How are pension plan sponsors’ fiduciary duties evolving in the time of coronavirus?

While the coronavirus pandemic certainly doesn’t change pension plan sponsors’ fundamental fiduciary duty to their plan members, the crisis is creating circumstances that will test how that responsibility manifests.

Fiduciary duty arises when one party has a certain vulnerability in respect to another party, said Kenneth Burns, partner at Lawson Lundell LLP, in a webinar roundtable hosted by the Association of Canadian Pension Management on Thursday. In a pension context, plan sponsors have a fiduciary duty to their members around such issues as investment decisions, dealings with pension regulators, complying with pension laws and communicating plan information.

“Even if we’re comfortable that certain legal concepts such as these might be largely staying the same, the occasions when these duties arise might not be the same and the way we meet the legal standards to address them might not be either,” he said.

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Pension plan sponsors have to consider their fiduciary duty as pension regulators make changes aimed at assisting them in the wake of the pandemic, said Burns. “As some of our laws are modified, whether permanently or temporarily in this time of COVID-19, as our practices change and as the expectations of pension regulators change during this pandemic, the fiduciary law applies to every effort exerted to understand and react to those changes.”

In one example, regulators in Ontario and Quebec are allowing plan sponsors to file off-cycle valuations to lock in pre-coronavirus funded statuses, noted Kathryn Bush, partner at Blake, Cassels and Graydon LLP, also speaking during the webinar. “I just raise the issue of, could an off-cycle valuation be challenged as not being in the best interest of plan members?

“This is a fiduciary issue and there is no black and white answer. We have no case law in Canada on this issue. But I think plan sponsors are going to have to follow a process as they consider the off-cycle valuation and document that process [so] the documentation will show how they considered all of the inputs [and] when they came to that decision, including the best interests of members.”

Another issue to consider is benefit security, said Julien Ranger, partner at Osler Hoskin and Harcourt LLP, during the webinar. “Is the security of benefits jeopardized by having an up-cycle evaluation at this time? In many cases the answer will be no and then at least you have documented that you’ve thought about it.”

Read: Are pension plans considering filing early valuations to lock in pre-coronavirus funded ratios?

Plan sponsors must also act in the best interests of plan members when considering changes to the plan, such as reducing contribution levels, as pension investments have taken a hit from the pandemic-induced market downturn, he added. “I think it will be important for administrators to be able to show that they’ve at least turned their minds to the fiduciary consideration. We’ve been in those meetings and sometimes we just look at the numbers and it makes so much sense from a financial perspective . . . but you want to be able to demonstrate that you’ve turned your minds to the conflict of interest issues.”

Plan members may also expect more communications from plan sponsors during this time, noted Burns, on issues such as plan and benefit sustainability and, for defined contribution plan members, addressing concerns about their investments. “The plan administrators have, arguably, a fiduciary duty to answer. Plan administrators must always be accountable, in good times and bad, but COVID-19 is arguably taking this to a higher level.”

The duty to oversee third parties that are handling plan administrative functions is something plan sponsors can struggle with even in good times, said Burns. But during these times, investment managers aren’t bringing in the returns they previously did and professional advisors, actuaries, third-party administrators and lawyers are working from home, all attempting to get a grip on an ever-evolving situation. “With things changing constantly, how do the fiduciaries, the plan administrators, maintain the knowledge base and the reliable data that they need to effectively supervise?”

Read: What are the implications for pension funds coming out of coronavirus crisis?

Bush noted that the 2013 Supreme Court of Canada judgement in Sun Indalex Finance LLC v. United Steelworkers clarified that employers have to demonstrate that they’ve considered the best interests of plan members when making decisions around issues such as continuing to pay out a dividend when the plan is in deficit, filing an off-cycle valuation or even setting a discount rate.

“The health of the sponsor, the funded status of the plan and the economic effects of the proposed actions are going to be things people have to think about in the context of considering their fiduciary duties,” she said. “For people who are administrators of plans — and we know the courts have told us the directors have those administrative responsibilities — it’s going to be important for them to conduct the proper analysis.

“And they’re going to need to illustrate, to the extent that they’re ever challenged, that they thought about their fiduciary duties, they considered the plan interests when they made those decisions. It’s not they they’re going to have to do everything that a pension plan member might have liked, but they’re going to have to consider their obligations.”

Read: Employers permitted to suspend DC pension contributions, says FSRA