Pension investing and plan governance

The dazzling array of new asset classes and investment products means new opportunities for DB plan administrators. But, as pension investing becomes more sophisticated, one of the challenges is ensuring that the plan’s investment practices meet legal standards. For many years, there was little guidance on the legal requirements for pension investing. Now that’s changed. A recent Ontario decision, R v. Christophe et al., 2009 (CCWIPP), provides guidance on the standard of care that a plan administrator must meet when investing in alternatives. And, in November 2011, the Canadian Association of Pension Supervisory Authorities (CAPSA) released the Pension Plan Prudent Investment Practices Guideline, which stresses that prudent investing in all asset classes should focus on behaviours and processes rather than solely on outcomes. (The Guideline applies to DC plans, too.)

Plan administrators cannot afford to ignore these developments. The CCWIPP case shows that the Financial Services Commission of Ontario (FSCO) won’t hesitate to lay charges for breaches of the investment rules. In the CCWIPP case, the plan administrator was a board of trustees. Each member of the board had to pay a fine of about $22,500 for breaking the 10% rule, which prohibits a pension plan from investing more than 10% of its assets in any one entity or group of entities. FSCO has also launched investigations into the investment practices of several other plans—and, in two cases, this has led to class action lawsuits. A plan administrator can significantly reduce its legal risks by taking the following four steps.

1) Know the rules. It’s essential for plan administrators to know the laws that apply to pension fund investing and to ensure that the plan documentation reflects the regulations. It’s easy to focus only on selecting good investments. But, as the board of the CCWIPP discovered, the investment rules do matter.

2) Obtain expertise. The court in the CCWIPP case held that a plan administrator will not meet the legal standard if it doesn’t get expert advice, provided either internally or externally, when making investment decisions. The court’s comments make it clear that the advice must come from someone with expertise in the particular asset class under consideration.

3) Maintain a good governance structure. The plan administrator must ensure that investment-related tasks are properly delegated, with appropriate monitoring and reporting requirements. The members of the board of trustees in the CCWIPP case were charged with—and convicted of—failing to properly supervise the investment committee.

4) Document decision-making. While lack of documentation doesn’t necessarily mean that the legal standard hasn’t been met, documenting procedures is necessary for a plan administrator to be able to show that it has met the legal requirements. For example, the trustees in the CCWIPP case failed to establish a due diligence defence because they lacked documentary evidence (e.g., meeting minutes) to show that they were aware of the 10% rule and were taking steps to make the plan compliant.

It may take pension plan administrators some time, effort and expense to adopt the necessary investment processes and procedures. However, it is important to do just that in order to demonstrate that their investment activities meet statutory obligations—and to mitigate serious legal risks.

Bonus tip

Use the prudent investment self-assessment questionnaire

The CAPSA Guideline is accompanied by a self-assessment questionnaire intended to assist both DB and DC plan administrators with reviewing their investment practices. If a particular pension investment is called into question, the regulators will view it negatively if the administrator can’t demonstrate that it knows the guideline and is trying to follow it. If the administrator has never used the questionnaire, it would be difficult to establish that it was trying to follow the rules.

Louise J.A. Greig is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP.

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