Pension plans sponsored by the same employer often pool pension fund investments in a master trust. This can simplify administration, reduce expenses through economies of scale and increase the range of available investment options. But it may not be appropriate to use the same asset mix for all plans participating in a master trust if the plans have materially different characteristics and liability structures. It’s generally accepted that a pension plan with a young active membership and few retirees can take on more investment risk and have a portfolio weighted more heavily to equity investments than bonds, but regulators become concerned that benefit security may be at risk when a pension plan with older members and a larger proportion of retirees has a large proportion of its investments in equities.

The Régie des rentes du Québec(Régie)has expressed concern in recent months about the degree of asset/liability mismatch for Quebec-registered defined benefit pension plans—especially those invested in a master trust using the same asset mix for all participating plans. In late November 2007, the Régie warned plan administrators by sending them letters stating that if individual plans in a master trust have different characteristics and liabilities, using the same asset mix for all plans does not comply with the Supplemental Pension Plans Act. The letters also advised that the Régie will act to ensure that plans participating in a master trust each have an appropriate investment policy.

Where plans participating in a master trust have similar characteristics and the asset mix is appropriate to the plans’ liability structures, a plan administrator who receives an enquiry from pension supervisory authorities should provide information about the appropriateness of the asset mix; in most case such explanations should be sufficient. However, if plans holding investments in a master trust have materially different characteristics, the plan administrator should consider reviewing the investment policy for each plan and rebalancing the asset mix as required to ensure it is appropriate to each plan’s liability structure.

Taking action now could avert potential enquiries from the Régie, compliance action and additional reporting requirements. From the perspective of governance and fiduciary responsibility, pension plan administrators should ensure that every pension plan has an up-to-date statement of investment policy and procedures(SIPP)appropriate for the plan. The need to have a current SIPP applies whether or not the plan’s assets are held in a master trust arrangement.

It’s worth noting that the benefits of holding assets for multiple plans in a master trust can be realized even though participating plans have different asset mixes. For example, participating plans with different liability characteristics can achieve appropriate asset mixes by holding units in individual funds of a master trust rather than units of the master trust itself.

It can be expected that other pension regulators in Canada will have similar concerns as expressed by the Régie and will conduct similar supervisory action to ensure that the SIPPs of pension plans participating in a master trust are appropriate to their characteristics and liability structures.

James Pierlot is a lawyer with Towers Perrin in Toronto. Jacques Lafrance is a principal with Towers Perrin in Montreal. and

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