Transparency and Communication to Stakeholders
While the guidelines are specific with regard to governance, investment and funding the
elements relative to transparency of data, strategy and recommendations are critical to
ensuring the credibility of the roles and responsibilities.
Pionairs would be pleased to assist CAPSA in developing such a Self Assessment
document.
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ADDENDUM
Guidelines
Plan sponsors and administrators should be directed to implement the measures contained
in the final documents concerning funding policy and investment practices.
The Questionnaire should be completed annually by each plan administrator, be filed to
be reviewed by its pension regulator, and be made available to all plan members.
Roles and Responsibilities
The Roles and Responsibilities sections should be supplemented to include the following:
•
Provide the text wherein it is stated that the administrator has a duty to act in the
interests of the plan members
•
Describe the processes used to ensure that all individuals are acting as, or in
support of, the administrator understand this duty
•
Describe the processes employed to identify, and to reduce or eliminate inherent
conflicts of interest
•
Include consultative participation by professional, skilled, knowledgeable retiree
representatives.
Administrator’s Accountability
Section I of Investment Objectives should require the administrator:
•
to articulate its considerations that lead to the balance of risks that it has
adopted, and
•
to articulate the considerations that lead it to conclude that the risks to the plan
members should be considered acceptable .
Pension plan regulators should require administrators to conduct plan valuations, both
solvency and ongoing, no less frequently than annually.
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If plan valuations are completed less frequently than annually, then the administrator
should be required to document in the Questionnaire
•
The risk that this infrequent valuation poses,
•
The manner in which this risk is taken into account in the investment practices,
and
•
The measures employed in the administrator’s processes to mitigate that risk.
It is proposed that CAPSA encourage the adoption of regulations that would require
sponsors to reset their funding obligations according to plan valuations that are completed
no less frequently than annually.
•
Describe the process used to determine whether the funding policy, together with
expected plan performance, is capable of achieving plan solvency within five
years.
•
Describe the process used by the administrator to inform the sponsor regarding
the adequacy of the current funding levels to achieve plan solvency, and over
what period of time.
•
Describe the adjustments to the funding levels made in reaction to the advice
referenced above.
•
Identify the means used for selecting benchmarks, including the rationale
employed to determine that those benchmarks support the interests of plan
members.
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The Canadian Federation of Pensioners
Advocating on Behalf of Pensioner Groups & Their Members
31 May 2011
Christian Nordin
Policy Manager, CAPSA Secretariat
c/o Financial Services Commission of Ontario
5160 Yonge Street, Box 85
Toronto, ON M2N 6L9
sent by E-mail: [email protected]
Subject: Prudent Investment Guideline, Funding Policy Guideline, Self-Assessment Questionnaire
Attached is the joint submission of the Bell Pensioners' Group (BPG) and the Canadian Federation of
Pensioners (CFP) in response to the invitation by CAPSA for comment on the above noted Guidelines
and the companion Questionnaire.
BPG and CFP consider pension plan governance to be of critical importance to the security of
pensioners. Sound plan governance, premised on a firm understanding of the roles and responsibilities
of the plan's sponsor and the plan's administrator, is essential to the effective operation of the pension
plan. The ultimate objective of the pension plan is to deliver on the pension promises that have been
made to the plan's members. Failure to fulfill these promises has a direct and material impact on
pensioners. For this reason, all pensioners are key stakeholders in pension plan practices, and in
particular in the governance practices of their pension plan.
As the submission points out, CAPSA has proposed many useful measures that would add to the
security of pensioners. The attached submission suggests ways in which those proposals could be
further strengthened, and compliance can be ensured.
Timely implementation of these proposals is important. The sooner they are in place, the sooner will be
the added protection afforded to pensioners. It is hoped that CAPSA will be in a position to act on these
recommendations in short order. In this regard, CFP understands that its comments of 4 February 2010,
some sixteen months ago, as well as the comments of other parties regarding "The Prudence Standard
and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment" are
still under consideration by CAPSA. We trust that these considerations will be completed soon.
Pensioners also hope that the consultation process that is the subject of the attached submission will
result, in the near future, in measures that will enhance pension plan governance practices.
BPG and CFP stand ready to assist CAPSA in its deliberations. We trust that CAPSA will welcome the
voice of pension plan members as key stakeholders in all issues that contribute to the sound governance
of pension plans. We would be pleased to discuss these matters with CAPSA at any time.
Yours truly,
Robert F. Farmer
President, Bell Pensioners' Group
Director, Canadian Federation of Pensioners
133 Stonehome Cr, Almonte, ON, K0A 1A0
[email protected]
Encl.
Comments of
Bell Pensioners' Group
and
Canadian Federation of Pensioners
on
Canadian Association of Pension Supervisory Authorities:
Pension Plan Prudent Investment Practices Guideline (1 March 2011),
Pension Plan Funding Policy Guideline (1 March 2011)
and
Self-Assessment Questionnaire on Prudent Investment Practices (1 March 2011)
31 May 2011
The Bell Pensioners' Group (BPG) and the Canadian Federation of Pensioners (CFP) are pleased to
comment on the draft guidelines for Pension Plan Prudent Investment Practices and Pension Plan
Funding Policy and the associated Self-Assessment Questionnaire1. The Canadian Association of
Pension Supervisory Authorities (CAPSA) has made a strong contribution to the sound governance
of pension plans in these documents, and is to be congratulated in for its work in this area.
BPG represents the interests of more than 30,000 retired members of Bell Canada's defined benefit
pension plan. CFP advocates on behalf of the 150,000 retirees of the defined benefit pension plans
of its member organizations. Because pensioners have a direct interest in the sound governance of
their pension plans, BPG and CFP welcome the opportunity to comment on the draft documents.
The Questionnaire contributes to sound pension plan governance by providing a plan administrator
with an effective tool to review its investment practices, and by providing the relevant pension
regulator with information that would allow it to determine whether the administrator is fulfilling its
statutory duty to act in a prudent fashion. Below, amendments to the Questionnaire are proposed,
building on the strong framework already established in CAPSA's draft documents.
Measures should be requirements, not guidelines
Though CAPSA has documented many measures that can be expected to strengthen plan
governance, they are presented as "guidelines", as measures that sponsors and administrators might
consider for implementation. Guidelines do not carry the weight of requirements; measures that can
be considered for implementation can also be rejected. To strengthen plan governance, it is proposed
that the measures outlined in the CAPSA documents, as amended by the comments herein, be
required of plan sponsors and administrators. Specifically,
1 In this submission, "Guideline No. X, Pension Plan Prudent Investment Practices Guideline, March 1, 2011" is
referred to as the "Investment Guideline"; "Guideline No. X, Pension Plan Funding Policy Guideline, March 1, 2011"
is referred to as the "Funding Guideline"; and "Self-Assessment Questionnaire on Prudent Investment Practices,
March 1, 2011" is referred to as the "Questionnaire".
1
Plan sponsors and administrators should be directed to implement the measures
contained in the final documents concerning funding policy and investment
practices.
The Questionnaire should be completed annually by each plan administrator, be
filed with and reviewed by its pension regulator, and be made available to all
plan members.
The sponsors and administrators of many defined benefit pension plans already follow the measures
discussed in the draft documents, and they will find little difficulty in documenting their practices in
the form of the Questionnaire. As for those pension plans whose sponsors and administrators do not
currently conform to the measures, the consequent strengthening of the governance of these plans
will add to the security of their pension plan members, and the administrators will be able to provide
evidence of compliance with their statutory obligations.
Our proposals for the Questionnaire are suggested as means to mitigate the risk that the pension that
has been promised to a retiree in partial compensation for his or her life of work will not be realized
in full. The Investment Guideline succinctly captures this risk:
"The pension plan's primary risk is not being able to pay pensions."2
Similarly, the Funding Guideline articulates the key hopes of pensioners in regard to their pension
plan:
"The goal of funding defined benefit pension plans is to ensure that sufficient assets
will be accumulated to deliver the promised benefits on an ongoing basis. This is
particularly intended to protect pension benefits in situations that involve employer
insolvency or bankruptcy."3
Each of the proposals below is made in furtherance of this objective.
2 Investment Guideline, page 7
3 Funding Guideline, page 3
2
Strengthen measures to address potential conflicts of interest
Both the Investment Guideline and the Funding Guideline draw attention to the fact that for many
pension plans, the employer is both the plan sponsor and the plan administrator. They also
acknowledge that the employer has different responsibilities to pension plan members in each of
these two roles. In particular, in its role as administrator, but not in its role as sponsor, the employer
is "a fiduciary whose actions and decisions must be made in the best interests of the plan's
beneficiaries in an even-handed manner."4 The Ontario Expert Commission on Pensions also spoke
to this issue, noting the potential for a conflict of interest in respect of these two rules, and
recommended explicit actions to provide oversight on potential conflicts of interests:
"Recommendation 8-9 Plan sponsors who administer their own plan should be
encouraged to reduce or eliminate inherent conflicts of interest by:
ensuring, so far as possible, that those assigned to the role are given an
unequivocal mandate to act in the best interests of the plan;
providing representation for members and/or retirees and/or independent members
on the plan's highest decision-making body; or
retaining arm's-length professional advisors to administer the plan on their
behalf."5
Sections 1 and 2 under Roles and Responsibilities canvass this important issue. However, it is
proposed that
the Roles and Responsibilities sections should be supplemented to include the
following:
Provide the text wherein it is stated that the administrator has a duty to act
in the interests of the plan members,
Describe the processes used to ensure that all individuals acting as, or in
support of, the administrator understand this duty and act in accordance
with this duty,
Describe the processes employed to identify, and to reduce or eliminate
inherent conflicts of interest, and
Describe the processes employed to resolve conflicts of interest which are
identified.
4 Funding Guideline, page 4
5 "A Fine Balance", Report of the Ontario Expert Commission on Pensions, 2008, page 165
3
The sections relating to Investment Objectives also speak to the potential conflict of interest. In
particular, section 1 asks the administrator to "identify how the pension fund's investment objectives
take into consideration … the acceptable degree of risk for the pension fund, the plan sponsor and
plan beneficiaries". This section illustrates the conflict that may arise in the dual roles that the
employer plays.
In many instances, the investment incentives of the plan members will coincide with those of the
sponsor. Clearly, both have the ultimate objective that the plan's assets are sufficient to cover its
liabilities. For pensioners, this objective assures payment of the pension promise, even if the
sponsor ceases to be a going concern. For the sponsor, achievement of this objective reduces or
eliminates the need for additional pension plan contributions. In addition, marked fluctuations in
plan financial status over time are unattractive to both plan members and plan sponsor. Rather, both
favour certainty and stability, since an unstable financial dynamic may quickly turn a fully-funded
plan into one requiring additional funding. The sponsor understandably endeavours to avoid
situations which call for additional plan contributions; plan members wish to avoid the risk of
underfunding, since that would ultimately result in lower pension payments should the sponsor falter
before the plan is brought back to full funding.
The risk of plan underfunding properly rests with the sponsor, since it is the sponsor that has
promised its plan members that their pension benefits will be paid, irrespective of market
performance. As long as the employer remains in business, investment risk resides with the
employer. The administrator is permitted to invest in vehicles that are not risk-free because it is
understood that (a) strong market performance is favourable to the plan sponsor and has no negative
implications for the plan's members, and (b) the negative implications of poor market performance
fall to the sponsor who has an obligation to fulfill its pension promises. However, should the
employer falter and consequently not remain in business, then the risks of poor investment
performance are not felt exclusively by the sponsor. Rather, if the poor performance has caused
there to be plan underfunding, and the bankrupt sponsor is not capable of making good that
underfunding, then pensioners face reductions to their pension payments. As an agent acting in the
interests of the plan members, the administrator has to take this risk to plan members into account
4
when setting its investment strategy. One can imagine that an administrator who sets its investment
strategy solely in consideration of the sponsor's funding risk, may choose from time to time to "take
a flier" in a risky venture with the hope that the sponsor's obligation to contribute additional funds to
the plan might be reduced. Though that may be in the interest of the sponsor, it is not in the interest
of the plan members whose future livelihoods depend on sound funding of the pension plan, and
these livelihoods may well be challenged should the risky venture prove unsuccessful.
The Investment Guideline states that "[t]he plan administrator needs to achieve a balance between
risk and reward considerations."6 It should be stressed, however, that the rewards accrue to the
sponsor only, whereas the risks are borne by both the sponsor and the members of its defined benefit
plan. The risks to pensioners of poor investment performance are well understood, and those risks
are realized when the sponsor of an underfunded plan enters bankruptcy. But what are the rewards
to pensioners? Pensioners do not concern themselves with the hypothetical question of distributing
plan surpluses among themselves. Rather, their concern is with the very real – and all too often
experienced – situation where an underfunded plan is wound-up. The "rewards" of strong plan
performance go to the sponsor, in the form of reduced, or nil, contribution requirements. Hence, the
risk/reward considerations are not the same as those faced by, say, individual investors. Both the
sponsor and its plan's members face the risks, but the rewards are asymmetrically realized by the
sponsor only.
So that greater clarity can be provided regarding the manner in which the potential for conflict that
exists between the sponsor and administrator in respect of the investment strategy has been
addressed, it is proposed that
Section 1 should require the administrator:
to articulate its considerations that lead to the balance of risks that it has
adopted, and
to articulate the considerations that lead it to conclude that the risks to the
plan members should be considered acceptable.
6 Investment Guideline, page 3
5
Plan valuations should be completed annually
In the discussion of "Risk Tolerances", an important source of risk to pensioners has been left out.
No mention is made of the frequency of plan valuations, the risks posed by this frequency, and the
manner in which that risk has been considered in the investment practices, and the steps taken to
mitigate that risk. In some jurisdictions, annual plan valuations and funding resets are required. In
other jurisdictions, triennial reporting is permitted unless a plan has been shown to be underfunded –
and in some jurisdictions significantly underfunded – in the previous valuation. The market
downturn of 2008/2009 made it abundantly clear that a fully-funded plan can suffer a dramatic asset
loss in a relatively short period of time. Similarly, changes in discount rates can materially impact
the plan's liabilities. In these ways, a fully-funded plan can become underfunded in a matter of a few
months. Permitting triennial reporting causes underfunded plans to appear, for a protracted period,
as though they are fully funded, and substantially delays the process that would bring the plan back
to a fully-funded level. Indeed, infrequent reporting makes it difficult for administrators to meet
their obligations to pension plan members.
Pension plan regulators should require administrators to conduct plan
valuations, both solvency and ongoing, no less frequently than annually.
If plan valuations are completed less frequently than annually, then the
administrator should be required to document in the Questionnaire
the risk that this infrequent valuation poses,
the manner in which this risk is taken into account in the investment
practices, and
the measures employed in the administrator's processes to mitigate that risk.
Though it is recognized that the following is outside the ambit of the guidelines, but directly
pertinent to the timing of plan valuations,
it is proposed that CAPSA encourage the adoption of regulations that would
require sponsors to reset their funding obligations according to plan valuations
that are completed no less frequently than annually.
The draft documents accurately describe the role of the administrator to set the investment strategy
in consideration of (i) the sponsor's funding policy, and (ii) the pensioners' legitimate need to have
6
their pensions covered by the assets of the plan. In jurisdictions where funding requirements are
reestablished annually according to annual plan valuations, funding policy and investment practices
can cooperatively meet the expectations of plan members. However, the situation is different when
long periods of time, for example three years, can pass between plan valuations. One of the roles of
the administrator is to monitor the performance of the pension plan, and to determine whether the
plan performance together with the funding policy are capable of ensuring that the plan's assets can
match its liabilities. As an example, plan funding established when the plan was fully solvent would
likely not be sufficient to maintain plan solvency in the face of a market downturn. But in
jurisdictions where, for example, three years are allowed between plan valuations and filing, the
funding levels may not be reset for years after the downturn. In these cases, the funding and the plan
performance are out of step, and pensioners are put at risk. In these situations, the administrator
should monitor the performance of the pension plan, and advise the plan's sponsor that the plan is
likely unable to meet its commitments without adjustment to the plan's funding. This monitoring
exercise should be completed no less frequently than annually. For jurisdictions where plan
valuations can be done less frequently than annually, the Questionnaire7 should include:
Describe the process used to determine whether the funding policy, together
with expected plan performance, is capable of achieving plan solvency within
five years.
Describe the process used by the administrator to inform the sponsor
regarding the adequacy of the current funding levels to achieve plan
solvency, and over what period of time.
Describe the adjustments to the funding levels made in reaction to the advice
referenced above.
Establish benchmarks and standards for review of plan performance
BPG and CFP agree with CAPSA that monitoring of the pension plan is an essential component of
plan governance. In Chapter 7 of the Investment Guideline, "Monitoring and Review", many
effective measures are identified. Regarding section 4, it is proposed that the following be added:
7 These additions could be made either to "Roles and Responsibilities", or to "Monitoring and Review".
7
Identify the means used for selecting the benchmarks, including the rationale
employed to determine that those benchmarks support the interests of plan
members.
Though it is agreed that the primary focus of monitoring should be on processes, plan performance
cannot be ignored. For instance, a prolonged period of poor plan performance may be indicative of
poor plan governance or ineffective investment strategies. To incorporate overall plan performance
in the investment review, it is proposed that the following be included in the Questionnaire:
Identify the frequency with which the investment review is conducted.
Identify the extent to which the overall plan performance conforms to its
objective.
Identify the changes in investment practices that will be undertaken as a result
of the current review.
BPG and CFP are hopeful that these comments will be considered by CAPSA for inclusion in its
final document. We share CAPSA's desire to assist plan sponsors and administrators to effect strong
governance practices in the management of their defined benefit pension plans. Strong plan
governance can be an important element in enhancing the security of pensions, and we look forward
to CAPSA's initiatives in this regard.
8
Seeing Beyond Risk
Canadian
Institute of
Actuaries
Institut
canadien
des actuaires
VoW ou-delà du risque
April 13, 2011
Mr. Christian Nordin
Policy Manager
Canadian Association of Pension Supervisory Authorities
CAPSA Secretariat
5160 Yonge Street
17th Floor, Box 85
Toronto, ON M2N 6L9
Dear Mr. Nordin:
The Canadian Institute of Actuaries would like to acknowledge receipt of the Guideline on Fund
Holder Arrangements issued on March 1. We have also received the Consultation on the Drafi
Guideline on Pension Plan Prudent Investment Practices and Self-Assessment Questionnaire, and
the Draft Guideline on Pension Plan Funding Policy, issued at the same time.
Although we are not offering a formal submission on these documents, we do appreciate being
included as part of the consultation process. As actuaries have a definite interest in the success of
retirement plans for Canadians, we encourage CAPSA to continue producing quality guidelines
in this area.
The CIA will review all documents as they are issued, and we will submit comments when our
profession has ideas to offer.
Regards,
Micheline Dionne, FCIA, FSA, MAAA
President
800-150 Metcalfe, Ottawa ON K2P P1
t613,2368196 t613.233,4552
[email protected] / [email protected]
actuariesca I actuatres.ca
Canadian Life
and Health Insurance
Association Inc.
Association canadienne
des compagnies dassurances
de personnes inc.
June 2, 2010
Christian Nordin
Policy Manager
CAPSA Secretariat
Toronto ON M2N 6L9
E-mail: [email protected]
Dear Christian:
Draft Pension Plan Prudent Investment Practices Guideline, Self-Assessment
Questionnaire on Prudent Investment Practices, and Pension Plan Funding Policy
Guideline
I am writing on behalf of Canada’s life and health insurance companies to provide comments on
the captioned documents, which were released on March 1, 2011.
Established in 1894, the Canadian Life and Health Insurance Association (CLHIA) is a voluntary
association with member companies accounting for 99 per cent of Canada’s life and health
insurance business. CLHIA members provide services to two-thirds of Canada’s registered
pension plans, with a primary focus on defined contribution pensions for small and medium-size
employers and their workers.
CLHIA congratulates CAPSA members on the work done to date in providing support to plan
administrators and other stakeholders with respect to regulators’ expectations regarding pension
plan funding and investment. The industry believes that such guidance can assist employers,
administrators and service providers in ensuring that pension arrangements are managed in a
transparent and accountable manner in order to protect consumer entitlements.
Scope of the Draft Guidelines and Questionnaire
In December 2010, federal, provincial and territorial Finance Ministers endorsed a framework
for “Pooled Registered Pension Plans” (PRPPs) as a new approach to pensions. Our industry
1 Queen Street East
Suite 1700
Toronto, Ontario
M5C 2X9
1, rue Queen Est
Bureau 1700
Toronto (Ontario)
M5C 2X9
Tel: (416) 777-2221
Fax: (416) 777-1895
www.clhia.ca
Tél.: (416) 777-2221
Fax: (416) 777-1895
www.accap.ca
Toronto
●
Montreal
●
Ottawa
Canadian Life
Association Inc.
de personnes inc.
strongly supports the PRPP initiative. While CLHIA members understand CAPSA’s desire to
move ahead with guidance regarding prudent funding and investment, our industry is concerned
that finalizing the captioned documents prior to development of full statutory and operational
requirements for PRPPs may be premature.
It is expected that the PRPP model will transfer a significant portion of the compliance
obligations currently borne by employers to expert, regulated, service providers. Proceeding
toward formal adoption of the current documents at this time may be perceived as creating, at
least on a temporary basis, too onerous a pension compliance environment for many employers.
This may discourage some employers from establishing or maintaining pension plans for their
employees. And such a perception may reduce the ultimate participation in and effectiveness of
the PRPP proposals currently under development, unnecessarily eroding pension participation in
Canada.
CLHIA believes that further review and consultation is warranted in response to some of the
concerns noted below. The industry is also of the view that addressing these concerns could run
simultaneously with development of a more complete statutory and regulatory environment for
PRPPs. CLHIA therefore encourages CAPSA to re-evaluate these documents within the context
of PRPPs, and to incorporate funding and investment guidance relevant to PRPPs in these
documents prior to their release.
While much of the focus of this document is not on defined contribution pension plans where
individual plan beneficiaries have responsibility for making investment decisions, there are
multiple references to such plans (e.g., page 3, second last paragraph; page 5, fifth paragraph) in
the proposed Prudent Investment Practices Guideline. Without diminishing the applicability of
this document and in order to better focus the attention of pension plan stakeholders on the
specific regulatory guidance applicable to such plans, CLHIA encourages CAPSA to make
specific reference to CAPSA Guideline No. 3, Guidelines for Capital Accumulation Plans,
within this document, especially as part of the second last paragraph on page 3. CLHIA believes
that cross-referencing other CAPSA guidance will enhance stakeholder understanding of the full
range of regulatory expectations, and better ensure sound governance and operation of pension
plans, leading to greater security and predictability of consumer benefits, regardless of the
underlying pension plan design.
The CLHIA is also aware of continuing work by CAPSA’s DC Plans Committee which may lead
to additional specific guidance with respect to such plans. It may be appropriate to incorporate
reference to that anticipated guidance in a Prudent Investment Practices Guideline, or to
coordinate release of all relevant guidance.
2
Canadian Life
Association Inc.
de personnes inc.
Prudent Delegation
The first sentence of this section would appear to conflict with defined contribution pension
plans that provide beneficiaries with investment choice, since those individuals, despite the best
efforts of the plan administrator and any service providers, may lack appropriate skill,
knowledge and expertise, but who insist on exercising their rights to make such choices. While
plan sponsors and stakeholders may take reasonable efforts to ensure that investment options are
broadly appropriate for plan members, it would be unreasonable to assume that such options
could prevent potentially adverse results for all plan participants. Therefore, it may be
appropriate to note the limitations of a plan administrator’s ability to ensure prudent investment
decision processes in the context of such beneficiary rights.
Introduction
While many defined contribution pension plans provide plan beneficiaries with the opportunity
to select investment options, this may not be the case for all defined contribution pension plans,
either at present or in the future. Indeed, plans that do not offer such choice are explicitly
contemplated in question 3 of section 8 of the questionnaire dealing with defined contribution
pension plans. Consequently, the last sentence of the introduction may be overly broad in scope
and should be narrowed.
Plan Administrator Roles and Responsibilities
Question 3 refers to the plan administrator’s self assessment of its knowledge, skill and expertise.
In contrast, in the context of prudent delegation in the Guideline, authority, information and
resources are also considered. While authority may arguably be presumed, it is not clear why
information and resources are not also explicitly considered in this question.
Question 4(d) does not appear to consider fixed income investments unless provided within an
insured contract. It may be appropriate to explicitly identify fixed income investments such as
deposit contracts that are not provided under an insured arrangement.
Responsibility for Establishing the Investment Policy
Similarly, question 2(d) does not appear to consider fixed income investments unless provided
within an insured contract. Again, it may be appropriate to explicitly identify fixed income
3
Canadian Life
Association Inc.
de personnes inc.
investments such as deposit contracts that are not provided under an insured arrangement.
Question 4 refers to the plan administrator’s assessment of a potential service provider’s
knowledge, skill and expertise in preparing and reviewing the investment policy/SIP&P. In
contrast, in the context of prudent delegation in the Guideline, authority, information and
resources are also considered. As noted under the immediately prior heading, it is not clear why
information and resources are not also considered in this question.
Delegation of Investing Activities for Pension Fund Assets
The first bullet under question 1 contains a redundant “the”.
The third bullet under question 4 appears to be possessive, and does not identify the recipient of
such reports; “… ensure reports to the plan administrator by investment manager(s)…” may be
more informative.
Monitoring and Review
Question 2 assumes delegation although such delegation is not required. It may be more
accurate to substitute “any” for “the” in the preamble to the question.
Defined Contribution Pension Plans
The first bullet of the second paragraph of the preamble notes that “sufficient disclosure of
retirement income” is an area to pay attention to within a defined contribution pension plan.
Since income is not guaranteed under such plans, it is unclear what is intended by “sufficient
disclosure of retirement income”. This might reasonably be interpreted as disclosure that no
income level is guaranteed by the plan. It might also be interpreted as meaning that CAPSA
members expect that an estimated level of future retirement income will be provided to plan
beneficiaries on a periodic basis.
This latter interpretation is problematic, in that inclusion of such illustrations or estimates could
easily lead to a presumption that such income amounts are, in fact, guaranteed, under the plan,
effectively converting defined contribution plans to defined benefit plans, or at least some form
of “target benefit” arrangement. This would be inappropriate for all stakeholders.
CLHIA recognizes that a better understanding of the retirement income that may arise from a
defined contribution pension plan is an important part of a plan member’s comprehensive
planning for retirement income and financial security. But the inherent variability of
4
Canadian Life
Association Inc.
de personnes inc.
contribution rates, investment returns, mortality and longevity assumptions and experience make
illustration or estimation of retirement income unreliable. A more precise description of any
regulatory expectations relating to such illustrations is essential, and as primary service providers
to defined contribution plans, CLHIA and its members would hope to have a thorough discussion
of this issue with CAPSA members prior to finalization of this portion of the questionnaire.
While the draft guideline focuses on defined benefit pension plans, this is not made clear until
the section dealing with funding principles and objectives.
The benefits ultimately payable under both defined benefit and defined contribution pension
plans are clearly contingent on the contributions and investment experience of the plan. In the
former case, predictable benefits may give rise to volatile contributions; in the latter, predictable
contributions may give rise to incomes that are uncertain or unpredictable until the cusp of
retirement.
While the relevance of a funding policy to a defined contribution pension plan is arguably less
clear than in the context of a defined benefit plan since there is no obligation to ensure a
particular level of income benefit, it would seem reasonable that stakeholders of a defined
contribution pension plan would be better able to plan for the income ultimately provided by the
accumulated capital within the plan if there were a shared understanding of the planned
contribution pattern to the plan.
If the intent of this document is to focus exclusively on defined benefit plans, then this should be
indicated in the first sentence under Context for the Guideline. Some explanation of why defined
contribution plans are not addressed might then be reasonably included. Indeed, to the extent
that DC funding policies might be considered in the proposed DC specific guidance currently
being developed and would be redundant in this document, notation of that intent might be
warranted. However, it may be preferable and appropriate to take a broader view and include
some consideration of funding of a defined contribution pension plan within the proposed
guideline, as was contemplated in the earlier draft documents.
At a purely technical level, the second last sentence on page seven refers to “funding decisions
that are made by (the) plan sponsor or plan administrator.” While funding decisions may impact
other decisions made by the plan administrator, this sentence appears to overstate the ability of
the plan administrator to make funding decisions, and should be revised to exclude any reference
to the plan administrator, or to expand the scope of the decisions being considered.
5
Canadian Life
Association Inc.
de personnes inc.
Thank you for your consideration of the foregoing comments. CLHIA would be pleased to
discuss any of the captioned concerns with CAPSA members or staff. The industry looks
forward to continuing cooperation with CAPSA as these documents and related issues evolve.
As always, I can be reached by telephone at 416-359-2021 or by email at [email protected],
to discuss any of these matters.
Sincerely,
Ron Sanderson
Director, Policyholder Taxation and Pensions
6
ComprehensivePensionGovernance
4221 Canterbury, North Vancouver, BC V7R 3N4
Christian Nordin
Policy Manager
CAPSA Secretariat
do Financial Services Commission of Ontario
Toronto ON M2N 619
May 24, 2011
Dear Ms Nordin
Re: CAPSA Consultation on the Draft Guideline on Pension Plan Prudent Investment
Practices and Self-Assessment Questionnaire, and the Draft Guideline on Pension Plan
Funding Policy
I am a pension consultant involved in several pension committees and professional pension
advocacy groups. I have also been a pension administrator, pension investment manager and a
member of several Canadian and US pension committees and boards. My previous
background also included the role of the senior financial person responsible for pension in a
large global company with numerous DB, DC RRSP RCAs and RRSP pension programs. I
believe that my unique background, insight and hands on experience will provide you with
useful feedback with respect to the above noted draft Guidelines.
I currently manage a pension governance consulting firm and have a keen interest and stake in
the revisions to the CAPSA guidelines. My clients are smaller sponsors (<$1 billion) who
generally lack the resources and expertise to fulfill their administrator roles hence they rely on
inc to provide them with administrator expertise and insight. Being a smaller “player” In the
Canadian pension industry I realize my opinion is of minor importance but I think you need to
hear a smaller plan administrator’s perspective on the proposed new or revised guidelines. I
do not feel that the CAP members are particularly well served by the large insurance
companies that dominate the CAP industry nor do I believe Canadians will he well served or
appropriately served by “fmancial Institutions” as administrators of the proposed Registered
Polled pension Plan. CAP Guidelines therefore have the potential to be very useful to smaller
CAP sponsors and administrators.
I applaud you for circulating for comment the draft guidelines and questionnaire and
appreciate the opportunity to comment on these documents. My comments are outlined below.
(There are a number of wording issues that I think could be addressed however J will focus on
a few key macro issues below that I believe are priorities at this stage as identified in the
Questionnaire.)
Self- Assessment Questionnaire
—
Introduction pg. 3
The last paragraph in this Introduction suggests that CAP sponsors “are encouraged to
cons ider all sections in the questionnaire” (presumably the other 3 guidelines as well). I
believe this statement highlights a major deficiency in the Guidelines
I
422! Canterbury, North Vancouver, BC V7R 3N4
Combining the DB and CAP guidelines in one document is a major shortcoming of the
proposed Guidelines. The task of applying many of the concepts outlined for DR plans to a
CAP situation is far too abstract and ambiguous an undertaking for the majority of CAP
sponsors and far too open to interpretation. Approximately 3-4 full pages (of-50 pages) of
the four white papers are specific to CAPs, While —80% of the pension assets are in DB plans,
4O% of the pension plans in Canada are or will be CAPs in the near future. Once again, the
focus is on DR plans and sponsors vs. the majority of sponsor who have CAPs. TheCAP
sponsor are generally smaller plans and organizations, have far less time and resources to
pension governance and therefore need as much in the way f explicit and guidance as
possible.
Recommendation A separate set CAP Guidelines should be developed for CAPs e.g.
something more along the lines of the ERISA guidelines for 401K plans in the US.
-
Self- Assessment Questionnaire
—
Risk Tolerance pg. 9
Perhaps one of the most complex issues that pension administrators have to deal with is the
issue of “risk” (totally “loaded” word), Few of the more sophisticated financial type’s banks
or insurance companies really have a handle on the concept of risk e.g. Citibank, Bank of
America, Lehman Brothers etc. so expecting a pension sponsor or administrator and pension
committees to come to grips with it in designing a plan or an administrator in overseeing a
plan an optimistic/unrealistic. The focus of any type of pension program has to be on risk
management which in most cases should focus on investment risk (return volatility).
Volatility needs to be emphasized as a key risk for both DB and CAPS. There are other risks
that are important such as sponsor failure, liquidity risk, crtdit risk, interest rate risk etc. but
lumping them all together in a list implies they are generally all of equal importance: they are
not. Volatility is the key risk affecting DB funding and the likelihood CAP members will
have insufficient pension incomes. The guidance with respect to risk is too general in the
documents particularly with respect to CAPs, I believe this specific risk needs to be singled
out in the Guidelines and expressly identified as something that CAP administrators need to
explain to their committee and plan members.
The issue of diversification is also featured in both legislation and guidelines and is presented
as a panacea to risk management and investment strategies. This is unfortunate in that
investment professionals are aware that diversification fails when it is needed most Le., in the
case of extreme kurtosjs or “fat tails”, DB members are not ass affected in this situation
because the DR sponsor is pooling risk over a long period and more importantly, can write a
cheque to make up funding deficiencies; this is not the case for CAP members close to
retirement i.e. in their 50’s. This is a classic example where the differences between CAPs
and OB plans need to be emphasized and different guideli’ s offered,
Recommendation in a separate set CAP Guidelines a significant portion of the Guideline
should address the issue of key investment risks i.e., primarily volatility but also duration and
interest rate risk.
—
2
4221 Canterbury, North Vancouver, BC V7R 3N4
Self- Assessment Questionnaire DC Plans pg. 20
—
Another important and poorly issue that pension administrators have to deal with is fees. Few
DII or CAP administrators really understand the impact or role of fees in terms of monitoring
performance.
DII administrators generally look at the reasonableness of fees but don’t focus on the impact
on funding or the potential impact on discount rates. The issue of fees from a CAP
perspective is even more important from a fiduciary perspective.
The only mention regarding fees however in the documents appears to be on page 20 of the
Questionnaire. A more detailed discussion of fees is warranted. The CAP Guidelines should
outline the following with respect to fees:
a) Fees paid by CAP members should be broken down as follows:
• record keeping fees;
• fees paid by the record keeper to financial advisor/sales reps;
• investment manager fees; and,
• fees paid to other consultant’s and agents.
b) The dollar axnonnt of fees paid annually by a member should be disclosed on the
members’ statements at least annually.
c) A breakdown is necessary as part of the disclosure requirements to CAP members
and is part of an administrator’s fiduciary duty to monitor fees and the performance of
service providers. Without these cost details the evaluation of service providers
becomes too subjective and, the members should also know exactly what they are
paying, to whom and for what services.
Recommendation A separate set of CAP Guidelines should be developed for CAPs and
significant portion of the CAP Guideline should address the issue of fees and full disclosure
of the nature and cost of all elements the members is required to pay for.
-
The final point I would like to make is that it is not clear whether the proposed draft
guidelines are intended to replace Guidelines for Capital Accumulation Plans May 28, 2004
or supplement them. If the proposed guidelines are to replace the May 2004 Guidelines
believe there are a number of topics (sections) and issues that have been omitted that need to
be included in the proposed guidelines. I would appreciate it if you would clarify this point
for me
—
Yours very truly,
Gerry WahI, Managing Director, ComprehensivePensionGovernance
(comprehensivepensiongovemancegmajl corn)
n
3
1
1 June, 2011
Christian Nordin
Policy Manager
CAPSA Secretariat
Toronto ON M2N 6L9
Email: [email protected]
Dear Ms Nordin
Re: CAPSA Consultation on the Draft Guideline on Pension Plan Prudent Investment
Practices and Self-Assessment Questionnaire, and the Draft Guideline on Pension
Plan Funding Policy
FEI Canada is a professional association of senior financial executives, with eleven
chapters across Canada and approximately 2000 members. Membership is generally
restricted to senior financial officers of medium to large corporations, as well as senior
financial officers in public sector organizations. We have 813 members in Ontario,
representing approximately 40% of the total in Canada.
The Issues and Policy Advisory Committee (IPAC) is one of two national advocacy
committees established by FEI Canada. IPAC comprises more than 60 senior financial
executives representing a broad cross-section of the Canadian economy, who volunteer
their time, experience and knowledge to consider and recommend action on a broad range
of topics of interest to Canadian business and government agencies.
The IPAC mandate is to broaden awareness on issues and continually prompts
accountability and improved practices in these areas. The other major FEI Canada technical
committee is focused on corporate reporting and continuously liaises with accounting
authorities and the Ontario Securities Commission and its counterparts across Canada.
The Pension Task Force (PTF) of IPAC is specifically established to:
• Develop FEI Canada public positions on matters pertaining to pension and other
•
Employee benefit issues
•
Provide guidance and expert opinion on emerging issues on pensions and other
post-employment benefits relevant to FEI Canada members and,
1201-170 University Ave. Toronto, ON M5H 3B3
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2
•
Act as advisors on pension and other post-employment issues of current importance
to industry groups, government, associations, and other constituents who will
benefit from the impartial counsel of the Committee
FEI Canada has been active in commenting on pension maters since the 1970’s, at which
time it initiated a series of pension surveys, for first of their kind in Canada. Since then it
has sponsored many pension papers. These include, Canada at the pension crossroads 1978
and Business Committee on Pension Policy Papers (1983). It has replied to many
consultations including that of the Expert Commission on Pensions in Ontario in 2007 and
2008. It has advised the federal, provincial and territorial governments on its members’
views on retirement income reform in Canada.
We commend CAPSA for drafting and circulating for comment the above referenced draft
guidelines and questionnaire that attempts to give one guidance for plans that are regulated
by thirteen different regulatory regimes. We thank CAPSA for giving us the opportunity to
comment on these draft documents.
In these documents CAPSA has achieved most aspects of its stated objective to promote
consistency in the governance of defined benefit (db) pension funds and funding. It has
provided one framework to demonstrate how a fiduciary standard of care can be applied to
the investments of pension plans. It has provided another framework for funding policy and
implementation that “may be subject to an implied duty of good faith” with the admonition
that both resulting documents should be consistent.
CAPSA provides this single guidance for pension plans of many different sizes, most of
which in the private sector are single employer plans on a much smaller scale than that
envisioned in the guidance. They are also subject to different legislated regulations. The
guidance does note that legislation takes precedence when superior to the prudent person’s
rule and that administrators and sponsors should make adjustments to the guidance for their
size and complexity.
This guidance will probably become the criteria to judge various db plans’ governance.
Given such application of this guidance, we urge CAPSA to be more explicit on the
application of this guidance to specific segments of the pension plan population. Plans are
in different stages of maturity and have different risk tolerances for various investments
because of different time horizons for these investments. A plan with young members can
invest in more risky investments, as its time line to recover any possible investment losses
is much longer than that of a plan whose most members are approaching retirement age.
Many employer-managed db plans buy units of balance funds. These implicitly provide for
asset allocation and matching of liabilities at a much more imprecise level than that
possible for a larger plan with greater infrastructure. The latter could devise an appropriate
asset allocation to match more closely the maturities of its liabilities. Without such more
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3
explicit caveats employer administrators of plans will be forced to spend more fees with
consultants to document the defense of their choices.
We suggest the funding guidance provide discussion of any regulatory obstacles preventing
a different funding policy. We refer to the continuing asymmetrical problems of db pension
plan surpluses and deficits. A plan sponsor is responsible to fund in a short period any
deficit resulting from a point in time calculation required by regulation but the sponsor
must share with the beneficiaries pro rata to contributions any similarly calculated possible
surplus distributions.
In describing evidence of prudent person’s action in investments, CAPSA is explicit and
detailed in describing the current best practices in the investment process to manage the
pooled risks of the beneficiaries to ensure that db pension funds will be available to pay the
promised pension benefits. We ask that CAPSA be similarly explicit to sponsors who have
chosen defined contribution (dc) plans beyond its comments in section eight of the
questionnaire and the admonition that parts of other sections would apply.
CAPSA should elaborate the risks that are being transferred to the individual as part of the
price to have portable retirement savings in a dc plan. These risks are more onerous than
for an administrator of a plan that pools risks as they include the mortality risk as well as
investment risk in capital accumulation and interest risk for income during a retirement of
uncertain length. CAPSA should be specific about the governance of dc plan sponsors to
provide the tools to its members to understand and to manage these risks and ensure that
fees to be charged to dc members are reasonable.
The sponsors provide the members with alternative investment options at reasonable
administrative and investment fees, depending on age or years to retirement, subject to
evidence similar to that for investment processes addressed to maturing db payments. In
addition, dc plan sponsors should provide education tools that project levels of funds
available at retirement at various savings and investment return rates. These tools should
also project the levels of retirement income the funds were invested at various annuity
rates. One could argue that this is beyond the scope of a dc plan. However, one must
remember that a dc plan is the alternative for an easily calculated amount of a db plan
benefit. The education should also make explicit the necessity for other retirement income
and details on their possible sources. The estimating tools should provide incorporation of
such income so that the individual can estimate the possible total amounts of accumulated
capital required for retirement long before these savers reach retirement age. In this way
the member can determine his or her own personal retirement liability and all the risks
associated with it.
We understand that dc plans are significantly more numerous that db plans. With the
continuing difficulties in the regulation of db plans we suspect that a much higher
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4
proportion of future pension investment will be in dc plans. We ask that CAPSA prepare a
separate document on the governance of dc plans so as to guide dc plan sponsors in their
efforts to educate plan members on the significant risks they must manage.
CAPSA emphasizes the documentation of the exercise of the prudent person rule so that
there is evidence of good investment governance. It is worthwhile to emphasize that
documentation is no substitute for clear exercise of prudence. In its Latin root prudentia
was described from the Middle Ages as auriga virtutum or the charioteer’s virtue. The
emphasis here is clearly on the doing rather than the recording particularly in the education
of dc plan members.
Again we commend CAPSA for publishing these draft guidelines. We hope its finds our
comments as helpful as we think pension plan sponsors and administrators will find the
amended final guidelines.
Yours very truly,
D. Peter Donovan
Chair, Pension Committee
William E. Hewitt
Chair, Issues and Policy Advisory Committee
Michael Conway
Chief Executive and National President
FEI Canada
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416.366.3008
June 6, 2011
Mr. Christian Nordin, Policy Manager
CAPSA Secretariat
Toronto ON M2N 6L9
Dear Mr. Nordin,
Re:
CAPSA Consultation on the Draft Guideline on Pension Plan Prudent Investment Practices and
Self-Assessment Questionnaire
Mackenzie Investments (“Mackenzie”) is pleased to provide our comments on the draft Pension Plan Prudent
Investment Practices Guideline and its companion document, the Self-Assessment Questionnaire on Prudent
Investment Practices, both released by CAPSA on March 1, 2011.
Mackenzie, as agent for M.R.S. Trust Company, offers single-employer defined contribution pension plans (“DC
plans”) across Canada. These plans invest in Mackenzie mutual funds, distributed for sale through an established
network of independent investment advisors.
Even though our focus is on providing DC plans, we are aware of the various challenges facing all pension plans
today. As such, we fully support CAPSA’s efforts to issue guidelines that promote consistency in the governance
of pension funds, as well as help clarify the roles and responsibilities of the various pension plan stakeholders.
We appreciate the opportunity to comment and trust that our input will be helpful to CAPSA in finalizing
guidelines for pension plan prudent investment practices.
I.
Comments on the Draft Pension Plan Prudent Investment Practices Guideline
Overall, we believe that the Draft Guideline will provide pension plan administrators with a good overview of
their roles and responsibilities with respect to the prudent investment of the pension fund.
The DC plans that we offer are sponsored by employers who also act in the capacity of plan administrator,
therefore we support CAPSA’s intention to acknowledge this dual role in the Draft Guideline. As a provider of
DC plans where the plan beneficiaries are solely responsible for directing the investment of all contributions
that they receive, we are also in favour of CAPSA’s intent to include guidance pertaining to ongoing
communication with plan beneficiaries. We believe this is an important point for the plan administrator to
consider when the investment decisions for the pension fund rest with the plan beneficiaries.
For the Investment Policy/Statement of Investment Policies and Procedures (SIP&P) section on page 7, we
propose that CAPSA consider clarifying the circumstances in which a plan administrator may want to establish
a broader investment policy that extends beyond the SIP&P. For small to medium-size DC plans, the SIP&P is
typically the only investment policy document adopted by the plan administrator due to the less-complex
nature of their pension fund.
II.
Comments on the Self-Assessment Questionnaire on Prudent Investment Practices
We fully support the promotion of a self-assessment questionnaire to help plan administrators review the
investment practices for their pension funds. Although the DC plans we offer feature member-directed
investment decisions, we concur with CAPSA’s view that plan administrators should review and consider all
sections of the questionnaire when completing their self-assessments.
For Question 6 Delegation of Investing Activities for Pension Fund Assets on page 13, the questionnaire
provides background on the roles of “Fund Holder” and “Investment Management”. If the intent is that the
questionnaire accompany and be read together with the Draft Guideline, we propose that CAPSA consider the
inclusion of a pension stakeholder overview at the beginning of the Draft Guideline that includes these roles,
or refer the reader to Guideline No. 5 Guideline on Fund Holder Arrangements for more information.
In conclusion, Mackenzie supports CAPSA’s strategic initiative to promote consistency in the governance of
pension funds. Should you have any questions regarding our comments, please contact our Pension Plan Specialist,
Laura Turner, at (416) 922-5322 extension 7898.
Sincerely,
MACKENZIE FINANCIAL CORPORATION
Marilyn Smolsky, Vice-President
Specialized Products and Services
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Christian Nordin
Policy Manager
CAPSA Secretariat
5160 Yonge Street
17th Floor, Box 85
Toronto ON M2N 6L9
Re:
Submission of the Multi-Employer Benefit Plan Counsel of Canada
regarding CAPSA’s Consultation on the Draft Guideline on Pension Plan
Prudent Investment Practices and Self-Assessment Questionnaire and the
Draft Guideline on Pension Plan Funding Policy
Introduction:
We are pleased to make this submission regarding CAPSA’s Consultation on the Draft
Guideline on Pension Plan Prudent Investment Practices (“Investment Guideline’) and
Self-Assessment Questionnaire (1nvestment Questionnair&) and the Draft Guideline
on Pension Plan Funding Policy (“Funding Guideline) on behalf of the Multi-Employer
Benefit Plan Counsel of Canada ( MESCO).
MEBCO was established in 1992 as a not-for-profit, federal non-share capital
corporation, to represent the interests of Canadian multi-employer pension and benefit
plans. MEBCO’s volunteer Board of Directors is elected from all professions and
disciplines involved in multi-employer plans, including: union and employer trustees;
professional third-party administrators; non-profit and in-house administrators;
actuaries; benefit consultants; lawyers; and chartered accountants. MEBCO’s
membership currently includes many defined benefit, multi-employer pension plans.
z
C
Before providing our comments on the Investment Guideline, Investment Questionnaire
and the Funding Guideline, we believe it would be valuable to briefly provide some
background regarding multi-employer pension plans and, in particular, how they differ
from single-employer pension plans. While single-employer pension plans are currently
the dominant form of pension plan in Canada, the number of plan members covered in
multi-employer pension plans is surprisingly close.
According to the Report of Ontario’s Expert Commission on Pensions issued in October
2008, there are just over 6000 single employer plans registered in that province,
compared to 127 multi-employer pension plans. However, membership overall is
“almost evenly balanced between these two types of plans” with 55% of pension plan
members belonging to single-employer pension plans and 45% belonging to multiemployer pension plans.
Multi-employer pension plans developed out of the collective bargaining process as a
response to the difficulties associated with providing retirement benefits to unionized
workers employed in industries typified by small companies and a mobile work force.
Members of multi-employer pension plans work in industries as diverse as construction,
manufacturing, food service, retail, hotel, restaurant, graphic communications,
healthcare, education, garment manufacturing, security, textiles, transportation, and
entertainment. A single, multi-employer pension plan may be national, regional,
provincial, or local in coverage. Anywhere from two to more than 1,000 employers may
contribute to one of these plans in accordance with the terms of the relevant collective
agreements. It is estimated that there are approximately 200 multi-employer pension
plans in Canada with more than one mililon members.
A multi-employer pension plan is typically structured as a pension trust fund for
purposes of a 149(lXo) of the income Tax Act The trustees, who maybe appointed by
both labour and management, or labour only, are appointed pursuant to a trust
agreement and are responsible for the administration of the plan and its trust fund. Such
plans may handle their administration in-house or hire a third-party administrator.
As noted above, trade unions normally represent members of multi-employer pension
plans. In a classic multi-employer defined benefit pension plan, contributions are fixed
by a collective agreement and an employer’s only obligation is to pay the required
contributions and provide the information necessary to administer the plan. As
employers generally cannot be forced to make contributions in excess of those required
by the relevant collective agreements, a defined benefit multi-employer pension plan is
in reality a target benefit plan as accrued benefits may have to be reduced to alleviate a
funding shortfall. Such benefit reductions are currently permitted in all provinces except
Quebec and New Brunswick.
Multi-employer defined benefit pension plans based on union-management negotiations
are a cornerstone to the provision of retirement income in Canada. Unlike single
employer plans, multi-employer pension plans are not being wound up, converted to (or
replaced by) defined contribution plans, or subject to wind-up because of the insolvency
of a single employer. They are also not the subject of disputes about contribution
holidays or the ownership of any surplus as employers are required to continue to make
contributions regardless of the funding level of the plan and all contributions are
ultimately used to pay benefits or pay administrative expenses. In his May 2007
comments to a Toronto pension conference, then Bank of Canada Governor, David
-2-
Dodge, stated that multi-employer pension plans are an important method of providing
retirement plan coverage and that efforts should be made to promote them.
Submissions:
In these submissions, we first address the Funding Guideline and then the Investment
Guideline and Investment Questionnaire.
Funding Guideline:
Different Considerations for Multi-Employer Pension Plans
The first section of the Funding Guideline indicates that the goal of funding a defined
benefit pension plan is to ensure that sufficient assets will be accumulated to deliver the
promised benefits on an ongoing basis and to protect pension benefits in the event of
an employer insolvency or bankruptcy. These statements are more directed towards the
circumstances of a single employer pension plan than to those applicable to a multiemployer pension plan (“MEPP”) as the insolvency or bankruptcy of a single employer
will not impact the benefits of a member of a MEPP.
MEBCO believes that different funding considerations apply in the case of a MEPP.
The Funding Guideline acknowledges this by indicating that, “[d]ifferent funding
considerations may apply to single employer pension plans, than to other types of
pension plans such as multi employer pension plans (MEPPs)’. The distinction between
the funding principles and objectives applicable to MEPPs and those applicable to
single employer pension plans is further acknowledged in this section through two
separate references to exceptions for MEPPs (see last sentence of the second
paragraph which refers to the ability to adjust benefit levels in a MEPP and the last
sentence of the fourth paragraph which refers to the fact that contribution levels in a
MEPP are fixed). The distinct nature of MEPPs is further recognized in the discussion of
the elements of a funding policy which indicates that special considerations will apply for
a funding policy for a MEPP.
Given the significant differences between single employer pension plans and MEPPs,
MESCO submits that it would be appropriate to address MEPPs in a separate stand
alone section in this Funding Guideline. As noted below, we believe this would also
assist in clarifying certain aspects of the Funding Guideline.
Target Benefits
Ontario’s Pension Benefits Act was amended through Bill 120 to provide for the creation
of a new category of benefits called “target benefits”. These amendments to provide for
target benefits’ will come into force on proclamation. In addition, in August 2010, the
-3-
Ontario government released a Technical Backgrounder indicating that it was proposing
to clarify that certain target benefit MEPPs are exempt from solvency funding
requirements. While detailed regulations with respect to “target benefits” have not been
released, all relevant material published by the Ontario government indicates “target
benefits’ may potentially be reduced.
The Funding Guideline does not appear to contemplate this new important category of
benefits. MEBCO expects that the benefits provided under many MEPPs will qualify as
‘target benefits”. As such, ills submitted that the Funding Guideline should expressly
address the funding considerations applicable to “target benefits” and ideally as part of
a
separate
section.
Role of Plan Sponsor and Role of Plan Admin(strator
•
Standard of Care
The Funding Guideline indicates that the funding policy should be developed by the
plan sponsor and That in carrying out activities related to the establishment of a funding
policy, the plan sponsor is not held to a fiduciary standard of care”. However, the
Guideline proposes that, “[f]or MEPPs. the plan administrator would typically be
responsible for the adoption of the funding policy”.
The Funding Guideline does not indicate whether CAPSA is of the view that the
administrator of a MEPP would or should be held to a fiduciary standard of care when it
develops and establishes a funding policy. As no pension legislation requires that a
funding policy be established by a plan administrator, there is no statutory guidance on
the standard of care applicable to a pension plan administrator when it undertakes
activities related to developing and establishing a funding policy. MEBCO submits that
the same standard of care should apply to a plan administrator and plan sponsor in
carrying out activities related to establishing and developing a funding policy.
•
Interpreting the Funding Guideline
The Funding Guideline indicates on page 4 that, “[i]n the discussion of other elements of
the funding policy for a MEPP any role that is assumed by the plan sponsor would be
assumed by the plan administrator.” This statement assists in interpreting the Funding
Guideline. However, some references to the “plan sponsor” throughout the Funding
Guideline are not in relation to a specific role in the development of a funding policy. For
example, there are references to the “plan sponsor’s funding objectives” and the
“characteristics of the plan sponsor”. It is not clear how these references should be
interpreted in the context of a MEPP, We submit that This lack of clarity concerning
-4-
references to the plan sponsor could be remedied by addressing MEPPS separately in
this Funding Guideline.
Elements of a Funding Policy
This section addresses various elements that CAPSA believes should be included in a
funding policy. One of the headings under this section is “Multi-Employer Pension
Plans”. As noted earlier, the discussion under this heading concerning the elements of a
funding policy indicates that special considerations will apply for a funding policy for a
MEPP. This section appears to require the administrator of a MEPP to make
determinations in advance as part of the development of the funding policy concerning
how benefits will be adjusted, if necessary, and the considerations that should be taken
into account in making these determinations.
There are many court decisions which discuss the duty of a plan administrator when
making decisions involving benefit changes. These cases indicate that plan
administrator must be mindful of its fiduciary duties in making such decisions and further
that such decisions can only be properly made after giving proper consideration to
relevant factors and excluding irrelevant or improper factors from consideration. Please
.
2
1 and Edge v. Pensions Ombudsman
see, for example, Neville v. Wynne
We submit that it would not be appropriate for a fiduciary plan administrator to
determine in advance how benefits will be adjusted, if necessary, and what factors will
be considered in making such a determination. We believe that these decisions can
only be rriade in the context of specific circumstances and facts. The case law supports
this view. As such, MEBCQ believes that to make such decisions in advance as is
suggested by the Funding Guideline would create a potential conflict with the plan
administrators fiduciary duties. We submit that the funding policy for a MEPP should not
be required to bind the administrator to a specific decision or to consider only a limited
set of factors.
This section also indicates that ‘issues of intergenerational equity and policy on benefit
reductions or restructuring (where applicable)’ should be discussed in the funding
policy. We submit that it is not appropriate to refer to ‘intergenerational equity” in the
context of a pension plan. Rather, given the fiduciary duty of the plan administrator, the
appropriate reference should be to the fiduciary obligation of the administrator to be
even-hande& in their treatment of beneficiaries.
[20051 B.C.J. No. 712 (BC SC); appe& dismissed [20061 B.C.J. No. 2778 (CA.)
2
[199914 All CR. 546 (CA.)
-5-
Investment Guideline and Investment Questionnaire:
The Investment Guideline indicates that prudent investment practices for MEPPS that
are collectively bargained with negotiated fixed contributions will take into account the
target benefit levels specified in the plan document. MESCO believes it is appropriate
for this to be included amongst the prudent investment criteria for a MEPP. In fact, it
seems that it would be appropriate for the investment practices applicable to all plans to
consider the particular benefit levels. However, in the case of a MEPP, we believe that
the fact that the accrued benefits may be reduced to alleviate a funding shortfall should
also be recognized. Neither the Investment Guideline nor the Investment Questionnaire
expressly addresses the possibility of a reduction in accrued benefits under a MEPP.
MEBCO submits that this possibility must be expressly recognized in the Investment
Guideline and Investment Questionnaire.
As noted above, Ontario’s Pension Benefits Act has been amended to provide for the
creation of “target benefits”. The Investment Guideline does not appear to contemplate
this new important category of benefits. We expect that the investment practices that
are prudent and/or appropriate for target benefits may differ from those applicable to
other plans. MEBCO recommends that the Investment Guideline and Investment
Questionnaire expressly address the investment practices that are appropriate for target
benefits.
The Investment Questionnaire does not provide clear direction to plan administrators.
Specifically, many of the questions in the Questionnaire are open-ended, multiple
choice questions and there is no guidance as to the satistactory or preferred response
from CAPSA’s perspective. For example, the first item in Part 1, provides as follows:
The roles and responsibilities of the plan sponsor and
“1.
plan administrator (including the different roles of each in the
administration and investment of plan assets) are
documented in the:
•
plan text
•
investment policy
•
Statement of Investment Policies and Procedures
(SIP & P)
•
other
In this question, it is not clear whether CAPSA’s view is that the roles and
responsibilities of the plan sponsor and plan administrator should be documented in one
of, some of or all of the documents noted above. There are many other examples of this
-6-
O
type of open-ended, multiple choice question in the Investment Questionnaire. MEBC
e
submits that CAPSA’s expectations with respect to responses to the Questionnair
should be clarified.
We would be pleased to discuss the Funding Guideline, Investment Guideline and
Investment Questionnaire and our comments on these documents with you. Please do
not hesitate to contact the undersigned should you have any questions about this letter,
or in the event that we can be of any assistance.
Yours truly,
William Anderson
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June 17, 2011
Christian Nordin
Policy Manager
CAPSA Secretariat
Toronto ON M2N 6L9
Dear Mr. Nordin:
RE: CAPSA’s Draft Guideline on Pension Plan Prudent Investment Practices
and Self-Assessment Questionnaire, and the Draft Guideline on Pension Plan
Funding Policy
Thank you for allowing PIAC to present its comments and observations on CAPSA’s
Draft Guideline on Pension Plan Funding Policy (“Funding Guideline”) and the Draft
Guideline on Pension Plan Prudent Investment Practices and Self-Assessment
Questionnaire (“Investment Guideline and Questionnaire”). As an association
representing the largest pension funds in Canada, PIAC is well-positioned to provide
meaningful and constructive input to your consultation process.
PIAC has been the national voice for Canadian pension funds since 1977. Senior
investment professionals employed by PIAC's member funds are responsible for the
oversight and management of over $1 trillion in assets on behalf of millions of
Canadians. PIAC's mission is to promote sound investment practices and good
governance for the benefit of pension plan sponsors and beneficiaries.
Funding Guideline
Benefits of Implementing a Funding Policy
PIAC agrees that a funding policy is a component of a good governance framework.
However, discretion over what is included in the funding policy is a plan sponsor
decision. In this regard, PIAC believes:
39 River Street, Toronto, Ontario M5A 3P1
Tel 1-416-640-0264 Fax 1-416-646-9460 Email [email protected] Web www.piacweb.org
2

The CAPSA Funding Guideline should not dictate a level of funding requirement
that would change the minimum funding rules already prescribed in pension
legislation;

The funding policy should not repeat what is in other governing documents,
such as the Statement of Investment Policies and Procedures (“SIPP”); and

Flexibility in creating a funding policy is essential to reflect the unique issues for
different types of pension plans, for example single employer pension plans
(“SEPP”) versus multi-employer pension plans (“MEPP”) or jointly sponsored
pension plans (“JSPP”).
Plan sponsors need to have assurance that following all the regulatory requirements
(i.e. meeting minimum funding) when adopting a funding policy will continue to be
viewed as a significant element of a best practices approach.
Sponsor Flexibility and Applicability of the Funding Guideline
As noted in the Funding Guideline, the plan sponsor can act in its own interest with
consideration for its own stakeholders with an implied duty of good faith to its pension
plan beneficiaries. Although the Funding Guideline acknowledges that plan sponsors
require flexibility and that competing organizational demands are important
considerations, PIAC feels that this point should be further stressed.
For a SEPP the decision to fund the pension plan beyond the minimum is clearly
within the plan sponsor’s discretion as the funding entity. The Funding Guideline
suggests that a funding policy should be communicated widely whereas PIAC notes
that for a SEPP communication with plan beneficiaries may not be optimal. For
example, funding may be a collective bargaining issue.
The Funding Guideline has more practical application to a MEPP or JSPP where
funding directly impacts beneficiaries via benefit levels that may fluctuate as often as
annually. As a consequence, communication with beneficiaries and a high level of
transparency are appropriate for these types of plans.
PIAC agrees with CAPSA’s recommendation on communication between the
administrator and the sponsor as key to the prudent management of the plan and the
ability to meet short and long term obligations. The caveat is that the level and form of
communication should still be left to the administrator’s or sponsor’s discretion.
Policy Interaction
The funding of a pension plan is impacted by its benefit policy, which is reflected in the
plan text, funding arrangements and collectively bargained benefits. Although this is
not directly discussed in the Funding Guideline, changes to one policy (for example
SIPP or funding policy) cannot be viewed in isolation and the interaction between
policies must be considered as part of a good governance framework.
3
Finally, the sponsor is already expected to provide input into the selection of actuarial
assumptions and methods. It is unclear how Item 9 in the Funding Guideline changes
this and PIAC is concerned that the focus on issues such as margins for adverse
deviation will interfere with plan sponsor discretion.
Investment Guideline and Questionnaire
PIAC supports initiatives that seek to harmonize investment practices across
jurisdictions so therefore PIAC is supportive of the Investment Guideline and efforts to
provide practical tools such as the Questionnaire. In this regard, it appears that most
items covered in the Investment Guideline are already required elements of
investment policy in most Canadian jurisdictions. It is not clear though, whether there
are additional requirements set out in the Investment Guideline that might effectively
result in CAPSA creating an additional regulatory layer for plans.
In addition to concern over the applicability of the Investment Guideline in various
jurisdictions, PIAC has concerns on a variety of specific issues related to the
Questionnaire, including:






the degree to which Plan Administrators can rely on the Questionnaire to meet
their fiduciary and prudency requirements;
the level of detail in the Questionnaire and the use of a prescriptive approach
rather than employing a prudence standard;
the inconsistent format of the Questionnaire;
the duplication across other CAPSA Guidelines and within the Questionnaire
itself;
the distinctions between defined contribution and defined benefit plans and
between corporate and other types of sponsors; and
in some cases, specific terminology within the documents is not always
appropriately used.
Referring to our prior submission dated April 30, 2010 regarding “The Prudence
Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan
Funding and Investment” (http://www.piacweb.org/submissions_to_government.html),
we reiterate the need to distinguish between investment policy issues and
implementation issues, with the former being important for the Investment Guideline.
In presenting our comments in this letter, the goal is not to comment on all sections
and articles of the Investment Guideline and Questionnaire, but we will use one or two
specific examples to demonstrate our perspective.
Overlapping Policies
The Investment Guidelines overlap with CAPSA Funding Guidelines and other
Guidelines issued by CAPSA. Many items related to appropriate delegation and
documentation are included in the CAPSA Governance Guidelines and Governance
4
Self-Assessment Questionnaire. Further, many items related to defined contribution
plans are included in the CAPSA Capital Accumulation Plan Guidelines. The original
consultation document was named “The Prudence Standard and the Roles of the Plan
Sponsor and Plan Administrator in Pension Plan Funding and Investment”. The
sections related to Prudence and the Roles of Plan Sponsor and Plan Administrator
are now duplicated in the Funding Guideline and the Investment Guideline. For
example, CAPSA is suggesting that both the Funding Guideline and the Investment
Guideline require a section on Risk.
PIAC agrees that the overlapping areas are important and should be considered
during policy setting and decision making. However, a pension plan is typically
managed as a comprehensive entity and a requirement to address the same issue in
every policy is not practical. A holistic view rather than specifically itemizing written
areas for each policy is common and should be acceptable.
Distinction Between Defined Benefit and Defined Contribution Plans
Although the Investment Guideline recognizes that defined contribution (DC) plans are
different from defined benefit (DB) plans, they state that any of the
Guidelines/Questionnaire can apply to DC plans. However a specific section for DC
plans is included in the Questionnaire. Clarity on DB versus DC is required.
General Clarity Issues
CAPSA’s Questionnaire should provide plan sponsors with a tool to ensure they have
met all prudent standards and regulatory requirements related to the investment
policies of their plan. The Questionnaire references the federal investment rules and
the need to ensure that the SIPP is reviewed regularly so it remains in compliance with
relevant pension legislation. It needs to be clear that simply completing the
Questionnaire is not a guarantee that a plan administrator has met the prudence
standard or has discharged its broader statutory obligations. PIAC suggests making an
explicit statement in section 5 that the Questionnaire is not an exhaustive list of
regulatory requirements. It would also be useful to include references or links (at the
date of publication) to appropriate jurisdictional requirements for SIPPs.
To make the Questionnaire useable and practical for the plan sponsor, PIAC
recommends that it be written in a consistent format. For example, using a question
based approach rather than using a mix of formats (points to consider, checklists,
some open questions). The preamble to each section in the Questionnaire puts
forward several relevant considerations, which are then followed by lists of additional
(and in some cases overlapping) considerations in a table format. We also note the
significant overlap between many sections. For example, section 4 makes repeated
references to the investment objective, which is the heading for section 3.
PIAC also notes that the Questionnaire in particular is too specific in some areas to
apply to all types of plans. Some parts of the Questionnaire are based on investment
beliefs and/or investment perspective that vary by plan and may be construed as
limiting factors. For example, section 4, article 2, mentions risk mitigation by
investment style (e.g. value/growth or index/active). Although style diversification may
5
be one way to diversify investment risk, such an approach may be appropriate in some
markets and not others. Similarly, using correlation as a risk mitigation factor is a
legitimate tool but, as demonstrated in the 2008 market crisis, historical correlations
can be unstable.
Article 2 of section 4 in the Questionnaire lists certain types of risks. In this section,
investment risk appears redundant; market risk and interest rate risk are not
necessarily separate; further, the definition of demographic risk is not clear.
Reference made to risk tolerances should often refer to risk identification and the
degree of acceptance or mitigation. For example, the reference on page 3 states that
the "...investment function should be undertaken in accordance with the prudential
principles of security and liquidity...". While liquidity is an important risk, PIAC is
concerned that this reference elevates liquidity to a fundamental principle. PIAC also
notes that, for clarity, terminology needs to be consistently and accurately applied.
Conclusion
We reiterate PIAC’s support for the principles based approach underlying the Funding
Guideline and the Investment Guideline and Questionnaire. The changes we have
suggested are to provide additional clarity and avoid duplication between CAPSA and
the regulatory authorities and between a funding policy and other governing
documents.
PIAC would welcome the opportunity to discuss our comments and observations with
you further.
Yours sincerely,
Barbara Miazga
Chair
June 8, 2011
Christian Nordin
Policy Manager,
CAPSA Secretariat
Toronto, ON
M2N 6L9
Dear Sirs,
Re: CAPSA Consultation on the Draft Guidelines on Pension Plan Prudent
Investment Practices and Self-Assessment Questionnaire, and the Draft
Guidelines on Pension Plan Funding Policy
Thank you for the opportunity to provide comments on the above named proposals.
The ACPM is the informed voice of retirement income providers for Canadians.
Established in 1976, the ACPM advocates for an effective and sustainable Canadian
retirement income system. Our members are drawn from all aspects of this industry
from one side of this country to the other. They represent over 300 pension plans
consisting of more than 3 million plan members, with assets under management in
excess of $300 billion.
The ACPM promotes its vision for the development of a world-leading retirement income
system in Canada by championing the following Guiding Principles:
Clarity in legislation, regulations and retirement income arrangements;
Balanced consideration of other stakeholders’ interests; and
Excellence in governance and administration
The ACPM regularly advocates and participates in public dialogue on pension issues.
General Comments
We have reviewed the three documents and offer the following comments.
Our overall impression of the three documents is that they require editing to make them
more effective. There is repetition and redundancy throughout all three.
We would strongly suggest some sort of introductory section outlining the various types
of pension plans and their characteristics. We believe this would benefit the users of
these guidelines as it would provide context and recognize the unique requirements that
may exist for each of these plan types.
Our overall observation of the Guideline is that it inadequately describes the relationship
between the funding policy and the investment policy. For example, in the “Purpose of
the Funding Policy” section it is indicated that the “plan’s investment policy” should be
considered when establishing the Funding Policy. We would argue that the Funding
Policy is the first step and the Investment Policy should take into consideration the terms
of the Funding Policy. Examples of items that should drive the Funding Policy include
the plan liabilities, sponsor risk tolerance and cash flow projections.
In addition, we suggest that Letters of Credit be explicitly mentioned as a tool available
to the sponsor for the funding of the plan.
Why is there no mention of jointly sponsored plans in the “Pension Plan Funding
Principles and Objectives” section?
In the section that deals with the “Purpose of the Funding Policy” other items that should
be considered for the purpose of the policy include surplus entitlement under the law, the
terms of the plan, and member communications; treatment of contribution holidays under
the law, the terms of the plan and member communications; and asset and liability
matching in fund investments.
In the “Dual Role of the Employer as Plan Sponsor and Plan Administrator” section it is
surprising to us that a “duty of good faith” standard has been introduced (second
paragraph, Page 4) applicable to the plan sponsor. We think this has the potential of
creating a conflict as the employer (as plan sponsor) does not have a fiduciary
responsibility and is entitled to act in its own best interest.
In the section entitled “Developing a Funding Policy” on Page 5, second bullet, we
suggest that the word “will” be changed to “should help to”.
In “Elements of a Funding Policy” on Page 6, Item 4 “plan’s” should be replaced with
“plan sponsor’s” in the sentence “It should describe the plan’s tolerance for volatility in
funding requirements.”
Finally, we do not agree with the suggestion of “scenario testing” in the Funding Policy
as too much detail will be involved if specifics are given and if not, there will be too many
generalities to make the information useful.
We feel the Guideline is repetitive and could be redrafted to be made more concise.
We are concerned about the inclusion of plan beneficiaries to “monitor and assess
investment management practices” (Prudent Person Rule – last paragraph on Page 6). It
should be sufficient for plan beneficiaries to understand their plan benefit, be assured
that the benefit is adequately funded and understand what the risks are related to them
2
receiving their entitlement. Establishing an inappropriate and unachievable expectation
is counter-productive to the purpose of the Guidelines as the majority of plan
beneficiaries will not possess the expertise to be able to monitor and assess investment
management practices.
We would suggest that explicit reference to the CAP Guidelines be made where
appropriate. For example, the section entitled “Prudent Investment Practices” does not
appear to recognize the unique attributes of defined contribution plans such as the fact
that investment risk essentially lies with the plan member, not the plan administrator.
The dynamic nature of the relationship between the investment policy and the funding
policy needs to be more explicit as it is important for plan sponsors and administrators to
understand the connection between them.
In the “Investment Policy/Statement of Investment Policies & Procedures” section, Page
7, first bullet in the third paragraph, we suggest that the point should read “identify the
kinds of investments that could be held” (changing “should” to “could”). The prescriptive
nature of “should” is restrictive to potential investment opportunities that could benefit the
plan while meeting prudent investing objectives.
In the “Monitoring” section of the Guideline, the monitoring practices for investments are
listed. We would suggest that the order of these practices be changed so that
investment performance is not the first practice. Investment performance should be the
result of the other practices.
There is significant overlap between the draft Policy and the OSFI Guidelines on
developing a SIPP. Due to the adoption of the federal investment rules in most
provinces, that Guideline is used by most Plan administrators. It would be helpful to
integrate the two documents.
There are items included in the Questionnaire that go beyond investments, for example,
overall governance, administration and funding. The focus should be on investment only.
As the Guideline is very repetitive so is the Questionnaire. We would suggest that the
streamlining of both would make them more useful to plan sponsors and administrators.
We question the requirement of documentation of a plan administrator’s self assessment
to determine their “knowledge, skill and expertise to fulfill its investment function
internally” (Page 4, Section 3). This goes beyond best practice.
We have the same comment for Item 1 on Page 6.
We believe that the requirement on Page 12, Item 5 should be eliminated. The due
diligence is up front in choosing the appropriate professional in the first place, not at the
end when the work is done and the recommendations are being presented.
On Page 14, Item 4, last bullet “are poor” should be replaced with “do not meet the
expected targets over a stated period of time” (same on Page 17, Item 4, third last
bullet).
3
On Page 15, end of Item 4, last bullet “decisions” should be replaced with “policy and
performance”.
Should there be any questions, we make ourselves available at your convenience.
Sincerely,
Bryan D. Hocking
Chief Executive Officer
4
CAPSA Draft Guidelines:
Pension Plan Prudent Investment
Practices and Questionnaire
and
Pension Plan Funding Policy
NATIONAL PENSIONS AND BENEFITS LAW SECTION
CANADIAN BAR ASSOCIATION
May 2011
500-865 Carling Avenue, Ottawa, ON, Canada K1S 5S8
tel/tél : 613.237.2925 | toll free/sans frais : 1.800.267.8860 | fax/téléc : 613.237.0185 | [email protected] | www.cba.org
PREFACE
The Canadian Bar Association is a national association representing 37,000 jurists,
including lawyers, notaries, law teachers and students across Canada. The Association's
primary objectives include improvement in the law and in the administration of justice.
This submission was prepared by the National Pensions and Benefits Law Section of the
Canadian Bar Association, with assistance from the Legislation and Law Reform
Directorate at the National Office. The submission has been reviewed by the Legislation
and Law Reform Committee and approved as a public statement of the National
Pensions and Benefits Law Section of the Canadian Bar Association.
Copyright © 2011 Canadian Bar Association
TABLE OF CONTENTS
CAPSA Draft Guidelines:
Pension Plan Prudent Investment
Practices and Questionnaire
and
I.
INTRODUCTION ............................................................... 1
II.
INVESTMENT GUIDELINE AND QUESTIONNAIRE ........ 1
III.
IV.
A.
General Comments ................................................................... 2
B.
Specific Comments On Investment Guideline............................ 3
C.
Specific Comments on Investment Questionnaire ..................... 5
FUNDING GUIDELINE ...................................................... 8
A.
General Comments ................................................................... 8
B.
Specific Comments ................................................................... 9
CONCLUSION ................................................................ 16
CAPSA Draft Guidelines: Pension Plan Prudent
Investment Practices and Questionnaire and
I.
INTRODUCTION
The Canadian Bar Association National Pensions and Benefits Law Section (the CBA Section) is
pleased to participate in CAPSA’s consultation on the Draft Guideline on Pension Plan Prudent
Investment Practices and Self-Assessment Questionnaire (Investment Guideline and
Questionnaire), and the Draft Guideline on Pension Plan Funding Policy (Funding Guideline).
The CBA Section comprises lawyers from across Canada who practice in the pensions and
benefits area of law, including counsel to pension and benefit administrators, employers,
unions, employees and employee groups, trust and insurance companies, pension and benefit
consultants, and investment managers and advisors.
These submissions supplement the CBA Section’s April 2010 submissions on the consultation
on the Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension
Plan Funding and Investment (2010 submission). We acknowledge that the materials address
a number of issues raised in our 2010 submission.
II.
INVESTMENT GUIDELINE AND QUESTIONNAIRE
The CBA Section generally agrees with the approach to the Investment Guideline and
Questionnaire. Our general comments are thematically divided into three parts, each theme
spanning both the Investment Guideline and Questionnaire:
1.
2.
Investment Policies, Objectives and Risk Tolerances
3.
Defined Contribution Plans
Page 2
Submission on
Investment Guideline and Questionnaire and Funding Guideline
A. General Comments
1.
The CBA Section agrees that the roles of the plan sponsor and plan administrator should be
clearly delineated in the plan documentation, and agrees with CAPSA’s approach to this topic.
Pension stakeholders will appreciate the greater degree of clarity.
2.
Investment Policies, Objectives and Risk Tolerances
The CBA Section recommends that the contents of the investment policies, objectives and risk
tolerances be developed in harmony with the guidelines of pension regulators and the dictates
of the legislation in most provinces.
The 2010 submission notes (bottom of page 1, Section II) that the CBA Section would welcome
guidelines on best practices for pension plan investments to clarify the fiduciary standard
against which pension plan administrators are measured. We reiterate that statement.
Although the Investment Guideline contains a section on prudent investment practices, plan
administrators may not find that this sufficiently clarifies the standard.
3.
Defined Contribution Plans
There are no references in the Investment Guideline and Questionnaire to the CAPSA Guideline
No.3 for Capital Accumulation Plans (the CAP Guideline). The Investment Guideline and
Questionnaire should be consistent with and complement the CAP Guideline. References to the
CAP Guideline should be added in the Investment Guideline and Questionnaire where relevant
(some examples are provided below).
The Investment Guideline and Questionnaire refer to defined contribution pension plans (DC
plans) and to a combination of defined benefit and defined contribution plans. As the intention
seems to be to apply these documents to registered DC plans only (and not to other capital
accumulation plans), this should be clarified in the two documents.
The Investment Guideline states that DC plans under which plan beneficiaries may choose from
a list of investment options will have different prudent investment practices criteria than a
pension plan where this option is not available. In practice, many DC plans provide that
members are responsible for selecting their investment choices. The Investment Guideline
Submission of the National Pensions and
Benefits Law Section of the Canadian Bar Association
Page 3
could refer to Section 8 of the Questionnaire on selecting investment options and default
option, as well as to Section 2.2 (Investment Options) of the CAP Guideline.
B. Specific Comments On Investment Guideline
Role of the Plan Sponsor/Administrator/Dual Role of the Employer
The roles of the sponsor and administrator should be better defined to provide a clear
distinction and appreciation of the duties that accompany each role. In particular, failure to
clarify the dual role of the employer as plan administrator and sponsor may result in the
employer’s failure to fulfill the responsibilities that accompany each role. The CBA Section
suggests that a more comprehensive discussion of the respective responsibilities and duties be
provided in the “Dual Role” section.
Recent case law suggests a shift in the courts’ view of the two roles and of the difficulties
employers face deciding which role they are acting in.1 The CBA Section proposes adding a
recommendation that employers, sponsors and administrators stay current with legal
developments, and seek legal advice if they are uncertain about their roles and respective
responsibilities. Failure to do so could result in inappropriate funding and investment
decisions.
Communication with Plan Beneficiaries
The information in this section on DC plans is quite general. For example, it mentions that plan
beneficiaries should be given sufficient details about the pension plan investment options to
make informed investment decisions.
To make the Investment Guideline a more useful tool, a reference to the CAP Guideline and the
relevant subsections of Section 3 (Investment Information and Decision-Making Tools for CAP
Members), Section 4 (Introducing the Capital Accumulation Plan to CAP Members), and Section
5 (Ongoing Communication to Members) should be added.
1
Re Indalex, 2011 ONCA 265 (CanLII); Slater Steel Inc. (Re), 2008 ONCA 196 (CanLII).
Page 4
Submission on
Risk Tolerances
The Investment Guideline provides a comprehensive list of possible risks comparable to the list
in Section I.4 of the Office of the Superintendent of Financial Institutions (OSFI) Guideline for
the Development of Investment Policies and Procedures for Federally Regulated Pension Plans.
The CBA Section recommends that the Investment Guideline describe the risks consistent with
the OSFI Guidelines. For example:
Credit risk
risk that a counterparty will not pay an amount
due as called for in the original agreement, and
may eventually default on an obligation.
Funding/Mismatch risk
risk that a solvency deficiency will develop
because an increase or decrease in the market
value of the plan assets are not matched by a
corresponding increase or decrease in the
liabilities.
Foreign exchange/Currency risk
risk that the market value of a financial
instrument will fluctuate due to changes in
exchange rates.
Market/Price risk
risk that the market value of an investment or of
a financial instrument based on investments will
fluctuate.
Interest rate risk
risk that the market value of a security will
fluctuate due to changes in market interest rates.
Investment Policy/Statement of Investment Polices & Procedures
The CBA Section agrees with the approach in the Investment Guideline discussion of the overall
requirements for the investment policy and Statement of Investment Policies and Procedures
(SIP&P) under the same heading. It is appropriate to allow plan administrators to determine
whether to set out the investment policy in one or in several documents.
The Investment Guideline lists some key elements for investment principles. We propose that
key elements for SIP&Ps be included consistent with the elements prescribed in the Federal
Investment Rules (the FIR):
(a)
(b)
Categories of investments and loans, including derivatives, options and futures;
Diversification of the investment portfolio;
(c)
(d)
(e)
(f)
(g)
(h)
Page 5
Asset mix and rate of return expectations;
Liquidity of investments;
Lending of cash or securities;
Retention or delegation of voting rights acquired through plan investments;
Method of, and basis for, valuation of investments not regularly traded at a public
exchange; and
Permitted related party transactions and the criteria to be used to establish whether a
transaction is nominal or immaterial to the plan.
Like the FIR, the list should be inclusive and not limit the SIP&P to only the specified
components.
C. Specific Comments on Investment Questionnaire
Section 1 – Plan Administration Roles and Responsibilities
Questions 1 and 2: The CBA Section suggests including a reference to governance policy (or
terms of reference) in the list of documents. While this could be included in the “other”
category the general responsibilities identified in both questions, especially 1, should be
addressed or at least identified in relevant governance documentation.
Question 4: There has been a move by consulting firms to perform investment functions on
behalf of plan administrators. These structures give rise to some unique considerations,
especially from a liability standpoint. It may be appropriate to include consulting
arrangements in a separate category.
Question 6: Greater clarity is needed on the information sought to be elicited by Question 6.
The CBA Section suggests adding “both indirectly and directly” at the end of the fourth bullet.
A number of investment related delegates are often involved and relevant information might
make its way to the plan administrator in a variety of ways. Also, the CBA Section suggests
adding “the requirement to monitor delegates on an ongoing basis” to the list of activities, as it
is not fully captured in the rest of the question.
Section 2 – Responsibility for Establishing the Investment Policy
Question 2:
Consultants and lawyers tend to be heavily involved in drafting SIP&Ps, more so
than, say, insurance and trust companies or external investment managers. The CBA Section
suggests that they should be included in the list in question 2, rather than relying on “other”.
Page 6
Submission on
Section 3 – Investment Objectives
Question 2:
Reference should be made to “plan sponsor(s)” to recognize jointly-sponsored
plans.
Section 4 - Risk Tolerances
Question 1:
“Investment risk” should be added to the bullet list.
Section 5 - Content of Investment Policy/SIP&P
Question 4:
The last bullet should be amended to “the amount and the effect of management
and administrative fees, transaction costs and custodial fees”.
The CBA Section suggests including the following:
•
•
•
•
•
•
•
•
•
Benchmarks
Rate of return expectations (including time frame) and expected volatility
Pension fund performance measures
Investment review process
Policy review process
Criteria and process for permitted related party transactions
Conflicts of interest policy
Roles and responsibilities of delegates
Criteria and process for monitoring delegates
An additional question should be added after Question 3 asking “Does the investment
policy/SIP&P include the elements required under the applicable legislative investment rules?”
Section 6 – Delegation of Investing Activities for Pension Fund Assets
In the first paragraph under the heading “Fund Holder”, the CBA Section suggests that the last
sentence indicate that where a fund holder has been retained, there “must” be a written fund
holder agreement, rather than “should”. In the same sentence, an agreement should also
include the item “determines legal terms and conditions, including an appropriate standard of
care”.
The third sentence in the next paragraph under “Fund Holder” should add a reference to “legal
terms and conditions” and a “standard of care” to the requirements for a custodian agreement.
The paragraph should also discuss the selection of sub-custodians and who is responsible for
Page 7
their oversight. The CBA Section reiterates the suggestions in our September 2010 submission
to CAPSA on the Guideline on Fund Holder Arrangements.
Question 5:
The CBA Section suggests that the list of what to include in the written
procedures for selecting an investment manager should also include an assessment of the
boilerplate investment management agreement.
Section 8 – Defined Contribution Pension Plans
This section should specify that it also applies to defined benefit plans that have a defined
contribution component.
Question 1:
Where investments are selected wholly by plan beneficiaries, the plan
administrator may be able to make some selection as to the range of investment options
offered by the financial institution. The CAP Guideline mentions on page 4: “In some cases the
choice of a service provider will define or limit the type of investment options available to a
plan”. This should be reflected in Question 1 with an item such as: “a range of investment
options offered by the financial institution and selected (totally or partially) by the plan
administrator”.
Question 3:
While the items outlined in this question are useful, the CBA Section
recommends that the introductory wording be rephrased similar to Question 2 but referring to
situations where investment options are wholly or partly selected by plan beneficiaries. The
question could also refer to steps taken, documentation supporting this decision and factors
considered in this decision. Other items could be added in the proposed list such as those
mentioned in Section 2.2 (Investment Options) of the CAP Guidelines. The wording in the
Investment Guideline and Questionnaire should be consistent with the wording in the CAP
Guideline. The CBA Section also suggests adding a bullet “other ____________” at the end of the
listed items.
If the wording is not changed as suggested, the CBA Section notes that the question refers to
the retirement needs of plan beneficiaries. This would be in line with the reference to DC plans
(and not to other capital accumulation plans) in the Investment Guideline and Questionnaire.
We also suggest replacing “taken to reflect” with something like “considered taking into
account”.
Page 8
Submission on
Question 6:
The CBA Section suggests adding a second bullet such as: “monitor the number
or percentage of plan beneficiaries whose investment options are not in line with their investor
profile (e.g. prudent investment profile with aggressive investment choices)”. Other bullets
could be added, such as “monitor the frequency of transactions.”
Question 7:
•
•
•
•
•
•
The CBA Section suggests adding items to this question such as:
Investment options and funds
Change, replace or remove investment options or funds
Investments selected by plan member
Transfer options and related fees
Investment activity (transaction details)
Responsibilities of plan members with respect to investment decisions
Question 8:
Suggested additional questions
The following questions could be added in this Section:
•
•
•
III.
Identify the steps taken to ensure that the decision-making tools provided are generally
well suited to the plan beneficiaries and used by them.
Identify the procedures in place to deal with plan beneficiaries questions or complaints.
Determine if communication of information measures or policy is needed (e.g. what,
when, who).
FUNDING GUIDELINE
A. General Comments
1. The CBA Section believes that the Funding Guideline will assist in developing a sound and
practical funding policy to permit a plan sponsor to meet its statutory funding obligations. The
CBA Section agrees that plan sponsors should be encouraged to consider adopting a funding
policy. However, the Funding Guideline should be clear that the development and adoption of
a funding policy may not always be desirable or appropriate for every plan or plan sponsor,
rather than be prescriptive in nature.
2. As discussed in the 2010 submission, creating a funding policy is the responsibility of the
plan sponsor/employer under a single employer pension plan (SEPP). The Funding Guideline
appears to acknowledge this important concept. The Funding Guideline should clearly
distinguish between SEPPs on the one hand, and multi-employer pension plans (MEPP) and
jointly-sponsored pension plans (JSPP) on the other to avoid confusion, uncertainty and
misunderstanding among pension plan stakeholders.
Page 9
3. Funding considerations, processes and practices may differ greatly depending on the
governance and benefit structure of the pension plan and the circumstances of the employer.
To be effective for plan sponsors, the Funding Guideline must acknowledge that the funding
policy will not be driven by a prescriptive or “one size fits all” approach and while the detailed
written funding policy envisioned by the Funding Guideline may be appropriate in some cases,
it will not always be appropriate. The Funding Guideline should acknowledge that employers
must have some flexibility to address circumstances unique to each pension plan and sponsor.
The CBA Section recommends that the Guideline acknowledge the need for flexibility and
address broad principles without prescribing the contents of a funding policy.
4. Funding and investment policies are interrelated. However, it is responsibility of the
administrator to set investment policy in a way that reflects the funding policy for the plan, not
the converse. For example, it would be inappropriate for the plan administrator to be free to
establish an aggressive investment policy based on an assumption that the plan sponsor will
have to account for this in setting or adjusting funding policy. Clarity about the relationship
between investment and funding policy is necessary to maintain a proper governance
structure.
5. The Funding Guideline inherently applies only to pension plans with a defined benefit
component and would not apply to defined contribution plans. To avoid confusion, the CBA
Section recommends that the opening paragraph of the draft Funding Guideline clarify that it
applies to a pension plan which has a defined benefit component (as distinct from a defined
contribution plan). In addition, the title of the Funding Guideline should identify that it applies
only to plans with defined benefit components rather than pension plans generally.
6. In its 2010 Submission, the CBA Section encouraged harmonization between provincial
legislation and the Funding Guideline, to provide plan sponsors and administrators with clear
direction as to the standards they are expected to follow. The CBA Section commends CAPSA
for addressing this issue throughout the Guideline.
B. Specific Comments
As noted above, the opening paragraph of the Funding Guideline should clarify that it applies
only to a funding policy for a defined benefit pension plan (as distinct from a defined
contribution pension plan), and should clarify that:
Page 10
Submission on
(1) for a SEPP, the decision to establish a funding policy and development of the policy rest
with the plan sponsor; and
(2) for a MEPP or JSPP, the decision to establish a funding policy and development of the policy
rest with either or both of the sponsor and administrator of the plans as applicable in the
circumstances.
Pension Plan Funding Principles and Objectives
The CBA Section generally agrees with the principles and objectives in the Funding Guideline.
The CBA Section also agrees that different funding considerations may apply to SEPPs on the
one hand and MEPPs and JSPPs on the other. As noted above, the CBA Section recommends a
separate section in the Funding Guideline devoted to MEPPs and JSPPs, rather than including
references throughout the Guideline. This would reduce confusion with references to the
involvement of administrators in the creation of funding policies for plans “other than SEPPs”.
For example, the last sentence of paragraph 1 that begins “different funding considerations…”,
the last sentence of paragraph 2, and the last sentence of paragraph 4 are important concepts
and should be combined under the heading “Special Considerations for MEPPs and JSPPs”. It
would be beneficial to address this distinction up front, as it relates to the discussion of
principles and objectives and the purpose of a funding policy, and is a distinction that affects
the tone, content, and clarity of the entire Guideline.
Paragraph 2 of the Funding Guideline refers to “funding requirements”. In light of the
significant pension reform in the last two years, the CBA Section recommends that CAPSA
ensure these statements are consistent with new funding requirements in many jurisdictions.
For example, the federal Pension Benefits Standards Act now requires annual actuarial
valuations using a three-year average solvency ratio to reduce fluctuations caused by market
events. This was first raised in the 2010 submission. However, the Funding Guideline does not
appear to recognize that changes have occurred and different funding requirements have been
introduced to minimize fluctuations and enhance benefit security of members (e.g., limits on
contribution holidays).
As set out in paragraph 3, the CBA Section agrees that funding decisions should not be ad hoc
and a funding policy could provide some consistency to funding related decisions. At the same
Page 11
time, the Guideline should note that funding decisions have a significant impact on plan
sponsors (currently the term used is “stakeholders”) and should recognize that sponsors
require flexibility to alter or shift their objective and focus with regard to funding decisions.
Purpose of a Funding Policy
The CBA Section agrees that a number of relevant factors should be considered in developing a
funding policy. However, the Funding Guideline should clarify that funding policies are not
intended to create expectations or requirements to fund in excess of that required by
applicable legislation. The Funding Guideline should indicate that a funding policy provides a
framework for how the plan sponsor will meet its funding requirements, rather than require
the sponsor to exceed minimum required funding.
The CBA Section stresses the importance of ensuring that the plan sponsor has the flexibility to
respond to unforeseen circumstances that may have implications for funding a pension plan.
Further, the Funding Guideline should indicate that provisions of a funding policy cannot
substitute or alter entitlements in pension plan documents (e.g., plan text, funding agreements
or collective agreements).
The CBA Section also recommends that the factors listed include the Income Tax Act maximum
limits, overall plan assets and liabilities, and the nature of the pension promise (e.g., target
benefit versus defined benefit).
The CBA Section recommends that the funding policy and investment policy should be separate
documents.
Finally, it is not clear what is intended by the last factor identified (“related agreement between
the plan sponsor and plan beneficiaries”). This should be clarified.
Role of the Plan Sponsor
As discussed in the 2010 submission, the CBA Section recommends that the Funding Guideline
clearly state that funding decisions are the role of the plan sponsor. The CBA Section also
recommends that the Funding Guideline expressly state that, while funding policies are a good
Page 12
Submission on
practice and a matter of good governance, the Funding Guideline is not mandating that all plan
sponsors create a policy.
Role of the Plan Administrator
The CBA Section agrees that the administrator is responsible for ensuring that the investment
policy is consistent with the funding policy. It is also important, as stated in the Funding
Guideline, that the plan sponsor and administrator understand each other’s role for
implementation of the funding policy. The Funding Guideline should also indicate that the
roles and responsibilities of the plan sponsor and administrator be clearly set out in the
documentation itself.
The Funding Guideline contains varying references to MEPPs that result in uncertainty about
the distinction between the role of the plan sponsor and administrator. As discussed above,
this should be addressed by removing these references from various sections of the Funding
Guideline and dedicating a single section to a discussion of funding policy issues for MEPPs and
other similar plans such as JSPPs.
Dual Role of the Employer as Plan Sponsor and Plan Administrator
As stated in the 2010 submission, it is important that the Funding Guideline clearly recognize
the differences between the roles of sponsor and administrator. The CBA Section agrees with
the section on the Dual Role of the Employer as Plan Sponsor and Plan Administrator,
especially references to the standards and considerations applicable to each role.
Developing a Funding Policy
The CBA Section agrees with some of the potential benefits outlined in this section of the
Funding Guideline, such as bettering the employers’ understanding of the risks faced by the
pension plan and furthering transparency. However, the Funding Guideline contains a number
of references that should be reconsidered prior to its finalization.
While the Funding Guideline explains that funding policies are a sponsor function, it goes on to
state that the funding policy should consider the specifics of the investment policy. The CBA
Section does not agree with this approach, as it would require the sponsor to consider
administrator policies when setting the funding policy. Instead, as stated in the 2010
submission about harmonization and clarity between funding and investment policies, the CBA
Page 13
Section recommends that the Funding Guideline clearly state the funding policy is a separate
policy that should be developed by the sponsor without reference to the investment policy. In
the event of a conflict between the funding policy and investment policy, it should be the
responsibility of the administrator to adjust the investment policy accordingly.
Once again, the CBA Section also recommends that the Funding Guideline be amended to
clearly address plans other than SEPPs upfront, to minimize any confusion with respect to the
role of the administrator in the development of a funding policy.
Elements of a Funding Policy
The CBA Section recommends amending this section to make it clear that these elements are
optional, not mandatory and that employers have some flexibility to address their unique
circumstances. Not every element will be relevant in every circumstance or for every pension
plan. For example, funding considerations, processes and practices may differ greatly
depending on the governance and benefit structure and demographics of the pension plan and
the size and circumstances of the employer. Further, collective agreement considerations and
other contractual obligations may affect funding policy considerations.
The Funding Guideline should expressly acknowledge that while a detailed written funding
policy may be appropriate in some cases, it will not be in all cases.
The Funding Guideline states that there may be overlap for some elements between the
funding policy and investment policy, and the funding policy should refer to the investment
policy to minimize duplication. The CBA Section does not agree with this approach. As the
funding policy is a sponsor responsibility and the investment policy is an administrator and
fiduciary responsibility, these documents should be separate and self-contained. The funding
policy should refer to all necessary factors that the sponsor wishes to consider, without
reference to the investment policy.
Element 2:
Funding Objectives
The CBA Section does not agree that the funding policy should indicate how the funding
objectives integrate with the plan’s investment policy. Instead, the investment policy should
indicate how it integrates with a funding policy, if one exists, and the administrator should be
Page 14
Submission on
responsible for adjusting the investment policy in the event of a conflict between the
investment policy and funding policy.
The CBA Section recommends that the Funding Guideline be revised to indicate that, where a
funding policy exists, the plan sponsor is not required to fund in excess of minimum standards.
Element 4:
Funding Volatility Factors and Management of Risk
The CBA Section recommends that this element indicate that a plan sponsor is not required to
disclose sensitive or confidential commercial information when summarizing a plan’s tolerance
for volatility in funding requirements.
Again, the Funding Guideline indicates that the funding policy should make reference to the
investment policy. Funding and investment policy should, at least in theory, take into account
the plan sponsor's and the plan administrator's goals and objectives, but each one proceeds
from a different point. Investment policy objectives should not have to be referred to in the
funding policy.
The CBA Section also believes that funding policies should not be required to refer to scenario
testing. These considerations are often very detailed and involve additional input from thirdparty advisors and regulators.
Element 6:
Cost Sharing Mechanisms
While a funding policy should discuss cost sharing mechanism if one is in place, for some plans
this may be a matter of collective bargaining. Where a plan is collectively bargained, the
funding policy must be consistent with the negotiated agreement regarding cost sharing. The
Funding Guideline does not adequately acknowledge the possible implications of a pension
plan where aspects are the result of bargaining and thus the necessity for greater flexibility in
the content of the policy.
Element 7:
Utilization of Funding Excess
As noted in our 2010 submission, the CBA Section generally supports that a funding policy can
address the "utilization of funding excess". However, the Funding Guideline should clearly
state that a funding policy cannot substitute for or alter plan or trust document terms. The
Funding Guideline should also indicate that funding policies must be consistent on the use of
Page 15
funding excess where minimum standards legislation contains restrictions or limitations.
Finally, the ability to use funding excess remains uncertain and entitlement may be a
contentious issue. Plan sponsors should not be required to set out how such funding excess
shall be used where uncertainty exists. This matter may require legal advice, which plan
sponsors should not be required to disclose. Finally, the use of surplus on plan termination is
not relevant to funding policy and need not be included.
Element 8:
Multi-Employer Pension Plan (MEPPs)
As discussed above, MEPPs (and similar plans such as JSPPs) should be discussed separately in
a section at the outset of the Funding Guideline, and should not be identified as a separate
element for consideration.
Element 9:
Actuarial Methods, Assumptions and Reporting
Many plan sponsors would not have the expertise to address the issues identified under this
element. Further, it may not be appropriate for the funding policy to effectively “crystallize”
the considerations that an actuary may undertake when appropriate methods and assumptions
are selected for the preparation of an actuarial valuation.
Element 10:
Frequency of Valuations
A funding policy that discusses the frequency of actuarial valuations may create unintended
expectations for a plan sponsor and it may not be an appropriate factor for discussion. Further,
the frequency of valuations may be dictated by legislative requirements (for example, federally
regulated plans must file annual valuations) such that consideration of this element is not
appropriate in a funding policy. Finally, it is unlikely that many sponsors will wish to file
actuarial valuations more frequently than required by legislation. In those cases, discussion of
this factor would not add value to a funding policy.
Element 11:
Monitoring and Amending the Policy
The CBA Section agrees that any funding policy should address ongoing monitoring of the
policy. The CBA Section recommends that the section on monitoring also encompass
amendments and termination of the policy to clarify that the Plan sponsor may amend the
policy from time to time as appropriate and may terminate the policy. The Funding Guideline
should suggest that Plan sponsors identify within their funding policy specific circumstances or
Page 16
Submission on
events that could trigger a review, amendment, or termination of the policy. Circumstances
could include changes in the financial risks of the plan sponsor or plan demographics.
Element 12:
Communication Policy
If a funding policy is created, the plan sponsor should determine whether it or related funding
information will be accessible to plan members. The CBA Section does, however, acknowledge
the importance of transparency and agrees it may be appropriate for the plan sponsor to
provide a summary of the funding policy to plan members, subject to the protection of
confidential or commercially sensitive information. Plan sponsors should not be required
(subject to applicable law) to disclose any information counter to their commercial interests,
including confidential or sensitive information.
Where the policy or a summary of the policy is to be made accessible to plan members, it
should be the administrator’s responsibility to communicate the information, consistent with
existing communication policies on the pension plan.
IV.
CONCLUSION
The CBA Section trusts our comments and recommendations will assist CAPSA in its work. We
would be pleased to provide further information on any of these points or to address any
questions you have in connection with the consultation.

Air Canada Pionairs

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