On November 30, 2009, the Canadian Association of Pension Supervisory Authorities (CAPSA) released a consultation paper on "The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment" for comment.
The consultation paper is part of CAPSA's strategic initiative to promote consistency in the governance of pension funds and funding by:
- examining the issues surrounding the application of the prudent person rule; and
- developing a common approach to funding policies, recognizing the link to fund governance.
Although the consultation paper primarily focuses on defined benefit pension plans, it aims at providing guidance to pension plans of all types and sizes. The guidelines contained in the paper, if adopted, are not legal requirements, but are best practices. These guidelines provide useful clarification of the separate and distinct roles of a plan sponsor and a plan administrator and practical guidance and assistance to plan sponsors and plan administrators in pension plan funding and investment.
The consultation paper consists of the following main components:
- Background. Under this part, the objectives of the guidelines are set out. The paper confirms the industry understanding of the different roles of a plan sponsor and a plan administrator (and the dual roles of an employer, as plan sponsor and administrator, in a single-employer pension plan with different responsibilities). It explains those governance principles in CAPSA's Pension Plan Governance Guideline which are applicable to funding and investment processes.
- The Prudent Person Rule. The prudent person rule is an important concept throughout the paper. This rule applies to fiduciaries (like plan administrators) in performing their duties. The rule emphasizes processes (i.e., procedural prudence) rather than end results. Comprehensive governance documents, effective decision-making processes, properly documented delegation procedures and monitoring, ongoing risk and performance monitoring, proper code of conduct and communication policy are stated to be key elements of procedural prudence. The importance of procedural prudence is apparent since when the regulator examines a plan administrator's funding and investment activities, the regulator focuses on the process that was used, looking for evidence that the prudent person rule was applied to investments and that due diligence was exercised for funding and investment activities.
- Funding. The paper distinguishes between the funding issues of a defined benefit (DB) pension plan and those of a defined contribution (DC) pension plan. The major concern of a DB pension plan is to ensure that sufficient assets will be maintained to deliver the promised pension benefits on an ongoing basis. The paper suggests that plan sponsors of DB pension plans adopt a funding policy to address this issue. The major funding issue of a DC pension plan is the adequacy of employer and employee contributions to produce the initially intended post-retirement income level. The paper recommends that a plan sponsor of a DC pension plan periodically review the adequacy of contributions to address this concern. The paper discusses the advantages of having a funding policy and the key components of such a policy. It recognizes the close inter-relationship between the funding policy and the statement of investment policies and procedures (SIPP) of a DB pension plan and the special considerations applicable in developing the funding policy of a multiemployer pension plan.
- Investment. The paper stresses the important fiduciary responsibility of a plan administrator in the prudent investment of the pension fund's assets. In assessing whether a plan administrator has discharged its responsibility, the administrator's conduct and decisionmaking process, rather than the result (gain or loss) of a particular investment decision, will be examined. One of the recommendations of the paper is the adoption of an overall investment policy by a plan administrator to complement the mandatory SIPP required by pension legislation. An investment policy is broader in scope and more detailed in outlining administrative procedures.
Stakeholders are invited to provide their feedback (in particular, on the specific questions raised by CAPSA) by January 29, 2010.