For any pension plan administrator looking for guidance around governance responsibilities, look no further than the Canadian Association of Pension Supervisory Authorities’ guideline No. 4.
The guideline, which was originally published in 2004, offers a principles-based approach, recognizing there’s no one-size-fits-all solution to governance and leaving implementation up to the plan administrator. The guideline and its accompanying self-assessment questionnaire were republished about a year ago, putting further emphasis on the obligation to document. So it’s a good time for plan administrators to revisit these governance guidelines.
Principle 1: Fiduciary responsibility
The first principle states that plan administrators have a fiduciary responsibility to the plan members and beneficiaries.
Good governance involves defining expectations, documenting processes and verifying the results. Plan administrators should ensure that participants in the governance framework understand their fiduciary duties; written processes are in place to meet these fiduciary duties; and documented evidence exists to substantiate that fiduciary duties are being met.
Plan administrators can develop orientation programs for new directors, trustees, committee members and staff to educate them on the role of fiduciaries and the nature of these duties. Participants should understand the specific aspects of their plan that result in a fiduciary relationship. For organizations or individuals that wear multiple hats, it’s critical to understand which roles and responsibilities are fiduciary in nature and which aren’t. (Hint: plan sponsors can sometimes act in their own best interests but the plan administrator role is fiduciary).
Organizations may wish to also have fiduciaries periodically sign a declaration acknowledging they understand their responsibilities.
Principle 2: Governance framework
The second principle recommends that plan administrators establish and document a governance framework for the administration of the plan. The governance framework simply describes how the plan administrator organizes itself in overseeing the plan. Having an established framework promotes a structured approach and reduces the likelihood of ad-hoc governance. Plan administrators more often fall short on documenting the framework.
A commonly applied structure is for organizations to delegate certain responsibilities to a pension or retirement plan committee. Considerations to be addressed when setting up an effective committee include:
- Membership composition;
- Procedures addressing the addition of new members and member turnover;
- Responsibilities of the chairperson (i.e., setting the agenda);
- Its autonomy for making decisions or recommendations;
- Decision-making and voting procedures (i.e., unanimous versus majority rule, quorum, etc.);
- Frequency of meetings; and
- Reporting obligations and procedures.
Ultimately, the right structure will depend on the specific circumstances and resources of the organization and its plan or plans.
Written policies, procedures and processes support the governance apparatus by demonstrating how the responsibilities are expected to be met. The Canadian Association of Pension Supervisory Authorities suggests creating and maintaining an electronic governance binder to store these policies along with other plan-related materials.
Some examples of topics that could be addressed by written policies and procedures — and which pension regulators sometimes request to examine — include:
- Selecting and monitoring service providers;
- Selecting and monitoring investment funds;
- Continuing education and training;
- Implementation of regulatory changes;
- Record retention;
- Conflicts of interest;
- Addressing member inquiries or complaints; and
- Contribution delinquencies.
Principle 3: Roles and responsibilities
The third principle recommends that the roles, responsibilities and accountabilities of all participants in the governance process are clearly described and documented. Naturally, this can be outlined in the governance policy document, which is a legal requirement in British Columbia and Alberta and will soon be mandatory in Ontario. Plan administrators in these jurisdictions will also need to ensure they cover other content requirements prescribed by applicable pension legislation. The governance policy document should be readily available to all participants in the governance process and reviewed regularly.
Careful consideration should be given to the assignment of responsibilities. It’s unreasonable to expect board members and executives to be bogged down in the day-to-day operations of the plan. At the other extreme, a wholesale delegation of oversight responsibilities isn’t appropriate either.
The responsibilities of the plan sponsor and plan administrator roles should be clearly distinguished. That way, participants in the governance process will understand which hat they’re wearing when carrying out their assigned responsibilities.
Following a governance checklist or tracking sheet throughout the year will help ensure responsibilities aren’t overlooked.
Principle 4: Performance monitoring
The fourth principle recommends that plan administrators establish and document performance measures to monitor the performance of participants in the governance and administration of the plan.
If the previous three principles are related to defining expectations and documenting processes, this principle is about verifying the results. Performance measures can be set up to track whether written processes are followed and expectations are met. Each of the responsibilities, policies and procedures outlined in the governance document can be translated into a performance measure. If the referenced item has been completed according to schedule, a simple passing grade is all that’s necessary. If not, some followup action might be required.
The governance tracking sheet can facilitate this process and can also be used for future reference as evidence of the plan’s compliance.
Principle 5: Knowledge and skills
The fifth principle states that plan administrators have a duty to apply the knowledge and skills required to meet the plan administrator’s responsibilities. Similar to the first principle, this is more of a statement of fact than a recommended practice. It also calls for the application of the knowledge and skills required, not necessarily possessed. Any identified gaps will need to be filled, potentially through external service providers.
New member orientation is an important pillar to meeting this principle. The orientation program can be delivered privately to new groups or individuals but may also serve as a helpful refresher for the broader group of participants. Consider meeting early or allocating time to orientation at the start of the first meeting that new individuals attend. This will also help them become familiar with the group dynamics and meeting protocols. Proper orientation will help new individuals feel more comfortable participating and enable them to start contributing sooner.
Meeting agendas should regularly dedicate time to ongoing education and training. Don’t limit training topics to only addressing circumstances where potential changes to the plan or investments are tabled. It’s important the curriculum covers all facets of the plan and that everyone understands the status quo as well. Previous topics should be revisited as time elapses and members turn over. External service providers can be leveraged to help with the development or delivery of the education strategy and materials.
Organizations can promote learning and skills development by providing education allowances or introducing minimum continuing education requirements. There are plenty of pension- and investment-related conferences and seminars targeted at plan administrators.
Finally, education and training can only go so far. For example, non-investment professionals won’t become experts after several hours of training each year. External service providers can fill knowledge gaps that can’t be filled internally. Proper due diligence will need to be followed to ensure external service providers have the requisite knowledge and skills, not only at the time of hire, but on an ongoing basis as well.
The next article in this series will look at governance principles 6 through 10.