Most plan administrators know by now that, effective Jan. 1, 2016, the statement of investment policies and procedures (SIP&P) will once again become a filed document with the Ontario pension regulator.

Moreover, starting next year, administrators will need to include specific information in plan member annual statements (and in biennial retired and former member statements) relating to the SIP&P, including how it will be available to members.

To date, plan administrators have largely focused on the requirement to address whether environmental, social and governance (ESG) factors will be considered in the SIP&P for the plan, and, if so, which ones and how they’ll be addressed. While this is an important issue, the Financial Services Commission of Ontario (FSCO) has also issued guidance on the content of the SIP&P relating to member-directed DC pension plans or the DC components of plans.

Plan administrators, then, must ensure their SIP&P reflects FSCO’s expectations in both these respects before the March 1, 2016, filing deadline.

Conversely, the industry has paid little attention to another new requirement (also effective Jan. 1, 2016) that pension plan assets must be invested in accordance with the SIP&P (except where the SIP&P doesn’t comply with applicable legislation or regulations governing the investment of the plan assets).

While this has always been expected of plan administrators, the specific statutory requirement now means they must ensure that their SIP&P accurately reflects their actual investment practices and that all investment decisions are consistent with the SIP&P. If plan administrators fail to do so, they could face potential regulatory action or claims arising from a breach of statutory duty.

New content requirements
There are two new issues affecting the content requirements for the SIP&P:

  • first, consideration of ESG factors (the only new statutory requirement); and
  • second, the requirements for member-directed DC plans (the regulatory guidance recently released by FSCO addresses a gap in the content of many existing SIP&Ps for DC plans).

1. ESG factors

In October, FSCO released its final investment guidance note on ESG factors, which contains helpful information on how to meet this requirement. The note indicates that the plan administrator should do the following:

  • ensure investment decisions—including the decision about whether to incorporate ESG factors—are made in accordance with its fiduciary duties;
  • decide whether to incorporate ESG factors, and if so, to incorporate all ESG factors or to list specific ESG categories or specific ESG factors in the SIP&P;
  • include a brief explanation of the approach taken to incorporate ESG factors in the SIP&P and the scope of application (e.g., across the entire pension fund or within certain asset classes);
  • ensure agents (e.g., external investment managers) are in a position to comply with the SIP&P as it relates to consideration of ESG factors;
  • demonstrate the rationale or justification for not incorporating ESG factors or for using ESG factors as an ethical or moral screen for investments (if the administrator chooses this approach), in each case to show that the decision protects the best interests of the plan’s beneficiaries; and
  • document the basis for its decision on consideration of ESG factors.

One scenario not clearly addressed in FSCO’s investment guidance note, however, is pension plans that are wholly invested in pooled investment funds. By investing in a pooled fund, plan administrators are effectively adopting the investment policies of that fund, over which they have no control. In this case, administrators should be wary of adopting any consideration of ESG factors in the plan’s SIP&P, except if they’re currently reflected in the pooled fund’s investment policy statement, or except if they’re investing in pooled fund products that make their ESG policies known and/or where such ESG policies are a factor in the administrator’s selection of the pooled fund.

2. Member-directed DC plans

FSCO also released a separate investment guidance note on the content requirements for SIP&Ps for member-directed DC plans. This note was prompted by changes at the federal level affecting “member choice accounts” in federally registered DC plans, which did not eliminate the need for a SIP&P at the provincial level but which prompted FSCO to clarify the content requirements for such a SIP&P.

FSCO expects the following items to be considered for inclusion in a member-directed DC plan SIP&P:

  • investment principles that inform the DC plan’s investments (e.g., active versus passive management, the use of lifecycle or target date funds and the number of investment options);
  • permitted asset classes;
  • the default investment option for members who don’t make an investment choice;
  • factors for considering the selection, monitoring and termination of investment managers and funds;
  • plan expenses and investment fees and any limits on and guidelines used for monitoring them;
  • related party transactions; and
  • information guidelines on investment options.

With certain content (e.g., factors for considering the selection, monitoring and termination of investment options and the information to be provided to plan members), FSCO’s guidance note refers to including the information in the CAPSA Guidelines. But once administrators incorporate this information, they’ll be forced to ensure that investment options—and investment information and decision-making tools—are measured against those criteria. If they fail to do so, they could see claims on the part of plan members, particularly given the enhanced disclosure and accessibility of the SIP&P to members.

Ontario plan administrators need to address the consideration of ESG factors in the plan’s SIP&P and assess whether the SIP&P sufficiently addresses the investment policies and procedures that apply to any DC provisions of the plan where members make an investment choice.

They must also consider whether their actual investment policies and practices are accurately reflected in the SIP&P and also whether those involved in managing the plan’s assets are capable of complying with its terms. If administrators fail to do this, they face a greater risk of claims by plan members and others because they’ve breached the statutory duty to invest the plan’s assets in accordance with the SIP&P.

Susan G. Seller is a partner in the Toronto office of Bennett Jones LLP and the head of its national pension and benefits practice. The views expressed are those of the author and not necessarily those of Benefits Canada.
Copyright © 2017 Transcontinental Media G.P. Originally published on benefitscanada.com

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