New FSRA Guidance – Pension Plan Administrator Roles and Responsibilities
A few weeks ago, the Financial Services Regulatory Authority of Ontario (FSRA) released new guidance on Pension Plan Administrator Roles and Responsibilities. Well, it’s not entirely new – it’s mostly a refresh and consolidation of old FSCO policies – but it’s a must-read for anyone who is responsible for the administration or sponsorship of a pension plan.
The Guidance has a greater focus on managing the conflicts of interest that can arise in single-employer pension plans when an employer is acting as both the plan administrator and the plan sponsor. Where the employer is both the plan administrator and the plan sponsor there is an inherent conflict between the fiduciary duties owed by the plan administrator to the plan beneficiaries and the self-interest of the plan sponsor. This is sometimes referred to as the “two hats” doctrine of pension plans.
Roles & Responsibilities
Broadly speaking, the plan administrator’s responsibilities include:
- providing information to plan beneficiaries
- complying with plan documents and applicable legal requirements
- establishing, maintaining and investing the pension fund
- maintaining complete and accurate plan records
- ensuring that appropriate contributions are made to the pension plan
- making benefit payments to plan beneficiaries
- implementing processes to manage the pension plan’s risks (investment, funding, operational, legal, etc.)
Whereas the plan sponsor’s responsibilities include:
- establishing, designing, amending and terminating the pension plan
- making contributions and providing sufficient funding to provide the promised pension benefits
- understanding the risks that might impact the security of the promised pension benefits
It is critical that the plan administrator act with the utmost good faith and in the best interest of the plan beneficiaries while discharging its responsibilities. In addition, pension laws impose a standard of care on plan administrators to act with the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person.
There is a far greater risk of potential conflicts of interest for pension plans where the employer is both the plan administrator and the plan sponsor. For example, the directors and officers of a corporate employer must act in the best interests of the corporation. But, in carrying out plan administrator duties, those same individuals must act in the best interest of plan beneficiaries.
Appropriate policies and procedures, including written records of administrator decisions and activities, can help ensure and demonstrate that only proper factors are considered (i.e. the interest of plan beneficiaries, compliance with plan documentation and applicable law) and that the appropriate degree of care, diligence and skill is adhered to.
Pay Now or Pay Later
One of the thorniest areas of potential conflict between the plan administrator and the plan sponsor roles comes when paying the invoices of the various service providers such as consultants, actuaries and lawyers.
Most pension plan documents permit the payment of reasonable expenses for the administration of the pension plan from the pension fund. The key word there is ‘administration’. Expenses related to activities of the plan sponsor, even if they are related to the pension plan, are not permitted to be paid from the pension fund. For example, fees paid to advisors in relation to collective agreement negotiations or the preparation of accounting figures for the plan sponsor’s corporate financial statement would clearly be impermissible expenses.
But watch out, it can get a lot more complicated and nuanced – for example, consulting fees to assist plan sponsors in considering plan design changes are impermissible; however, the fees to implement the changes are typically permissible. Also, actuarial funding valuation fees are generally permissible; however, FSRA’s new guidance highlights that the fees to prepare an off-cycle valuation with the primary goal of reducing employer contributions would be impermissible. I sure hope that it’s ok to charge legal fees to the pension fund so that the plan administrator can have their lawyers double check the suitability of each service provider invoice!
Our general recommendation to our clients has long been to consider paying all expenses, whether plan administrator or plan sponsor, directly and not through the pension fund. When a single-employer defined benefit pension plan is in a deficit position, there is no great advantage to paying any expenses from the pension plan since the more you pay from the plan the larger the contributions will be to fund the benefits and the expenses – a case of pay now or pay later. Of course, for pension plans in a surplus position, the employer does have an incentive to maximize the expenses that are paid from that surplus – just be sure that those expenses are in the interest of the plan beneficiaries!