One sure way for sponsors of defined contribution pension plans to attract the attention of class action lawyers is to tell members what the value of their account balance will be in the future and the monthly retirement income stream it will generate.

If the account contains equity investments, any projected balance is almost certain to be wrong. And even if, by some fluke, the estimated balance is correct, annuity rates are so volatile that the projected retirement income stream could be significantly higher (in which case there would be no complaints) or substantially lower (cue the lawyers) by the time the member retires.

Some plan sponsors already provide members with account balance and income stream projections or tools to calculate the estimates themselves. While the practice isn’t new, it arose in the most recent guideline (No. 8) published by the Canadian Association of Pension Supervisory Authorities. In guidelines No. 3 and 8, CAPSA states administrators of defined contribution and capital accumulation plans should consider providing members with information and tools to assist with retirement planning, including an estimate of the accumulated value of the member’s account at retirement and the income it should generate.

Read: DC sponsors face bigger legal risks than they believe

While CAPSA guidelines don’t carry the force of law, the expectation among pension regulators is that plan sponsors will follow them as an industry standard. Sponsors must be vigilant, however, as representations to members about projected account balances or income streams carry legal risk given that Canadian courts have shown a willingness to award damages to members who reasonably and detrimentally rely on negligent or unqualified statements made by a plan sponsor.

LegalUpdate_CAPSA_casesIn light of the legal risks, any projected account balance, future income stream or decision-making tool provided to members should come with clear disclaimer language and confirmation of the assumptions used. CAPSA’s guidelines require no less but provide little guidance on model disclaimer language or assumption parameters upon which plan sponsors might rely.

Other jurisdictions have proposed so-called safe harbour protections, including the U.S. Department of Labor that regulates pensions in the United States. It recently proposed a regulation requiring plan sponsors to provide defined contribution pension plan members with projected account balances and income streams. However, unlike the CAPSA guidelines, the U.S. proposal provides protection from lawsuits arising from inaccurate projections as long as sponsors used Department of Labor assumptions in calculating the projections.

Read: Pension association calls for flexibility and clarity in CAPSA governance guidelines

The department also used safe-harbour assumptions to develop a lifetime income calculator that estimates future income streams arising from both an employee’s current and projected account balances.

While CAPSA’s guidelines are well-meaning, they overlook the potential legal risks faced by plan sponsors. If it’s serious about account projections, it should seek legislative safe harbour-type protection and develop its own calculator for plan sponsors wishing to provide retirement tools.

For now, sponsors that choose to provide plan members with account projections or retirement tools should work to build sufficient legal protection around their retirement disclosure programs.

Claude Marchessault and Taylor Buckley both practise with Dentons Canada LLP’s pension, benefits and employment compensation group in Vancouver. Buckley also practises with the firm’s labour and employment groups.

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Copyright © 2019 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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Scott Aver:

The 5 largest Canadian life insurers dedicated to supporting DC RPPs (and other CAPs) take care of this issue very nicely and, in fact, have been doing so for many years.

Monday, July 11 at 12:29 pm | Reply

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