Refreshed CAP Guidelines
The Canadian Association of Pension Supervisory Authorities (CAPSA) recently released a consultation draft of revisions to their Guideline No. 3 – Guidelines for Capital Accumulation Plans (CAPs). The original version of Guideline No. 3 was published in 2004, and a lot has happened over the past 18 years, so the guidelines are certainly due for a refresh.
The focus of the guidelines is to outline:
- the responsibilities of CAP sponsors, administrators, services providers and CAP members
- industry best practice in the administration of a CAP
- information that should be provided to CAP members
What’s a CAP?
The guidelines define a CAP as “a workplace tax assisted investment or savings plan or program that permits its members to make decisions in respect of the investment of their individual accounts among two or more investment options selected and offered by the CAP sponsor.”
Not much new in this definition over the past 18 years; however, it’s very important to note that the guidelines are only applicable to plans that permit members to make investment decisions – so, if your CAP only offers one investment option such as a balanced fund then your life is relatively easy (although it’s certainty your responsibility to keep tabs on that investment).
The guidelines list the various examples of CAPs that currently exist in Canada:
- DC RPP – Defined Contribution Registered Pension Plan
- RRSP – Registered Retirement Savings Plan (RRSP)
- DPSP – Deferred Profit Sharing Plan (DPSP)
- RESP – Registered Education Savings Plan
- LIRA – Locked-In Retirement Account (also know as a locked-in RRSP)
- RRIF – Registered Retirement Income Fund
- LIF – Life Income Fund
- PRPP – Pooled Retirement Pension Plan
- VRSP – Voluntary Retirement Saving Plan
- TFSA – Tax Free Savings Account
There have been a number of additions to this list over the years, and there’s even a new one on the horizon: FHSA – First Home Savings Account.
Also, while not new, the guidelines make it extra clear that they apply “regardless of the regulatory regime applicable to the plan.” So, if you’re sidestepping a DC RPP in favour of a Group RRSP to avoid the requirements of pension legislation, you’re not totally off the hook as far as CAPSA is concerned.
Who’s in charge?
Usually it’s the employer that plays the role of CAP Sponsor, but sometimes it could be a union, board of trustees, or licensed administrator such as an insurance company or bank.
For a DC RPP, pension legislation sets out a duty of care that applies to the plan administrator; however, the guidelines newly assert that “all CAP sponsors have some level of common law fiduciary responsibility towards CAP members.” So again, don’t think that you’re off the hook if you only have a Group RRSP.
What do I have to do?
The refreshed guidelines include far more extensive listings of the responsibilities for CAP sponsors and CAP members.
For CAP sponsors, there are new explicit responsibilities for determining the key features of the CAP including automatic features to improve member outcomes (such as auto-enrolment, auto-escalation of contributions, and auto-rebalancing of investments), establishing a governance framework, plus consideration of fees for reasonableness and tangible benefits for members in terms of net investment returns.
Notably, there is no longer a requirement in the guidelines for CAP sponsors to “ensure a range of investment options is made available.” The new guidelines also make a point to note that a large number of investment options is not necessarily a good thing with the added oversight burden and more complex decision making for members. For a CAP with a primary purpose of retirement savings, my personal view is that overall member outcomes are optimized when they are not given any investment choices and simply put into a balanced fund or target-date fund based on their expected retirement age.
For CAP members, there is new emphasis on their responsibilities to determine their contribution levels and decumulation options that suit their particular needs. In my experience, it’s often not enough for the CAP member to contribute the default amount as specified in the CAP. CAP members not only need to consider higher contributions in order to attract the full matching contribution from their employer, but sometimes contribute even more to give themselves a better chance of maintaining their standard of living in retirement.
The refreshed guidelines include a whole new section on educating and communicating with CAP members, including extensive listings of disclosure requirements. The emphasis appears to be ensuring that CAP members are well equipped to make decisions, have access to retirement planning tools, understand their potential projected retirement income, consider the impact of fees on their savings, and potentially facilitating financial planning advice for members. I think that this last point is key – CAP members on average have low financial literacy and would be well served by easy access to independent financial advice in their best interest.
Finally, the guidelines now include explicit references to decumulation options and related considerations for CAP sponsors and CAP members. This aligns nicely with the evolution of CAPs to not just be about accumulating assets but also allowing CAP members to live off the resulting income in retirement. In my view, more CAPs should provide variable benefits and other retirement income options so that members can remain in the plan in retirement to enjoy the lower fees and greater oversight that typically come with CAPs.
The comment deadline for this consultation on Guideline No. 3 is August 15, 2022. I would therefore expect that a final version of these guidelines would be released shortly thereafter. Once the final guidelines are released, CAP sponsors and service providers will need to quickly ensure that their offering is compliant.
Other than this refresh of Guideline No. 3, CAPSA has been busy and recently released consultation drafts of a series of other guidelines related to Risk Management, Cyber Risk, Leverage, and Environmental, Social and Governance considerations for pension plans. Stay tuned for my next blog where I’ll deal with all these.