As we reported in an earlier post, the Canadian Association of Pension Supervisory Authorities (CAPSA) published a consultation paper in late 2009 entitled “The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment”. Following up on this consultation paper, CAPSA recently released draft guidelines on funding policies (Funding Guideline) and prudent investment practices (Investment Guideline). Comments on these guidelines will be accepted by CAPSA until June 1, 2011.
Draft Guideline on Pension Plan Prudent Investment Practices
The Investment Guideline is intended to help plan administrators meet their duty to act prudently in the investment of the pension plan’s assets. This Guideline puts a great deal of emphasis on the process to be followed by plan administrators in relation to their investment activities. In other words, CAPSA believes that prudence must be assessed mainly by the methods followed by a plan administrator rather than simply on the results achieved.
Given the limited judicial guidance on the standard of care that applies to plan administrators in connection with their investment activities (pension investment cases are generally settled out of court – see for example the Jeffrey Mine case), the Investment Guideline could become a benchmark against which the courts will judge plan administrators in the future.
As such, plan administrators will want to pay close attention to the “best practices” set out in the Investment Guideline, and will want to ensure they are able to show these practices were followed.
Draft Pension Plan Funding Policy Guideline
The Funding Guideline is intended to provide guidance on the development and adoption of funding policies by plan sponsors. CAPSA considers that funding decisions should not be made on an ad hoc basis, but should rather be made based on a pre-established decision-making framework. This Guideline outlines the elements that should be included in a funding policy, including among others funding objectives, key risks, tolerance to volatility, funding targets, cost sharing mechanisms and permitted uses of surplus.
It remains to be seen whether the idea of a funding policy will find traction among plan sponsors. Plan sponsors need flexibility in the funding of their plans and will not necessarily want to be bound or limited by the terms of a funding policy. It is to be expected that those who do adopt a formal funding policy will include broad statements rather than detailed rules and objectives.
Guideline on Fund Holder Arrangements
I also note in passing that CAPSA has now published its final Guideline on Fund Holder Arrangements (Guideline No. 5). This Guideline highlights good governance practices related to fund holder arrangements.