The Canadian Association of Pension Supervisory Authorities (CAPSA) recently published a consultation paper entitled “The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment” (PDF). The paper provides helpful guidance to pension plan sponsors and administrators regarding the regulators’ view of best practices for pension plan funding and investment, including a summary of important legal concepts such as the “prudent person rule”, and a description of the differing roles of the plan sponsor and the plan administrator.
Emphasis on Funding and Investment Procedures
The paper places tremendous importance on the process to be followed by pension plan sponsors and administrators in relation to their pension plan funding and investment activities. A key element of this process is the "prudent person rule", which serves as the guiding principle for all investment decisions, and essentially requires that a pension plan administrator exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person. In other words, the focus is on the methods followed by the administrator, and not simply on the result achieved.
According to the paper, it is essential that plan sponsors and administrators document their funding and investment procedures, as part of overall good governance, and in order to be able to satisfy the regulator in the event of a regulatory review. Evidence of the processes followed by the sponsor and administrator would also assist in putting forward a strong defence, should there be litigation over the pension plan’s funded status or the employer’s level of contributions.
Sponsor vs. Administrator Role: Which Activities Attract Fiduciary Duties?
The paper provides helpful insight into the regulators’ view regarding which aspects of pension funding and investment attract fiduciary duties and which do not. Activities that are required to be carried out by the plan sponsor in its capacity as such do not attract fiduciary duties, and decisions may be made based on the business’ best interests, subject to the obligations of good faith. On the other hand, activities that are required to be carried out by the plan administrator do attract fiduciary duties, and decisions must be made in the best interests of the plan and its members.
Generally, in single-employer pension plans, the employer has a dual role of plan sponsor and plan administrator, and the paper therefore describes which activities are to be performed by the sponsor (e.g., making necessary contributions to the fund) and which are to be performed by the plan administrator (e.g., investing the assets of the fund).
Interestingly, according to CAPSA’s paper, the establishment of a funding policy is a sponsor task. For example, a funding policy might set out the circumstances in which the sponsor will contribute amounts to the pension fund in excess of the minimum recommended by the actuary in the valuation. Prior to the publication of this paper, it was not always clear whether the regulators viewed that function as being part of the sponsor’s duties or the administrator’s duties. I note however that one of the specific issues on which CAPSA has asked for comments is the role of the plan administrator regarding the funding policy.
While not legally binding, the CAPSA paper provides a good summary of the regulators’ views on best practices in the area of pension funding and investment, as part of an overall pension governance strategy. After the consultation process, CAPSA plans to prepare three guidelines:
- best practices for funding policies;
- best practices for investment policies; and
- examinations by pension regulators of funding and investment processes.
Comments on the consultation paper will be accepted by CAPSA until January 29, 2010.
The implications of the CAPSA paper will be discussed further at our upcoming pensions seminar on Wednesday, December 9th.
