Pension legislation imposes a statutory duty of care on a pension plan administrator in the administration and investment of the pension fund. In discharging such duty of care, an administrator must review the pension fund investments and the plan's statement of investment policies and procedures on a regular basis.
The current market instability and related employee enquiries have caused administrators to ask whether they need to take any particular action in the circumstances to discharge their duty of care. Pension legislation does not impose specific obligations on pension plan administrators during market instability. However, there are a number of matters which an administrator should consider. These matters are relevant to pension fund administration at all times, not only during times of market instability. Market instability only highlights the need to take them into consideration.
The following is an illustrative and non-exhaustive list of matters which an administrator should consider:
1. Review the plan's statement of investment policies and procedures (SIPP) and determine whether any amendment to the SIPP is required, e.g., whether the investment and risk philosophies and portfolio diversification are still appropriate; whether changes are required to reflect the fund investment portfolio. Although the current market events should be taken into account as part of the review process, they should not be the dictating factors.
2. Review pension fund investments to determine:
(a) whether the pension fund investments are in compliance with the SIPP, e.g., whether any investment falls outside the parameters or below the applicable ratings set out in the SIPP; whether any asset mix rebalancing is required;
(b) for a defined benefit pension plan, the appropriateness of the pension fund investment portfolio, e.g., whether the current asset mix, investment and risk philosophies are still appropriate; and
(c) for a defined contribution pension plan, the appropriateness of the investment options, e.g., whether it is appropriate to offer more guaranteed investment products.
3. Consider the desirability of having meetings with investment managers to discuss their approaches and investment strategies to deal with the economic conditions and to discuss the investment exposure of the pension fund.
4. Consider the desirability of conducting an investment governance audit as this may be useful for confirming compliance or discovering non-compliance which requires remedial action.
5. Investigate the financial stability of service providers and other counterparties, e.g., pension fund trustee and custodian, record keeper, counterparties to derivative transactions and securities lending arrangements.
6. Consider the desirability of general employee communications particularly if there are employee enquiries. If a decision is made to issue such communication, the communication needs to be carefully drafted for accuracy and to avoid it being taken as investment advice.