Updated CAPSA Guideline No. 4: Pension Plan Governance
Are your pension plan governance processes as good as they can be? Are you following the governance practices that you’ve established? Do you even know how to define “pension plan governance”?
Pension Plan Governance
Pension plan governance refers to the structure and processes in place for the effective administration of the pension plan to ensure the fiduciary and other responsibilities of the plan administrator are met. Good pension plan governance can go a long way to ensure that plan members and beneficiaries receive the benefits that they are promised and understand their rights and responsibilities under the pension plan.
CAPSA Guideline No. 4
In December 2016, the Canadian Association of Pension Supervisory Authorities (CAPSA) published the final, updated version of their Guideline No. 4 related to Pension Plan Governance. This also included updated and expanded versions of the Frequently Asked Questions and the Self-Assessment Questionnaire.
The original Guideline No. 4 was published in 2004 in order to assist plan administrators across Canada implement and maintain effective pension plan governance processes. According to CAPSA, this guideline has become the most requested and utilized CAPSA publication by plan administrators.
The updated Guideline No. 4 is intended to further assist plan sponsors and administrators by:
- Clarifying when a fiduciary relationship exists and what obligations flow from such relationships, including that fiduciary responsibility is retained when any activities are delegated to third parties;
- Encouraging the establishment of a governance framework, through which information on governance methods and activities are documented;
- Equipping plan administrators with additional tools to identify the various roles and assign responsibilities to appropriate participants;
- Broadening the scope of performance measurement to include all participants in the plan administration; and,
- Capturing best practices as they relate to the identification and management of the plan’s risks.
The Guideline outlines the following 11 governance principals for pension plans, which are unchanged from the original Guideline:
1. Fiduciary Responsibility
2. Governance Framework
3. Roles & Responsibilities
4. Performance Monitoring
5. Knowledge and Skills
6. Governance Information
7. Risk Management
8. Oversight and Compliance
9. Transparency and Accountability
10. Code of Conduct and Conflict of Interest
11. Governance Review
It is important to note that the guidelines outline the appropriate roles and responsibilities of the plan sponsor only when the plan sponsor is acting as plan administrator. They do not cover the roles and responsibilities of the plan sponsor under general corporate governance principles. Many individuals who have pension plan governance responsibilities also have responsibilities to the plan sponsor. Consequently, those with governance responsibilities must clearly understand the different roles and responsibilities for each. Further, when taking actions that affect the pension plan, they must carefully document the actions for both sets of responsibilities.
I will now elaborate on two of the key governance principals that received the most attention in the revised Guidelines.
Fiduciary Responsibilities
The pension governance process should help the plan administrator carry out its fiduciary and other responsibilities. Although plan administrators may delegate certain tasks to third parties, the plan administrator retains fiduciary responsibility.
Fiduciary obligations are owed when legislation imposes such duties or when:
i. a plan administrator and/or any delegates can exercise discretionary power to affect the interests of members or beneficiaries;
ii. a plan administrator and/or any delegates can unilaterally exercise that power so as to affect the interests of the members or beneficiaries; and
iii. the members and/or beneficiaries are in a position of vulnerability at the hands of the plan administrator and/or any delegate.
The plan administrator and delegates must act honestly, in good faith and in the best interests of plan members and beneficiaries of the pension plan as part of their fiduciary responsibilities.
Risk Management
The plan administrator should establish and document a framework and ongoing processes, appropriate to the pension plan, to identify and manage the plan’s risks.
A plan’s risk management framework should provide reasonable assurance for the achievement of the Plan’s objectives through:
a) identifying the risks;
b) assessing and prioritizing the risks;
c) ensuring a clear understanding of the responsibilities for the management of the risks
d) accepting the risk or designing and implementing an appropriate risk-mitigating response;
e) monitoring and evaluating the risks and effectiveness of the responses and risk management processes generally; and,
f) documenting the risk management processes.
Best Practices and Next Steps?
The first step for plan administrators should be complete the Governance Self-Assessment Questionnaire to identify the strengths and weaknesses of their current pension plan governance framework. Then it is on to focusing on the areas which need improvement, utilizing the guidance provided by CAPSA, but also likely working with existing advisors (i.e. actuaries, third-party administrators, investment professionals, legal counsel, record keepers and custodians, etc.).
It is important to keep in mind that each plan’s governance framework needs to be customized to the realities of how the pension plan operates, including the various internal and external resources which work together to keep the plan running.
At the end of the day, the governance framework will be of no use if it’s not followed and respected by all parties!
