A few recent cases have highlighted the importance of setting up appropriate governance and oversight processes to select and monitor plan investments. This is particularly true in the current era of underfunded pension plans, where the investment of plan assets may come under greater scrutiny.
In one of these cases, which is still pending before the Québec Superior Court, the pension committee of the Pension Plan for Employees of the City of Sherbrooke (the Committee) retained the services of an actuary employed by Mercer to assist in revamping its investment policy and selecting investment managers. The actuary recommended that a portion of the assets of the plan be invested in hedge funds, and suggested a number of potential investment managers. With the assistance of the actuary, the Committee ultimately retained a firm called Norshield and invested $17 million in its hedge fund. Two years later, Norshield was placed in receivership and the plan’s investment had to be entirely written off.
The Committee filed a $17 million lawsuit against the actuary and his firm alleging, among other things, that they had (i) failed to inform the Committee of the risks involved in investing in hedge funds generally and in the Norshield hedge fund more particularly; (ii) failed to perform adequate due diligence on the Norshield hedge fund; and (iii) failed to disclose a conflict of interest when they offered their services to the Committee. Note that the actuary and his firm filed their defence and are strongly denying any wrongdoing.
The case as not yet been heard on the merits, but there are already “lessons” which should be considered by both plan administrators and service providers:
- Document the due diligence and investment process;
- Keep proper records (service agreements, correspondence, reports, etc.);
- Have mechanisms in place to check for conflicts of interest; and
- Review/update your services agreements.