Stock markets have plummeted since mid-2008, with the S&P/TSX Composite Index dropping 40% from its peak. Stock, currency and commodity markets are more volatile than today’s investors have seen before.  

Banks and investment banks in the U.S. and elsewhere have failed or been sold in distress. Credit risk has sprung up where many did not expect it.  

What is a prudent response by directors, officers and employees involved in administration of their company’s pension plans? Down the road, plan members and regulators may ask whether the response to these challenging times was in the best interests of plan members.  

Checklist for Investment Update

Consider undertaking the following:  

  • For plans with a defined benefit component, review the Statement of Investment Policies and Procedures (SIP&P) against the current investments to determine if asset mix and quality of investments continue to comply. If there are inconsistencies, consider whether it is time to adjust investments or modify the SIP&P.  
  • Projected payments out of the fund must be considered when revisiting investment strategy. In tough times, timing of payouts may be accelerated on employee terminations and partial wind ups triggered by plant closures or downsizing.  
  • Review any derivative contracts, short positions and securities lending in light of recent developments. Consider whether investment strategies adopted in less volatile times, such as portable alpha or 120/20, continue to be appropriate. Short sale strategies may have been affected by the temporary restrictions that were imposed in the U.S., U.K. and Canada. Update analysis of counterparty risk, since perceived credit risk for some financial institutions has changed significantly from just a few months ago.  
  • Monitor the investment performance of your pension fund. Ask the investment managers about their response to market developments. If in doubt, independent financial advice can be obtained to assess the performance of the investment managers.  
  • For defined contribution plans, review the SIP&P and the investment options offered to employees. Consider whether changes are required in light of recent developments.  

Funding impacts of an investment strategy may need to be considered, since an investment strategy focused strictly on returns could result in the employer being required to make substantial cash contributions when it can least afford it. However, an employer that is also the designated administrator is subject to fiduciary duties imposed by statute.  

Fiduciary Obligations re Investment

For pension plans subject to regulation in Ontario, fund investment is subject to fiduciary obligations imposed by the Pension Benefits Act. A director, officer or employee involved in investment of the company pension plan must:  

  • exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with property of another person,  
  • use all relevant knowledge and skill that he or she possesses or, by reason of his or her profession, business or calling, ought to possess, and  
  • not knowingly permit the interest of the employer to conflict with his or her duties or powers in respect of the pension fund.  

Failure to fulfill these statutory duties can expose individuals to substantial personal liability (see Tough Times and Pension Funding in Canada: Lessons from Slater Steel). If the needs of the employer and these statutory duties appear to conflict, we recommend that legal advice be obtained.  

Create a Paper Record

Hindsight can be harsh. Documented efforts to prudently respond to the current challenging investment environment can protect the plan administrator and the individuals involved in pension fund investment, whatever the actual investment results.