One of the touted benefits of pooled registered pension plans (PRPPs) is that they involve an off-loading of fiduciary duty. The employer just has to select and monitor the administrator and have the payroll system remit the contributions. The administrator, acting as a trustee for the members, is responsible for everything else.

It is assumed that ridding employers of the dreaded fiduciary duty will increase pension coverage. Employers will be more willing to start a pension arrangement if they do not have to contribute and they have little or no ongoing liability. And who can blame employers, when the requirements of fiduciary duty are so difficult to satisfy?

A fiduciary has a duty of care, a duty of loyalty, a duty to not allow personal interest to conflict with the fiduciary duties, a duty to not profit from a position as a fiduciary and a duty to deal with an even hand between competing interests. Certainly, the requirements for an employer to act in a fiduciary capacity in offering a DB plan can be problematic.

The duty of care, for example, will demand considerable time and resources—or money to hire outside time and resources. This makes registered pension plans expensive to maintain.

The duty to deal in an even-handed manner is challenging with DB plans that often have one group of members subsidizing another. Normally, those who terminate receive minimum transfer values and subsidize those who remain until retirement. Also, because of funding uncertainty, one generation may end up having to subsidize another generation.

And the duty of loyalty will bring into question when the employer can act in its own right, as plan sponsor, and when it must act in a fiduciary capacity, as plan administrator. This results in a sort of bipolar management of pension funds, at least for single-employer DB plans. For example, according to CAPSA Guideline No. 7, when the employer develops a funding policy, it is acting as plan sponsor; when the employer creates and maintains an investment policy, it is acting as plan administrator and is therefore held to a fiduciary standard of care.

This is a convenient fiction. In reality, a plan’s asset mix is normally established with reference to the risk tolerance of the plan sponsor. For example, a plan sponsor with a pension plan that is large relative to the business, and which has limited cash flow to cover volatility in contribution requirements, will likely want to establish a lower-volatility approach and possibly manage the assets closer to the liabilities. A sponsor of a smaller plan with contribution requirements that are immaterial relative to the cash flows of the sponsoring organization is more likely to focus on maximizing long-term return.

But if the plan administrator is acting in a fiduciary capacity, it should be setting an asset mix in the best interests of plan beneficiaries, not in the best interests of the plan sponsor. The interests of these two groups may not always be aligned, especially in a situation where the plan sponsor bears all the investment risk but where the members have entitlement to surplus. In such a situation, the members’ best interests may suggest investing aggressively, to the possible detriment of the employer plan sponsor.

The justification for gearing the asset mix to the plan sponsor’s risk tolerance is that it is in the best interests of plan members for their employer not to go bankrupt. This argument is a valiant attempt to reconcile fiduciary duty with actual practice, where it is the plan sponsor hat—not the plan administrator hat—that is being worn to set the asset mix policy. It only makes sense that the investment policy be aligned with the party that bears the investment risk, but it is difficult to argue that we are considering only the interests of the plan’s beneficiaries in doing so.

The only way in which the interests of the beneficiaries can be aligned with the setting of the investment policy is if it is the beneficiaries who are bearing the investment risk. Multi-employer plans (or target benefit plans) do not have the inherent conflict between the management of the funding risk and the beneficiaries’ interests. The plan beneficiaries bear the investment risk. Therefore, it is their risk tolerance that guides the setting of the asset mix.

Once plan members are on the hook for the investment risk, the need to have a fiduciary safeguarding their interests increases. This makes the PRPP concept of an employer off-loading fiduciary duty to a financial institution a concern. If a plan sponsor of a single-employer DB plan faces numerous conflicts, it is unclear how a financial institution administering a PRPP will not. The decisions of how to structure the plans, what investment vehicles to offer and when to replace them, how costs will be passed on to the plan members and how the program will be communicated to members all involve inherent conflicts of interest.

In fact, while bundling services may have cost advantages, some unbundling of responsibilities and separation of duties would provide for better fiduciary management. What a lot of current pension arrangements, including the proposed PRPPs, lack at the present time is an independent body that is truly concerned only with the best interests of the plan members—something like a pension advisory committee but with the authority to act.

DB or DC, registered pension plan or PRPP, there is still a need to properly safeguard the interests of the plan members.

Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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