Pension governance policies have been common for many years, at least since the Canadian Association of Pension Supervisory Authorities published its initial guidelines on pension plan governance in 2004.
There are compelling reasons for plan administrators to have in place a formal pension governance structure and written governance policy. A governance policy, which sets out clearly defined roles and responsibilities and performance measures for those persons responsible for the plan’s operation, generally leads to more effective plan governance, greater accountability and enhanced protection against regulatory and fiduciary breaches. Yet, the statutory recognition of such governance policies has lagged. With recent developments in New Brunswick and those being studied in the federal jurisdiction as well as the legislative changes enacted in Alberta and British Columbia over the past decade, this may finally be changing.
New Brunswick adopted changes to its pension regulations in October 2020, requiring plan administrators to establish, adopt and follow a written governance policy. The items that the governance policy must address in respect of plans registered in that province are similar to the statutory requirements that were enacted in Alberta and British Columbia in 2014/2015. The changes include addressing such items as: the structures and processes for overseeing, managing and administering the plan and what they are intended to achieve; the participants who have authority to make decisions and the roles, responsibilities and accountabilities of those participants; the performance measures and a process for monitoring against those performance measures; the performance of participants; access to relevant, timely and accurate information; a code of conduct for the administrator and a procedure to disclose and address conflicts of interest; a process for identifying the educational requirements and skills needed for the administrator to perform its duties; the material risks that apply to the plan and internal controls to address those risks; and a dispute resolution process for members and plan beneficiaries.
Many of these requirements mirror the CAPSA governance guidelines which were already well established, so one might ask what’s the value of codifying the requirement to have a governance policy? There’s no single answer, but here are some of the possible reasons.
Some pension plans don’t have a written governance policy
The first, and most obvious, reason is that in the absence of a statutory requirement to have a governance policy, and notwithstanding the prevalence of the CAPSA guidelines, some plan administrators have not established a governance policy for the plan. For these plans, the risk of a governance failure is greatly heightened.
Some defined contribution pension plan administrators, having gone through the process of selecting a service provider and an initial suite of investment funds, turn the plan over to their service provider and have no formal process in place for monitoring the service provider or the investment options and for assessing whether the fees charged to plan members remain reasonable and competitive.
Defined benefit pension plan sponsors without a governance policy may face even greater risks for not having in place a formal pension governance structure. These risks include an inconsistent or inappropriate approach to plan administration and interpretation, potential failures to meet plan reporting and filing requirements (resulting in administrative monetary penalties or more serious consequences), and most significantly, a failure to identify material risks affecting the plan (including its funding and investment) or conflicts of interest relating to their role as plan administrator.
Plans may have a governance policy, but it may be outdated or inadequate
Most plan administrators established pension governance policies at some point following introduction of the initial CAPSA governance guidelines. Over time, the initial guidelines became less reflective of best practices, which was largely rectified through the revised CAPSA guidelines published in 2016. While the revised CAPSA guidelines provide an invaluable guide to the principles underlying pension governance and to performing a self-assessment of a plan’s governance, they’re designed to outline principles and factors to be considered by the plan administrator when developing and assessing the policy, but are not prescriptive of its contents. Since the guidelines don’t have the force of law, some important issues or items may be missed by the administrator in establishing the policy.
Here are some common areas where existing pension governance policies may be deficient:
- A failure to identify and address the inherent conflict of interest between the employer’s role as plan administrator versus its role as plan sponsor (an issue highlighted by the Supreme Court of Canada’s 2013 decision in Indalex). While many pension governance policies contain a conflict of interest policy, it’s typically drafted to apply to members of the oversight body, or pension committee, in relation to the actual or potential conflicts of interest of individuals on that committee or outside agents, and doesn’t adequately address the employer/administrator’s own conflict with its role as plan sponsor and that of its governing board of directors, or how to manage that conflict.
- A failure to adequately identify and describe the material risks relating to the plan and the internal controls to address those risks. This is often an overlooked area and may need to take into account the employer’s own risk management strategies and approach.
- The failure to include a dispute resolution mechanism. While the CAPSA governance guidelines speak to the importance of transparency and accountability and documenting a communication process with members, the association doesn’t specify a dispute resolution process for dealing with plan member or beneficiary complaints. This requirement appears in most legislation that’s addressed the mandatory contents of the governance policy.
Plans that have a governance policy, but it’s not followed
Although few would doubt that governance policies are well intentioned, they’re not always followed. Certain jurisdictions have codified the requirement to have a governance policy and to conduct a periodic assessment of the plan’s governance, thereby ensuring that the policy remains current and appropriate. New Brunswick pension legislation requires the plan administrator to follow the governance policy and to ensure that the plan is administered in accordance with it.
Whether the relevant legislation requires the governance policy to be a filed document or not, codifying the requirement to have a written governance policy that’s accessible to members and the regulator increases the likelihood the plan administrator will follow the governance policy, thus ultimately leading to better outcomes for the plan. However, when a governance policy is mandated by statute and accessible to the regulator, it’ll open up the possibility of statutory penalties and/or contractual claims to be advanced by plan members where the governance policy is not followed — which is an important reason why plan administrators should pay careful attention to the contents of such a policy.
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Plan administrators in New Brunswick must establish or amend their governance policies to comply with the new statutory requirements by no later than December 31, 2021. Plan administrators in jurisdictions where a statutory requirement does not yet exist should reconsider their existing governance practices in light of recent legal developments and the evolving trend towards codifying and strengthening the requirements for a written governance policy.
Ontario also passed a legislative amendment in 2017 to require a governance policy as well as a funding policy of the pension plan, which would be filed with the regulator, and which must contain such information as is prescribed by regulation, but this provision has not yet been proclaimed in force.
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.