The Osgoode Certificate in PENSION LAW
Pension Governance and Risk Management:
The current world of Single Employer, Multi-Employer & Jointly Governed Target Benefit Plans, and the new world of PRPPs
April 23, 2014
Presented by: Mary Picard Toronto, Ontario, Canada
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this presentation will cover…
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• governance models in the current world: single employer, multi-employer & jointly governed target benefit plans
• practical perspectives regarding DC governance
• PRPPs
• CAPSA’s new DC pension plans guideline
overview of types of MEPPs
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think of three types of multi-employer pension plans: • private sector related employers • private sector unrelated employers• public sector employers
- versus -typical “pension plan” sponsored by a single employer
cautionary tale: United Way
strange cousins in the MEPP family:
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SMEPs: specified multi-employer plan (ITA)
SMEPPs: specified multi-employer pension plan (Alberta)
MUPPs: multi-unit pension plan (Alberta)
SOMEPPs: specified Ontario multi-employer pension plan (Ontario)
NCPs: negotiated cost plan (B.C.)
governance of MEPPs is totally different from governance of single-employer pension plans:
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• board of trustees is the administrator (statutory, personal liability)
• who should be on the board?
• benefits may be reduced
• Quebec is the spoiler regarding benefit reduction
• challenge for the governors of private-sector MEPPs: perhaps reduce accrued benefits for everyone except Quebec members, and reduce future accruals for current Quebec members?
public sector MEPPs:
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one example is OMERS:• established in 1962 as the pension plan for employees of local gov’ts• OMERS Act, 2006 continued the plan and created 2 separate corporate
bodies to govern the plan:• OMERS Sponsors Corporation; and • OMERS Administration Corporation
• Section 3.2 of Pension Benefits Act Regulations specifically prescribes OMERS pension plans as “jointly-sponsored” pension plans for the purposes of the PBA
• The OMERS plan has more than 900 employers, more than 400,000 members, and more than $50B in assets
OMERS…a jointly-sponsored plan:
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• governance of jointly sponsored plans• Section 3.1 of the PBA regulations requires that “the documents that create and
support the plan” must satisfy certain criteria, including:• 3.1 (3): “The employers…..and the members of the pension plan….are jointly responsible for
making all decisions about the terms and conditions of the pension plan….”
• OMERS Sponsors Corporation:• 14 Board members- 7 plan member reps & 7 employer reps• Board rep initially determined by OMERS Act, 2006, and now SC By-Law 4
• OMERS Administration Corporation:• 14 Board members- 7 plan member reps & 7 employer reps• Board rep initially determined by OMERS Act, 2006 but now SC By-Law 13
OMERS Sponsors Corporation:
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• Replaced the Ontario Government as Plan Sponsor in 2006
• Certain corporate laws were made applicable to SC but most are not:• OMERS Act, 2006: section 22(3) Section 132 (conflict of interest), subsection 134 (1) (standard of
care) and section 136 (indemnification) of the Business Corporations Act apply, with necessary modifications, to the Sponsors Corporation and its members. 2006, c. 2, s. 22 (3).
• Section 22(4) The Corporations Act and the Corporations Information Act do not apply to the Sponsors Corporation. 2006, c. 2, s. 22 (4).
• Responsible for:• Determining Plan Design;• Setting contribution rates;• Establishing or changing a Reserve;• Filing the actuarial valuation; and• Setting contribution levels and appointment protocol for SC and AC Board members
• Decisions that impact design, contributions or the reserve require a 2/3 vote of the Board
• Long range strategic funding plan, and 3 year plan approved in 2010
OMERS Administration Corporation:
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• The AC is the Administrator and Trustee of the OMERS Plans;
• The AC responsibility includes:• Investment management of OMERS assets;• Funding policies;• Pension services and administration;• Plan valuations;• Advise and assist the SC
• The board of the AC has fiduciary responsibility to the Plan members
Since 2006 the 2 OMERS corporations have worked to smooth out governance roles and responsibilities resulting in completion of a Framework Agreement
OMERS unique solution:
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Unprecedented comfort obtained in 2008 regarding governance:Ontario Superior Court of Justice upheld a Joint Protocol reached between the OMERS Administration Corporation (AC) and the OMERS Sponsors Corporation (SC). The protocol provides for:
• the reimbursement of certain SC costs from the OMERS pension plans; and
• technical and administrative support for the SC, provided by the AC.
• The SC and AC worked together to seek a court decision on which SC costs may be lawfully reimbursed by the OMERS pension plans – for the purposes of allowing the SC to carry out its mandate -- and the types of support that can be provided by the AC to the SC.
• For example, it was recommended that SC costs related to administrative support and the use of facilities be paid out of the OMERS pension plans. Details of expenses and support were set out in a Joint Protocol document.
potential personal liability in pension governance
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• individuals on the board of trustees of a MEPP, and on a pension committee of a Quebec-registered pension plan can be personally sued, and prosecuted
• DO NOT accidentally impose that personal liability on other individuals who are involved in the governance of a pension plan
(pension committee mandates, and SIPPs, often do so …)
R. v Christophe et al. (“CCWIPP”)
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Canadian Commercial Workers Industry Pension Plan:
• charges under Ontario pension legislation in relation to investments made by the Plan over the period from February 15, 2002 to December 31, 2003
• alleged breach of “10% rule” and prudent person rule in legislation
• convicted for breach of quantitative limits & failing to supervise individuals on Investment Committee
Ontario court harshly criticized governance:
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• didn’t retain consultants to attain required expertise
• didn’t maintain minutes that evidenced prudent consideration OR delegation to consultants/experts
“woefully inadequate”
OECD and U.K. Guidance on Governance
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Organization for Economic Co-operation and Development:
• OECD Guidelines for Pension Fund Governance• June 2009• http://www.oecd.org/dataoecd/18/52/34799965.pdf
U.K.: "The Pensions Regulator“:
• Conflicts of Interest Regulatory Guidance• October 2008• http://www.thepensionsregulator.gov.uk/guidance/guidance-conflicts-of-
interest.aspx
new frontiers in governance of DC plans
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• US 401k litigation mostly about fee disclosure
• no helpful legislative governance requirements for DC Plans
*exception * for federally-regulated pension plans:“safe harbour” in legislation+ DC guidelines issued by OSFI
• Guidelines issued by Canadian Association of Pension Supervisory Authorities (“CAPSA”)
new frontiers in governance of DC plans
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Important areas in DC Governance and CAP Guidelines• Selecting and supervising service providers
• Selecting and overseeing investment options
• Fees associated with investment options
• Liquidity and level of risk associated with the investment options
• Default options and auto-enrollment
• Investment education and/or advice
• Communication to members and tools available to assist
Proposed Canadian Pooled Structure
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Canadian EquityPool
Global EquityPool
Fixed IncomePool
Alternative Inv.Pool
Cash & ShortTerm Inv.
DC Participant “A”
DC Participant “B”
Target Date Funds(i) 2010(ii) 2020(iii) 2030
DBPlan no 1
DBPlan No 2
Passive IndexFunds(i) Global Equities(ii) Canadian Equities(iii) Fixed Income
ACTIVE POOLS
new frontiers in governance of DC plans
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Pros of Proposed Integration of DB and DC assets: • allows for complete fund manger oversight; • governance would use DB roles & responsibilities which have regulatory and
common law standards• reduces fees for the smaller asset pool (usually DC Pool); • significantly reduces fiduciary risk; • least costly option to maintain
Cons: • disruption to participants; • mapping of current choices to new options; • restricts employee choice; • potential significant tax impact to participants in Canada; • design not easily implemented in Canada
Pooled Registered Pension Plans
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• largely in place for federally-regulated employers
• "administrator" (certified financial institution)
• waiting for the provinces to bring in their own legislation
delegations & pension committees
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• typical delegations by Quebec pension committee
• accidental delegations (well-intentioned) create unnecessary personal liability
* * * * monitor and make recommendations * * * *
governance anxieties from “Slater Steel”
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• Actuary employed “asset smoothing” technique that FSCO didn’t like, which resulted in lower contribution obligations
• Slater Steel became insolvent and Morneau was appointed wind-up administrator
• Morneau sued actuary for $20 million, claiming that he overstated the plans’ assets which in turn improperly permitted Slater Steel to avoid making additional contributions before becoming insolvent
… Slater Steel …
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In response, actuary and consulting firm commenced “third party” claims in the lawsuit, against the directors, officers and employees who sat on the audit committee of Slater Steel, saying that those individuals caused or contributed to the deficit:
“…the Slater personnel, in their capacity as agents or employees of the administrator, acted negligently and in breach of statutory and fiduciary duties…placed themselves in a position of conflict of interest … followed a deliberate strategy to minimize the contributions Slater would have been required to make to the plans…”
FSCO & the Queen wade into Slater Steel
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• Prosecution under pension legislation against actuary was dismissed.
• FSCO has been sued -- “fourth partied” -- in the ongoing lawsuit that Morneau commenced against the actuary and the consulting firm.
• The lawsuit is in the “mediation” stage.
What did the Supreme Court of Canada tell us in Indalex about pension plan governance?
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know what hat you’re wearing
and deal with it!
How can members of a single pension committee wear “two hats”? Part 1:
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Obligation to act in a fiduciary capacity: When the members of the Pension Committee are monitoring the administration of the registered pension plans, they shall act in the best interests of the members of the registered pension plans.
How can members of a pension committee, or an employer, wear “two hats”? Part 2:
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No obligation to act in a fiduciary capacity: From time to time ABC Company Inc. may give the Committee information regarding matters where ABC Company Inc. is entitled by law to act in its own best interests with respect to the registered pension plans. ABC Company Inc. may occasionally seek recommendations from the Committee regarding such matters. Such matters include funding policy, solvency relief, containment of expenses, and amendment and termination of the Plans. On those occasions the members of the Committee are not required to act in the best interests of the members of the registered pension plans.
DRAFT: CAPSA Guideline No. X: July 13, 2012
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“3.3 Information and Tools Regarding Projected Account Balance at Retirement
In addition to following the CAP Guidelines, plan administrators should provide members with information to help them understand and estimate their plan benefits on retirement. They should consider providing members with the following information on an annual basis:
• Estimate of accumulated value of the member’s account at retirement.
• Estimate of the benefit that will result from the accumulated value.
Plan administrators should inform members that statements regarding future benefits are estimates. They should also include the assumptions used in estimating the future benefits.”
FINAL: CAPSA Guideline No. 8: March 28, 2014
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“Plan administrators should consider providing members, periodically, with an estimate or a general illustration of the accumulated value of the member’s account at retirement, as well as an estimate or example of the benefit that may result from the accumulated value.
Members should be informed that statements regarding projected account balances and future benefits are estimates only, and the assumptions used in the estimates should be clearly stated.”
The preceding presentation contains examples of the kinds of issues companies dealing with Pension Law could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique.
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