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©Copyright 2000 Rogers Media. The following article first appeared in the August 2001 edition of
BENEFITS CANADA magazine.
VIEWPOINT
DC proposals miss the mark
The Joint Forum's proposed DC plan regulations must do a better job of defining
responsibility
By Christopher Cartwright
The proposals released by the Joint Forum of Financial
Market Regulators envisage retail-style protection for members of group defined contribution (DC)
plans. The problem is, the proposals would extend securities regulations to all kinds of group DC
plans, including money purchase pension plans and group registered retirement savings plans. While
everyone wants employer promises honoured, are the principles in line with the kinds of promises
made in these different plans?
Under a defined benefit (DB) pension plan, employers determine employee
benefits. Employers commit to pay what's necessary and regulators ensure that requirements are
met. Under DB plans, members have no risks to manage. By contrast, under a DC plan employers
make the agreed contributions and then their basic promise to the employees is fulfilled.
Implicit in a DC plan is the provision of an investment vehicle where contributions can be
accumulated towards retirement. This is the part of the promise that the Joint Forum proposed
be addressed with rules from the mutual fund business.
In that industry, regulations protect the consumer from conflict of interest.
This contrasts sharply with group DC plans. In return for setting up the plan and contributing
to it, employers hope to attract and retain a more productive workforce. The group DC plan
scenario is a win/win story as everyone has a common goal: ensuring employees' financial
well-being at retirement.
Today, the 'right' investment vehicle is diversified and transparent, with
full investment disclosure. Present practice and prudent person rules exist to see that these
goals are achieved. Of course, with 20/20 hindsight, the 'right' vehicle is the one that
produced the highest return.
Unfortunately, these days, the rightness of a vehicle is being tested with
hindsight. Proposed regulatory principles blur the line between employers' responsibility to
act prudently in providing an investment vehicle and their responsibility for the ultimate
outcome.
Certain proposals move the focus to the fund or manager level by looking at
past performance as the measure of success. Whether or not specific benchmarks are spelled out,
future performance cannot be determined.
The fear is emerging that employers will be held accountable for
unsatisfactory performance. In the absence of clarification, employers may become convinced
that regulatory authorities are ready to encourage employees to seek compensation for
unsatisfactory investment results on the basis of a failure in fiduciary duties.
This line of thinking would turn DC plans into DB arrangements where employers
who make defined contributions are held accountable for undefined benefits. Employers who
promise to contribute a defined amount fulfill that obligation when they pay the contributions.
Employers who provide a vehicle for the accumulation of retirement contributions fulfill their
fiduciary obligations when they act prudently on behalf of their employees. To demand more is
to misunderstand the original promise.
We can only hope that those who influence the future regulations will reflect
on these fundamental facts. BC
Christopher Cartwright is manager, market strategy, group savings & retirement with Standard
Life in Montreal. christopher.cartwright@standardlife.ca.
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