Pension plan administrators have a fiduciary duty to invest plan assets prudently and in the best interests of plan beneficiaries. This much, to quote Jane Austen, is a truth universally acknowledged.

The rule is easy enough to state. It flows from a centuries-old principle of trust law that is elegant in its simplicity. Applying the rule in practice, though, is often much more complicated. Nowhere is this truer than in formulating the contents of the Statement of Investment Policies and Procedures (SIPP).

Read: New SIPP requirements take effect

For plan administrators, the same centuries-old trust law that gives rise to the fiduciary duty also provides the best, most adaptable defence: the administrator will have shown that it acted prudently if it can show that it had good reasons for its decisions, considered relevant factors, ignored irrelevant factors, sought professional advice and services when it lacked expertise and capacity, followed any applicable legislation, and, at all times, considered the best interests of plan beneficiaries as a whole.

In practice, a particular investment may go very badly for a plan. The administrator will nevertheless have a full defence if it can show that it was chosen for good reasons. On the flipside, an investment may be wildly successful even if it was chosen for all the wrong reasons. In the latter case, the administrator could well be in breach of its fiduciary duty. In short, reasons matter.

In this context, the exercise of developing or revising a SIPP presents a number of traps for the unwary, imprudent administrator. These risks are especially true for Ontario-registered plans. In Ontario, amendments to the regulations under the Pension Benefits Act (PBA) effective January 1, 2016 require that the administrator invest plan assets “in accordance with the statement of investment policies and procedures for the plan.” Before January 1, there was debate over whether contravening the SIPP could in and of itself lead to any liability. Since January 1, however, the legislation is clear: contravening the SIPP means contravening the PBA, with all the potential for regulatory orders, fines and bad publicity that it brings.

Read: Employers gearing up for new environmental, social requirements in 2016

In Ontario, SIPPs relating to defined benefit plans and defined contribution plans with no member investment choice must address a variety of topics, including acceptable categories of investments and loans, diversification, asset mix and rate of return expectations, liquidity, and voting of securities.

In addition, as of January 1, all SIPPs must disclose whether, and, if so, how, the administrator incorporates environmental, social and governance (ESG) factors into its investment decisions. As expected, the legislation does not provide right or wrong answers to any of these requirements. That would be too easy. The administrator must decide what’s prudent for the SIPP to provide in the circumstances.

Now here’s the rub. Administrators need to be especially cautious with off-the-shelf SIPPs or portions of SIPPs. Service providers prepare this documentation as a convenience for their clients. They want to help, and I say this as a service provider myself. In some cases, the documentation will be quite sufficient for some plans, but for others, it will require customization.

In all cases though, the administrator must independently assess what is prudent for the plan and be prepared to support whatever a SIPP says on a particular issue with adequate reasons. In other words, an off-the-shelf SIPP can address all of the PBA’s prescribed contents and the administrator may still be woefully short of meeting its fiduciary duty—a clear example of potentially the right result for the wrong reasons. As I said, reasons matter.

Read: ESG: Coming to a SIPP near you

The ESG disclosure requirement has been especially problematic because there are conflicting views as to what the application of ESG factors means, particularly in the context of the administrator’s fiduciary duty. This debate remains for another day, although I have written about it in a previous column. At first blush, boilerplate, or ready-made wording, on ESG disclosure that has been prepared by a consultant (including a lawyer like me) may seem an easy solution. This convenience, though, simply gives the administrator wording with which to work. It does not answer the question: “What is prudent for this particular plan?” Only the administrator can make that decision, and it must have reasons to support it.

In other words, administrators must consider what they intend their SIPPs to say about the incorporation of ESG factors (if at all) and the SIPPs other required contents, and support their SIPPs’ ultimate wording with demonstrable reasons. Most commonly, these reasons will be found in the minutes of the meeting(s) considering and adopting the wording. The minutes may be supplemented by reports or additional reasons from internal and external delegates, including an internal investment committee, internal pension investment staff (for those plans that have them), external investment consultants and even investment and fund managers themselves.

Read: Get investment beliefs out on the pension committee table

Off-the-shelf wording may well work. For a number of reasons, the administrator may agree to accept and adopt the wording provided by a consultant (or something reasonably close to it). The key here is the phrase “for a number of reasons.” The administrator must be prepared to show its reasons for adopting the contents of the SIPP. “Because our advisors gave us this wording” will, on its own, not pass legal muster.

Administrators (including delegates, such as internal pension and investment committees) would do well to review proposed wording for SIPPs in advance. Decision makers will likely not have time to consider wording that is sprung on them in the middle of a meeting in which an approval is sought. An internal or external delegate’s advice and suggested wording can be one among a number or reasons that an administrator has for adopting a particular position in the SIPP, but it—not the delegate—must make the final decision.

To summarize, in the unique world of pension plan administration, it is possible to arrive at the “right” result for the “wrong” reasons and still be in breach of one’s duty. As long as investments perform well, scrutiny by members and regulators (and plaintiff’s counsel) may be light. But all good things must come to an end. All administrators should be prepared to be challenged one day on the reasons for their decisions. With Ontario’s recent legislative amendments, this caution applies to the SIPP now more than ever.

Read: An important development for sustainable investment

Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com