Risk management is a key element in the governance of any registered pension plan. An important first step in risk management is the identification of potential risks. In Part I of a two-part blog post, we discuss the potential areas of risk for various stakeholders in the administration of a pension plan. In Part II of the post, we discuss the potential risks to administrators and sponsors of registered pension plans.
Types of Risk
As lawyers, the risks we focus on more often than not are the legal risks, but there are also other risks at play – risks that vary between stakeholders and the interests of a particular stakeholder. For example, what is a risk to a plan member may not be a risk to a director and officer and vice versa.
Risks to Members
In a defined benefit (“DB”) plan, one of the main risks for a member is not getting his or her promised benefit under the plan. This risk has been front page news in recent years with the shortfall in large plans like the Nortel plans and more recently with Sears. From an individual member perspective, apart from the stability of the plan as a whole, a DB benefit is often of greater value when the member has higher earnings. The risk to the member, therefore, in that context is leaving the plan too soon and not capitalizing on the potential benefit under the plan.
In a member-directed defined contribution (“DC”) plan, the most significant risk for the member lies with his or her investment choices. Is the member making the right investment choices? Will the plan provide enough at retirement? DC plan members often struggle to understand the nature of a DC plan which, in turn, creates risks for plan administrators in the management of the plan and the delivery of information to members.
Risks to Directors and Officers
Directors and officers of corporations that act as plan administrators or sponsors should be aware of the potential consequences of non-compliance with applicable legislation and the common law.
Plan sponsors and administrators have various obligations under pension standards legislation. When plan sponsors or administrators fail to comply with such legislation, the directors and officers are at risk. For example, the directors and officers of an organization that fails to contribute to its pension plan or is delinquent in contributing to the plan may be subject to penalty under pension standards legislation. Under subsection 110(2) of the Pension Benefits Act (Ontario) (“OPBA”), a director, officer or agent of a corporation, and persons acting in a similar capacity or performing similar functions in an unincorporated association, is guilty of an offence if the person: “(a) causes, authorizes, permits, acquiesces or participates in the commission of an offence… by the corporation or unincorporated association; or (b) fails to take all reasonable care in the circumstances to prevent the [entity] from committing an offence[.]”
In other words, if a corporation commits an offence under the OPBA, it may be subject to penalty under the OPBA. If the director or officer of the corporation authorized the offence or did not take all reasonable steps to prevent the offence, he or she may also be guilty of an offence under the OPBA and subject to penalty.
In addition to potential statutory liability, a director or officer who acts as a plan administrator or on behalf of a plan administrator may be subject to a claim for breach of fiduciary duty and other claims at common law if the director or officer breaches any of his or her common-law duties.
Risks to Shareholders and Creditors
The funded status of a pension plan may impact the viability and funding of the sponsoring organization and, in turn, increase the risk to shareholders and creditors. Will the value of the company shares remain stable? Is the company at risk of entering bankruptcy? Will the creditors get their money back? The answers to these question are not always positive for shareholders and creditors.