When was the last time you thought about pension plan governance? Or reviewed your pension governance policies? It would be great if your answer is “recently”. However, if you’re like many organizations whose answer is “I can’t remember” or “a while ago”, then you need to be aware of the potential risks of not regularly reviewing your pension plan governance structure.
Pension governance is often referred to as the decision-making structure and supporting policies and processes for overseeing, managing and administering a pension plan to ensure that fiduciary and other obligations of the plan are met.
Under pension standards legislation, the plan administrator is ultimately responsible for the governance of the pension plan. Plan administrators have a statutory fiduciary obligation to ensure that the plan is administered in accordance with the best interests of the plan members. Using “best efforts” is not sufficient. Fostering good governance practices, including having a written pension governance policy, will help you discharge this obligation. Without them, the likelihood of breaching your fiduciary standard of care increases. This could lead to claims and litigation against the pension plan and those responsible for plan administration, and even offences under pension standards legislation. It was only a few years ago that the trustees of a large multi-employer pension plan, who were responsible for plan administration, were charged and convicted under the Ontario Pension Benefits Act for breaching their fiduciary duty with respect to the plan’s investments, and fined a record-setting amount.
As a result, if you already have a written pension governance policy in place, now is a good time to review it. Conducting periodic reviews will assist you in making sure any required changes to that policy are made, and that your governance framework as a whole continues to be relevant and adequate to discharge your fiduciary duty. This in turn will ensure that there is proper oversight of the plan’s day-to-day operations, plan member interests are protected, and the risk of member complaints and claims against the pension plan are reduced.
If you don’t already have a written pension governance policy in place, now is the time to create one! A written pension governance policy can be an effective tool for improving your pension governance system. It’s also something that most regulators will ask for when conducting an examination of your pension plan.
As a starting point, any person involved in pension governance should be familiar with the guidelines published by the Canadian Association of Pension Supervisory Authorities (CAPSA) and in particular, Guideline No. 4. Originally released in 2004, CAPSA is currently updating Guideline No. 4, which sets out guiding principles and established best practices for pension plan governance. CAPSA has also developed several other guidelines that will assist plan administrators in developing good governance policies such as Guideline No. 3 on Capital Accumulation Plans, Guideline No. 5 on Fund Holder Arrangements, Guideline No. 6 on Pension Plan Prudent Investment Practices, and Guideline No. 8 on Defined Contribution Pension Plans. For a link to all of CAPSA’s guidelines, click here.
Although the CAPSA guidelines are not legally binding, pension regulators and most (if not all) pension practitioners expect plan administrators to follow them as industry standard. For that reason, establishing a written pension governance policy that takes into account the principles from the guidelines, after consultation with legal counsel, is recommended.
So if you haven’t reviewed your pension governance structure lately, or you don’t have a pension governance policy, now is the time to take action. Doing so will help ensure your plan is administered in accordance with applicable legislation (including your fiduciary obligation), and help avoid potential claims and deficiencies in the event of pension plan examinations.