COVID-19 is accelerating the pension world into a new normal, and the lasting impact will be a renewed focus on industry best practices. Pension plan sponsors and administrators can stay ahead of emerging trends and changes in the industry by considering how their plan is strategically aligned to these trends, and review the six key takeaways in this article, as discussed at the recent McCarthy Tétrault Pensions, Benefits, & Executive Compensation Annual Pension & Benefits Seminar.

The key takeaways for plan sponsors and administrators to consider are:

  • Review and be aware of recent changes in the legislative, regulatory, and case law landscape
  • Develop and maintain a formal governance framework as a key component of effective plan administration
  • Consider strategies that can be used to avoid trapped surplus in your defined benefit pension plans
  • Be aware of cyber-risk and implement strategies to develop cyber resilience
  • Improve plan administration efficiency and avoid future problems by adopting proactive and innovative considerations
  • Use ESG factors to provide financial insight; and do not ignore the material and urgent financial risks and opportunities presented by climate change

Review and be aware of recent changes in the legislative, regulatory, and case law universe

This past year has seen various developments in the jurisprudence and legislation related to pensions and benefits. This area of law is quickly evolving as a complex environment, and as the area of pension and benefits law continues to develop, it is imperative that plan sponsors, administrators, and service providers stay current on key developments. We suggest they meet with their legal counsel quarterly to stay up to date.

The Pension, Benefits & Executive Compensation Group is closely monitoring federal and provincial legislative and regulatory updates. We presented on these changes at the Seminar and also discussed the many issues of practical interest to plan sponsors and administrators arising in the Brewers Retail decision.

Develop and maintain formal governance frameworks

Pension regulators continue to focus on the role of formal governance frameworks and policies as a key component of effective plan administration.

In its recently published Interpretation Guidance No. PE0296INT: Pension Plan Administrator Roles and Responsibilities, the Financial Services Regulatory Authority (Ontario) indicated that the failure to have and follow a governance framework “exposes the administrator to potential sanction and liability for having breached its fiduciary and statutory standard of care.” Though not yet statutorily required in Ontario, plan administrators should nonetheless strongly consider developing and implementing a formal governance framework or policy in order to demonstrate they have satisfied the statutory standard of care and fiduciary duty owed to plan beneficiaries. Administrators in B.C., Alberta and New Brunswick should continue to follow their written governance policy, as required by applicable legislation, and review and assess their governance framework on an ongoing basis, and at least at such intervals as may be required by applicable legislation.

Consider strategies that can be used to avoid trapped surplus in your defined benefit pension plans

After more than a decade of special payments and employers cutting costs, the question arises: what will happen to defined benefit (DB) pension plans if investment returns pick up or interest rates rise? More likely than not, DB plans will enjoy better funded positions and may even eventually find themselves in a surplus position. However, with this comes the risk of an unanticipated outcome; no meaningful way to employ the surplus assets, except perhaps as a funding buffer in the event of a subsequent economic downturn. This is an unenviable position to be in.

Instead, consider these nine strategies for avoiding trapped surplus:

  1. Establish a defined contribution (DC) component to an existing or closed DB pension plan to facilitate “cross-subsidization” through use of DB surplus to take employer DC contribution holidays.
  2. Merge two or more plans (DB+DB or DB+DC) so that on completion of the merger all assets in the continuing plan are available to cover all benefits provided by the original plans.
  3. Use statutory surplus withdrawal procedures to crystalize surplus and extract it from the plan for use elsewhere by the employer.
  4. Consider restructuring the plan’s funding agreement to impose a “new” trust for “new” money and provide certainty of employer title.
  5. Explore the use of a solvency reserve account where available to segregate and hold solvency special payments until such time as the plan’s funded provision improves and surplus in the solvency reserve account can be withdrawn by the employer.
  6. Restrict contributions to DB pension plans to the minimum contribution levels recommended by the plan actuary in an attempt to avoid any trapped surplus.
  7. Consider an “early” or “off cycle” valuation in order to “re-set” and “lock-in” contributions at an optimal level until the next actuarial valuation is filed.
  8. Consider using a letter of credit, where permitted, to secure a portion of a pension plan’s obligations instead of making cash contributions.
  9. Implement a de-risking investment strategy.
  10. Terminate the plan and liquidate the plan’s assets.

Be aware of cyber-risk and implement strategies to develop cyber resilience

Pension plans are potentially valuable targets for fraudsters as they hold large amounts of personal information. In addition to a focus on cyber defense, sponsors and administrators should consider building out their cyber resilience by looking at systems and processes to reduce risk. They should also closely consider who has access to personal information and what additional training should be provided to protect that information.

Resilience also entails preparation for when, not if, a breach will occur. Plans to recover data and directions on how to author and deliver reports to internal and external stakeholders should be well defined. As plan administrators remain responsible for putting in place controls to ensure the security of data and assets, responsibility falls to them to have in place robust management and response plans. This includes adding cyber security to risk registers and maintaining vigilance over other parties who have access to personal information: actuaries, legal advisors, third-party administrators, and investment consultants.

Improve plan administration efficiency and avoid future problems by adopting proactive and innovative considerations

Improvements to the administration of plans is an ongoing endeavour for all administrators. A focus on proactive strategies that get ahead of potential future pitfalls can result in significant savings to cost and time.

One way to significantly improve plan administration is to spend up-front time on managing documents received following marriage breakdown, beneficiary designation, or other changes. Instead of tucking them away until the date of determination, proactively ensure they are in proper order and focus on finding and fixing issues earlier in the process to avoid future complications.

There is also much to be said for paying attention to the human side of pension events. Avoid time and resource-consuming complaints and other issues by ensuring parties feel better about outcomes and are content with the results.

Administrators should also undertake a review of their COVID response as it affects plan operation in order to determine if documentary or other policy changes should be made.

Use ESG factors to manage financial risk and opportunity

Pension fiduciaries who ignore environmental, social, and governance (ESG) factors that could have a material positive or negative affect on investment performance, exposes them to personal liability. Income tax rules require the primary purpose of a pension plan to be financial. As a result, pension fiduciaries can’t go wrong in focussing on ESG factors to obtain financial insight, not impacts. Fundamentally, it’s all about the money.

That being said, administrators and sponsors who do select funds or investments to achieve ESG impacts, even if that is alongside a financial return, should obtain legal advice.

Not all ESG factors may be relevant. However, the implications of climate change should not be ignored. It is widely acknowledged by every government in Canada as accepted in a recent decision of the Supreme Court of Canada, that it poses financial risks and opportunities that are both material and urgent. Pension fiduciaries who ignore the financial implications of climate change could lead to personal liability.

A few years ago the Province of Ontario enacted legislation which required plan fiduciaries to indicate whether they take ESG factors into account, and if so, how. Because of the potential financial relevance of ESG factors, fiduciaries should never say never. Bear in mind that plan-related ESG disclosures in a SIPP or in a member statement are evidence. These disclosures should be short and relevant. Legal review is strongly recommended.