guideline no. 3 may 2004 -...

CAPSA Secretariat, 5160 Yonge Street, 17th Floor, Box 85 North York, Ontario M2N 6L9 Tel: (416) 226-7773, 1-800-668-0128 ext 7773 Fax: (416) 590-7070 Email: [email protected]

GUIDELINES FOR CAPITAL ACCUMULATION PLANS On May 28, 2004, the Joint Forum of Financial Market Regulators released a final version of the Guidelines for Capital Accumulation Plans (CAP Guidelines), which have been approved for publication by Canadian Association of Pension Supervisory Authorities (CAPSA), the Canadian Council of Insurance Regulators and the Canadian Securities Administrators. Concurrently, CAPSA adopted the CAP Guidelines as CAPSA Guideline No. 3, Guidelines for Capital Accumulation Plans. Guideline No. 3 is applicable to defined contribution components of registered pension plans where members are permitted to make investment decisions among two or more options. While the CAP Guidelines are voluntary in nature, it is the expectation of CAPSA that registered pension plans that have CAP components will operate in accordance with the CAP Guidelines by December 31, 2005. The CAP Guidelines represent the culmination of four years of work by the Joint Forum Working Committee on Capital Accumulation Plans and is a landmark achievement in the development of common standards for Capital Accumulation Plans (CAPs) in Canada. The CAP Guidelines were developed with the assistance of an Industry Task Force based on an interim document entitled: Revised Principles for Investment Disclosure in Capital Accumulation Plans which was finalized by the Joint Forum in 2002 following an extensive consultation on proposed principles in the Spring and Summer of 2001. An initial draft of the CAP Guidelines was released for comment in April 2003, and was the subject of a four and a half month consultation, which included focus groups and consultation sessions across Canada.

Guideline No. 3 MAY 2004

Joint Forum of Financial Market Regulators

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5160 Yonge Street, Box 85, 17th Floor, North York, ON M2N 6L9 Telephone: 416-590-7054; Facsimile: 416-590-7070 www.jointforum-forumconjoint.ca

Table of Contents May 28, 2004

Capital Accumulation Plan Guidelines

TABLE OF CONTENTS Section 1: Introduction .................................................................................................. 1

1.1 - Definitions ............................................................................................................... 1 1.2 - The Purpose of the Guidelines............................................................................ 1 1.3 - Implications for the CAP Sponsor, Service Providers, and CAP Members . 2

Section 2: Setting Up a CAP ............................................................................................ 3

2.1 - General.................................................................................................................... 3 2.2 - Investment Options ............................................................................................... 4 2.3 - Maintenance of Records ...................................................................................... 5

Section 3: Investment Information and Decision-Making Tools for CAP Members ............................................................................................................................. 6

3.1 - General.................................................................................................................... 6 3.2 - Investment Information ......................................................................................... 6 3.3 - Investment Decision-Making Tools ..................................................................... 6 3.4 - Investment Advice ................................................................................................. 7

Section 4: Introducing the Capital Accumulation Plan to CAP Members......... 8

4.1 - General.................................................................................................................... 8 4.2 - Investment Options ............................................................................................... 8 4.3 - Transfer Options .................................................................................................... 9 4.4 - Description of Fees, Expenses and Penalties ................................................10 4.5 - Additional Information........................................................................................10

Section 5: Ongoing Communication to Members..................................................11

5.1 - Member Statements............................................................................................11 5.2 - Access to Information .........................................................................................11 5.3 - Performance Reports for Investment Funds ...................................................13

Section 6: Maintaining a CAP ..........................................................................................14

6.1 - Reviewing Service Providers.............................................................................14 6.2 - Reviewing Service Providers who Provide Investment Advice ............................14 6.3 - Reviewing Investment Options ..........................................................................14 6.4 - Reviewing Maintenance of Records .................................................................15 6.5 - Reviewing Decision-Making Tools ....................................................................15

Section 7: Termination..................................................................................................16

7.1 - Terminating a CAP..............................................................................................16 7.2 - Terminating a CAP Member’s Participation in the Plan................................16

Section 1: Introduction May 28, 2004

Capital Accumulation Plan Guidelines 1

SECTION 1: INTRODUCTION These guidelines reflect the expectations of regulators regarding the operation of a capital accumulation plan, regardless of the regulatory regime applicable to the plan. They are intended to support the continuous improvement and development of industry practices. Shaded text within the document is included as elaboration and clarification of the guidelines for the purpose of assisting the user. 1.1 - DEFINITIONS 1.1.1 Capital Accumulation Plan In these guidelines, a capital accumulation plan (CAP or plan) is a tax assisted investment or savings plan that permits the members of the CAP to make investment decisions among two or more options offered within the plan. A CAP may be established by an employer, trade union, association or any combination of these entities for the benefit of its employees or members.

Examples of a CAP may include a defined contribution registered pension plan; a group registered retirement savings plan or registered education savings plan; and a deferred profit sharing plan.

1.1.2 CAP Sponsors In these guidelines, the employers, trade unions, associations or combinations of these entities that establish CAPs are referred to as “CAP sponsors”. If the CAP is a registered pension plan, many of the responsibilities of the CAP sponsor described in these guidelines are those of a pension plan administrator. In such cases, these guidelines should be interpreted considering the different roles of employers and pension plan administrators under applicable pension benefits standards legislation.

1.1.3 Service Providers In these guidelines, “service providers” include any provider of services or advice required by the CAP sponsor in the design, establishment and operation of a CAP. 1.1.4 CAP Members In these guidelines, “CAP members” are individuals who have assets in a CAP.

These individuals may include active or former employees; trade union or association members; and in certain cases, their spouses or common law partners.

1.1.5 Investment Funds In these guidelines, an “investment fund” means a mutual fund, pooled fund, segregated fund or similar pooled investment product. 1.2 - THE INTENT OF THE GUIDELINES The intent of these guidelines is to: • outline and clarify the rights and

responsibilities of CAP sponsors, service providers and CAP members; and,

• ensure that CAP members are provided the information and assistance that they need to make investment decisions in a capital accumulation plan.

1.2.1 Application of the Guidelines These guidelines apply to all capital accumulation plans and supplement any legal requirements applicable to these plans. They do not replace any legislative requirements. CAP sponsors are responsible for meeting any applicable legal requirements, including any requirements that may extend beyond the scope of these guidelines.

Section 1: Introduction May 28, 2004


1.3 - IMPLICATIONS FOR THE CAP SPONSOR, SERVICE PROVIDERS, AND CAP MEMBERS 1.3.1 The CAP Sponsor When CAP sponsors decide to establish a plan, they assume certain responsibilities in their role as CAP sponsor. CAP sponsors may delegate their responsibilities within a CAP to a service provider. The CAP sponsor is responsible for: • setting up the plan; • providing investment information and

decision-making tools to CAP members; • introducing the plan to members; • providing on-going communication to

members; • maintaining the plan; and, • ensuring that termination of the plan or the

membership of an individual within the plan is done in accordance with the terms of the CAP.

Many of the responsibilities of the CAP sponsor relate to the provision of information and documents to CAP members. Information and documentation that the CAP sponsor provides to CAP members should be prepared using plain language and in a format that assists in readability and comprehension. The CAP sponsor should ensure that decisions about establishing and maintaining the plan and information about how those decisions are made, are properly documented and that the documents are retained.

1.3.2 Service Providers To the extent that the responsibilities of the CAP sponsor are delegated to a service provider, the service provider is responsible for following these guidelines and any applicable legal requirements. Service providers engaged by the CAP sponsor should have the appropriate level of knowledge and skill to perform the tasks delegated and to provide any advice within their area of expertise requested by the CAP sponsor. 1.3.3 CAP Members CAP members are responsible for making investment decisions within the plan and for using the information and decision-making tools made available to assist them in making those decisions.

Examples of decisions made by CAP members include: § how much to contribute (where the member

can make this choice); § how much they should contribute to any

particular investment option; and, § whether an investment in a particular option

should be moved to another option.

CAP members should also consider obtaining investment advice from an appropriately qualified individual in addition to using any information or tools the CAP sponsor may provide.

Section 2: Setting up a CAP May 28, 2004


SECTION 2: SETTING UP A CAP 2.1 - GENERAL 2.1.1 Defining the Purpose of a CAP CAP sponsors should clearly define and document why the capital accumulation plan is being established. The terms of the plan should be consistent with its purpose and what CAP members are told.

Some of the purposes for which a CAP sponsor may establish a capital accumulation plan are: § retirement savings; § tax efficient compensation; § profit sharing; and, § savings for other financial goals such as

education, home purchase, etc.

If the CAP sponsor decides to modify the purpose of a capital accumulation plan, the modified terms of the plan should be consistent with the modified purpose of the CAP. The decision to change the purpose of the plan and the modified purpose of the plan should be documented. Information on the decision and the impact the decision will have on CAP members should be provided to the members before the decision takes effect. 2.1.2 Deciding whether to use Service Providers The CAP sponsor should decide if it has the necessary knowledge and skills to carry out the responsibilities set out in these guidelines and all relevant legal requirements. The CAP sponsor should also decide whether and how service providers should be used. Where the CAP sponsor does not have the necessary knowledge and skills to carry out its responsibilities, service providers should be used.

2.1.3 Selecting Service Providers The CAP sponsor should establish criteria for the selection of service providers and use these criteria to select any service providers it engages.

Factors for the CAP sponsor to consider when establishing criteria for selecting service providers may include: § professional training; § experience; § specialization in the type of service to be

provided; § cost of the service; § understanding of employee benefits, pension

legislation and other related rules; § consistency of service offered in all

geographical areas in which members reside; and,

§ quality, level and continuity of services offered.

Where the CAP sponsor delegates responsibilities to a service provider, the CAP sponsor should ensure that the applicable roles and responsibilities of the CAP sponsor and service provider are carefully documented.



2.2 - INVESTMENT OPTIONS 2.2.1 Selecting Investment Options The CAP sponsor should select investment options to be made available in the plan. The investment options for CAPs may be limited by legislation. CAP sponsors must comply with all applicable legislative requirements when choosing investment options.

Examples of investment options include: § investment funds; § guaranteed investment certificates (GICs); § annuity contracts; § employer securities; § government securities; § other securities; and, § cash.

The CAP sponsor should ensure a range of investment options is made available taking into consideration the purpose of the CAP.

In some cases the choice of a service provider will define or limit the type of investment options available to a plan.

Factors a CAP sponsor should consider when choosing investment options, including any default option that may be selected by the CAP sponsor (see Section 2.2.4), include: • the purpose of the CAP; • the number of investment options to be

made available; • the fees associated with the investment

options; • the CAP sponsor’s ability to periodically

review the options; • the diversity and demographics of CAP

members;

• the degree of diversification among the investment options to be made available to members;

• the liquidity of the investment options; and, • the level of risk associated with the

investment options.

The degree of diversification and liquidity, and the level of risk associated with the investment options are particularly relevant for capital accumulation plans that are established for retirement purposes.

2.2.2 Selecting Investment Funds If the investment options chosen by the CAP sponsor include investment funds, the following factors should also be taken into account when selecting the funds that are to be made available: • the attributes of the investment funds such

as the investment objectives, investment strategies, investment risks, the manager(s), historical performance, and fees; and,

• whether the investment fund(s) selected provide CAP members with options that are diversified in their styles and objectives.

If investment funds are offered in a CAP that is a registered pension plan, the funds must comply with the investment rules under applicable pension benefits standards legislation. If the investment fund is a mutual fund under securities law, the funds must comply with the investment rules that govern conventional public mutual funds.

As at the date of publication, if the investment fund is a mutual fund, it must comply with the investment rules under National Instrument 81-102 Mutual Funds.



If the investment fund is an insurance product, the funds must comply with: • the investment rules applicable to individual

variable insurance contracts; or • the investment rules that govern

conventional public mutual funds; or • the investment rules under applicable

pension benefits standards legislation. 2.2.3 Transfers Among Investment Options CAP members should be allowed reasonable opportunities to transfer among the investment options available in the plan. Administrative costs incurred in making the transfer may be charged to members. The CAP sponsor may restrict the number of transfers a member can make, but members should have an opportunity to transfer among options on at least a quarterly basis.

Factors for the CAP sponsor to consider when determining how often CAP members can make transfers among investment options may include: § the purpose of the CAP; § the liquidity of investment options; § the number of options that are available; and, § the risks associated with the investment

options. Restrictions on the number of transfers each individual member can make might be appropriate to limit costs borne by the CAP sponsor or collectively by all members, for transfers by individual members. Restrictions may include limiting the number of transfers by members or imposing fees if the established limit is exceeded.

2.2.4 Policy Regarding Failure to Make Investment Choices The CAP sponsor should establish a policy that outlines what happens if a CAP member does not make an investment choice. The policy should be provided to the member before any action is taken under the policy.

The policy may involve setting a default option to be applied if a member does not make an investment choice within a given period of time. If the policy includes imposing a default option, the CAP sponsor should provide the member with information about the default option (see Section 4.2) when the policy is provided.

2.3 – MAINTENANCE OF RECORDS The CAP sponsor should prepare and maintain the records of the CAP, either internally or through a service provider. The CAP sponsor should also establish a document retention policy for the plan.

The contents of a document retention policy include: § a description of the types of documents to be

retained; § how long various types of documents should

be retained; and, § who can access the documents.

Section 3: Investment Information and Decision Making Tools May 28, 2004


SECTION 3: INVESTMENT INFORMATION AND DECISION-MAKING TOOLS FOR CAP MEMBERS The CAP sponsor should provide investment information and decision-making tools to assist CAP members in making investment decisions in the plan. Costs associated with basic investment information or decision-making tools should be structured so that there is no disincentive for members to use them. 3.1 - GENERAL To decide which types of information and decision-making tools to provide to CAP members, the CAP sponsor should consider: • the purpose of the

plan; • what types of

decisions members must make;

• cost of the information and decision-making tools;

• the location, diversity and demographics of the members; and,

• the members’ access to computers and the internet.

Information, decision-making tools and guidance provided by the CAP sponsor need not address the entire financial circumstances and planning needs of the CAP member.

3.2 - INVESTMENT INFORMATION The CAP sponsor should provide CAP members with investment information to assist the members in making investment decisions within the plan.

Examples of investment information include: § glossaries explaining terms used in the

investment industry; § information about how investment funds

work; § information about investing in different types

of securities (e.g., equities, bonds); § information regarding the relative level of

expected risk and return associated with different investment options;

§ product guides; and, § performance reports for any investment

funds offered in the CAP.

3.3 - INVESTMENT DECISION-MAKING TOOLS The CAP sponsor should provide CAP members with investment decision-making tools to assist the members in making investment decisions within the plan.

Examples of decision-making tools include: § asset allocation models; § retirement planning tools (if applicable); § calculators and projection tools to help

members determine contribution levels and project future balances; and,

§ investor profile questionnaires.

For example, members of a retirement plan should be provided with information and tools that focus on retirement planning.

Section 3: Investment Information and Decision Making Tools May 28, 2004


3.4 - INVESTMENT ADVICE In addition to providing investment information and decision-making tools, a CAP sponsor may choose to enter into an arrangement with a service provider, or refer the members to a service provider, who can provide the members with advice about their investment decisions. 3.4.1 Selecting Service Providers to Provide Investment Advice If the CAP sponsor chooses to enter into an arrangement with a service provider, or to refer CAP members to a service provider, who can provide investment advice to the members, the CAP sponsor should establish criteria to be used in selecting the service provider and use the criteria to select the service provider.

Factors for the CAP sponsor to consider when establishing criteria for selecting service providers to provide investment advice to members include: § the criteria used to select service providers

generally; § any real or perceived lack of independence

of the service provider relative to other service providers, the CAP sponsor and its members;

§ any legal requirements that individuals must meet before they can provide investment advice; and,

§ any complaints filed against the advisor or his or her firm and any disciplinary actions taken (if known).

Section 4: Introducing the Capital Accumulation Plan May 28, 2004


SECTION 4: INTRODUCING THE CAPITAL ACCUMULATION PLAN TO CAP MEMBERS When an individual becomes eligible to enrol in a capital accumulation plan, the CAP sponsor should provide information regarding the purpose of the plan and the information outlined in this section. 4.1 - GENERAL 4.1.1 Information on the Nature and Features of the CAP The CAP sponsor should provide CAP members with current information on the nature and features of the plan. Information provided to CAP members should include: • contribution levels (if applicable); • investment options available, how to choose

investments, how choices can be changed, and how long it will take for choices to be implemented;

• the policy regarding failure to make investment choices (see Section 2.2.4) and,

• names of service providers with whom CAP members interact, if applicable.

4.1.2 Outlining the Rights and Responsibilities of CAP Members The CAP sponsor should provide CAP members with information outlining their rights and responsibilities under the CAP. Information provided to members should include: • members’ right to access information about

the nature and features of the plan; • members’ right to request paper copies of

their member statements if the statement is

normally provided in another format (see Section 5.1);

• members’ responsibility for making investment decisions and that those decisions will affect the amount of money accumulated in the plan;

• members’ responsibility for informing themselves about the plan, using the documents, information and tools available to them; and,

• the recommendation that members ought to obtain investment advice from an appropriately qualified individual, in addition to using any information or tools the CAP sponsor may provide.

4.2 - INVESTMENT OPTIONS The CAP sponsor should provide CAP members with sufficient detail about the investment options available in the plan so they can make informed investment decisions. 4.2.1 Investment Funds For each investment fund that is an investment option available in the plan, the CAP sponsor should provide CAP members with the following information: • the name of the investment fund; • names of all investment management

companies responsible for the day-to-day management of fund assets;

• the investment objective of the fund; • the types of investments the fund may hold; • a description of the risks associated with

investing in the fund; • where a member can obtain more

information about the fund’s portfolio holdings, and other detailed disclosure about the fund; and,

• whether the fund is considered foreign property for income tax purposes and if so, a



summary of the implications of that status for a member who invested in the fund.

4.2.2 Employer Securities When securities of the employer or a related party of the employer are included as an investment option in the plan, the CAP sponsor should provide at least the following information to CAP members: • name of the issuer and the security; • relationship between issuer and employer -

if the issuer of the security is different from the employer of the CAP members, a description of the relationship between the issuer and the employer should be provided;

• risks associated with investing in a single security; and,

• whether the security is considered foreign property and, if so, the implications for members.

4.2.3 Other Investment Options When investment options other than investment funds or employer securities are included as investment options in the plan, the CAP sponsor should provide the following information to CAP members: • a description of the investment including its

name; • the type of investment; • the investment objective; • risks associated with the option; and, • whether the option is considered foreign

property and, if so, the implications for members.

4.3 - TRANSFER OPTIONS The CAP sponsor should provide CAP members with information about how to make transfers among investment options. This information should include: • any forms that are required and where they

must be sent; • whether there are other methods available

for making transfers (for example, on the website provided by a service provider);

• any costs that may be incurred for transferring among options; and,

• any restrictions on the number of transfers among options a member is permitted to make within a given period, including any maximum limit after which a fee would be applied.

The CAP sponsor should provide CAP members with a description of possible situations where transfer options may be suspended. In the event of a suspension, the CAP sponsor should provide CAP members with the reason why transfers will be suspended and details on the restrictions associated with the suspension should be provided before the suspension occurs (where possible).

Examples of situations where the CAP sponsor may temporarily suspend transfers are where: § investment options are being changed by the

CAP sponsor; § a service provider is being changed by the

CAP sponsor; or, § there are changes at the existing service

provider (e.g., introduction of new systems).



4.4 - DESCRIPTION OF FEES, EXPENSES AND PENALTIES The CAP sponsor should provide CAP members with the description and amount of all fees, expenses and penalties relating to the plan that are borne by the members, including: • any costs that must be paid when

investments are bought or sold; • costs associated with accessing or using any

of the investment information, decision-making tools or investment advice provided by the CAP sponsor;

• investment fund management fees; • investment fund

operating expenses; • record keeping fees; • any costs for

transferring among investment options (including penalties, book and market value adjustments, tax consequences);

• account fees; and, • fees for services provided by service

providers.

Where appropriate, these fees, expenses and penalties may be disclosed on an aggregate basis, provided the nature of the fees, expenses and penalties is disclosed. Where fees, expenses and penalties are incurred by members by virtue of member choices (e.g., transfer fees, additional investment information or tools, etc.) such fees, expenses and penalties should not be aggregated.

4.5 - ADDITIONAL INFORMATION The CAP sponsor should provide the CAP members with an outline of how they can access additional information related to the plan and a description of the type of information that is available.

Investment fund operating expenses include audit, legal and custodial fees, cost of financial statements and other reports or filings, taxes, transfer agency fees, pricing and bookkeeping fees.

Section 5: Ongoing Communications May 28, 2004


SECTION 5: ONGOING COMMUNICATION TO MEMBERS The CAP sponsor should regularly provide CAP members with information on their CAP account and the performance of the investment funds available in the plan. The CAP sponsor should also provide access to additional information upon the request of members. 5.1 - MEMBER STATEMENTS The CAP sponsor should provide CAP members with a statement of their CAP account at least annually. Paper copies of the statement should be available to members upon request if another format is standard. The member statement should include: • summary of investments - listing of the

investments by option type (e.g., investment funds, other securities, GICs);

• investment activity - the opening balance, contributions, withdrawals, net change in the value of the investments and closing balance;

• investment funds – name of fund, number of units, value of each unit, total investment value, per cent of total investments;

• summary of transactions; and, • how to get specific information on each

investment option, fees and expenses, transaction details, transfer options, and other information.

If a statement includes the calculation of a personal rate of return for CAP members, the method used to produce the calculation should be described, along with information about where the members can get a more detailed explanation of the calculation (if it is not shown on the statement). A personal rate of return should also be distinguished from any rate of return for an investment option (e.g., investment fund rate of return) disclosed in the statement.

5.2 - ACCESS TO INFORMATION 5.2.1 Other information available to CAP members The CAP sponsor should provide members with access to additional information regarding their CAP account. If not included in the member statement, the following information should be made available to CAP members upon request: • details on investment funds – where to get

fund holdings, financial statements and continuous disclosure information for each investment fund;

• transaction details - investment description: date of transaction, transaction type (e.g., inter-fund transfer), amount, unit value (if applicable), units purchased or withdrawn;

• details on GICs and other fixed term investment options such as term of investment, date of maturity, interest rate, current book value plus accrued interest;

• details on each of the other investment options (see Section 4.2);

• contribution details - option description, percentage of contribution to be allocated to option, type of contribution (member voluntary, member required, employer, transfer in);



• details on fees and expenses (see Section 4.4); and,

• information on transfer options (see Section 4.3).

5.2.2 Report on Significant Changes in Investment Options The CAP sponsor should provide advance notice to CAP members when there are significant changes in investment options. The notice to members should include: • the effective date of the change; • a brief description of the change and the

reasons for the change; • how the change could affect the member’s

holdings in the plan (e.g., if the change affects the level of risk of an investment option, this should be described);

• the manner in which assets will be allocated to new investment options (where applicable);

• details of any penalties or special transaction fees that may apply to the change;

• a summary of the tax consequences that may arise as a result of the change;

• where to get more detailed information about the change;

• details on what the members must do (if action is required) and the consequences of not taking action; and,

• a reminder to the members to evaluate the impact of the change on their current holdings in the plan.

Significant changes in investment options include: § changes to the nature or operation of

existing investment options, including the method of making transfers;

§ adding investment options; § removing or replacing investment options; § changes in fees and expenses (the expected

or actual level of fees and expenses associated with an investment option or ongoing administration and record keeping that are paid by CAP members); or,

§ change in service provider.

5.2.3 Adding an Investment Option If an investment option is added, the CAP sponsor should provide CAP members with the information listed in Section 4.2 and the information about transfer options in Section 4.3. Members should also be informed of the date when the new investment option will be available. 5.2.4 Removing or Replacing an Investment Option If an investment option is removed, the CAP sponsor should provide CAP members with information regarding what must be done with their investments in that option. Information on any deadlines for member action and how assets will be allocated to new investment options in the event that the member takes no action, should also be provided. If an investment option is replaced, information about the impact of liquidating one investment option and re-investing in a replacement investment option should be provided.

Examples of information to be provided include: market value adjustments, early withdrawal penalties, tax consequences, and transaction fees.



5.3 - PERFORMANCE REPORTS FOR INVESTMENT FUNDS The CAP sponsor should provide performance reports for each investment fund to the CAP member at least annually. The performance report for each investment fund should include: • the name of the investment fund for which

performance is being reported; • if there is one, the name and description of

the benchmark for the investment fund (if the benchmark is permitted by law to be composed of several indices, this should be explained);

• if used, corresponding returns for the benchmarks;

• the performance of the fund, including historical performance for one, three, five and 10 years if available;

• whether the investment performance is gross or net of investment management fees and fund expenses;

• identification of the method used to calculate the fund performance return calculation, along with directions on where to find a more detailed explanation; and,

• a statement that past performance of a fund is not necessarily an indication of future performance.

For example, the S&P/TSX Composite Index for a Canadian Equity Fund.

Section 6: Maintaining a CAP May 28, 2004


SECTION 6: MAINTAINING A CAP The CAP sponsor should periodically review all service providers it engages, investment options available in the plan, records maintenance, and decision-making tools provided to members. 6.1 - REVIEWING SERVICE PROVIDERS The CAP sponsor should establish criteria for the periodic review of service providers and use these criteria to review the service providers it engages.

Factors for the CAP sponsor to consider when establishing criteria for the periodic review of service providers include: § the criteria used to select the service

provider; and § the frequency and/or triggering events for the

review.

If a service provider fails to meet the criteria established, the CAP sponsor should decide what action to take.

6.2 - REVIEWING SERVICE PROVIDERS WHO PROVIDE INVESTMENT ADVICE Where applicable, a CAP sponsor should periodically review service providers with whom the CAP sponsor has an arrangement or

to whom the CAP sponsor has referred CAP members to help them make their investment decisions. As with other service providers, the CAP sponsor should establish criteria for the periodic review and use these criteria to conduct the review

Because the primary relationship of a service provider who provides investment advice is with each member, it will not be possible or practical for the CAP sponsor to directly review the quality of the advice being provided. Factors for the CAP sponsor to consider when establishing criteria for the periodic review of service providers include: § criteria used to select the service provider; § any complaints arising from the members;

and, § any complaints arising from the CAP sponsor

or other service providers employed by the CAP sponsor.

6.3 - REVIEWING INVESTMENT OPTIONS The CAP sponsor should establish criteria for the periodic review of each of the investment options in the plan. Review of the investment options should be conducted at least annually.

Factors for the CAP sponsor to consider when establishing criteria for the periodic review of investment options include: § the criteria used to select the investment

options; and § the frequency and/or triggering events for the

review.

If an investment option no longer meets the criteria used for reviewing the option, the CAP sponsor should decide what action to take.

Factors for the CAP sponsor to consider when deciding on what action to take include: § the length of time the criteria have not been

met; § any complaints arising from the members

(where applicable); § the effect that taking such action would have

on the members; and, § the availability of alternative service

providers.

Section 6: Maintaining a CAP May 28, 2004


Factors for the CAP sponsor to consider when deciding on what action to take include: § the length of time the criteria have not been

met; § any other deficiencies in how the investment

option operates; § any complaints arising from the members; § the effect taking such action would have on

the members (e.g., whether there would be tax consequences);

§ remaining investment options available in the CAP; and,

§ the availability of equivalent investment options.

6.4 - REVIEWING MAINTENANCE OF RECORDS The CAP sponsor should periodically review how well the plan’s records are maintained.

If the records are maintained internally, quality may be reviewed by: § reviewing CAP members’ complaints about

the records; and § periodic audit; or, § review by a service provider.

If a service provider maintains the records, quality may be reviewed by: § reviewing the members’ complaints about

the records; and, § periodic audit; or § requiring an annual certification regarding

the appropriateness of the controls, processes and systems employed; or,

§ review by an unrelated service provider.

The CAP sponsor should promptly take any corrective action required as a result of the review.

6.5 - REVIEWING DECISION-MAKING TOOLS The CAP sponsor should periodically review any decision-making tools provided to CAP members or that the members are encouraged to use.

Factors for the CAP sponsor to consider when periodically reviewing decision-making tools include: § the purpose of the plan; § what types of decisions members must

make; § cost of the decision-making tools; § the location, diversity and demographics of

the members; and, § the members’ access to computers and the

internet.

The CAP sponsor should make any changes required in the decision-making tools as a result of the review.

Section 7: Termination May 28, 2004


SECTION 7: TERMINATION 7.1 - TERMINATING A CAP The termination of a CAP should be done in accordance with the terms of the plan and any applicable legal requirements. 7.1.1 Communicating the Termination of a Plan to CAP Members If a capital accumulation plan is terminated, the CAP sponsor should promptly provide information to CAP members regarding: • the options available to each member; • any actions that are required in respect of the

members’ options; • any deadlines for member action; • the manner in which assets will be

liquidated or distributed; • any default options that may apply if no

action is taken; and, • the impact termination of the plan will have

on each investment option.

Examples of the impact of the termination of the plan may include tax consequences, any market value adjustments, early withdrawal penalties or associated fees.

7.2 - TERMINATING A CAP MEMBER’S PARTICIPATION IN THE PLAN The termination of a CAP member’s participation in the CAP should be done in accordance with the terms of the plan and any applicable legislative requirements. 7.2.1 Communicating to CAP Members on Termination of Participation If a CAP member terminates from a plan (e.g., because of termination of employment, retirement or death), the CAP sponsor should provide information about: • the options available to the member; • any actions the member must take; • any deadlines for member action; • any default options that may be applied if no

action is taken; and, • the impact that the termination of plan

membership will have on each investment option

Examples of the impact of the termination of plan membership may include tax consequences, any market value adjustments, early withdrawal penalties or associated fees.

In the event that a CAP member dies and ceases to participate in the plan, this information should be provided to the member’s designated beneficiary or personal representative.

GUIDELINE NO. 6

PENSION PLAN PRUDENT INVESTMENT

PRACTICES GUIDELINE

November 15, 2011

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TABLE OF CONTENTS

CONTEXT FOR THE GUIDELINE ............................................................................................. 3

Prudent Investment Practices ............................................................................................... 3

Self-Assessment Questionnaire ........................................................................................... 4

Role of the Plan Administrator .............................................................................................. 4

Role of the Plan Sponsor ..................................................................................................... 4

Dual Role of the Employer as Plan Administrator and Plan Sponsor .................................... 5

Communication between Plan Administrator and Plan Sponsor ........................................... 5

Communication with Plan Beneficiaries ................................................................................ 5

Prudent Investment Practices Guideline ............................................................................... 6

Prudent Person Rule ............................................................................................................ 7

Prudent Delegation .............................................................................................................. 7

Investment Objectives .......................................................................................................... 8

Risk Tolerances ................................................................................................................... 8

Investment Policy/Statement of Investment Policies & Procedures ...................................... 8

Asset Allocation .................................................................................................................... 9

Investment Selection and Due Diligence .............................................................................. 9

Monitoring ............................................................................................................................ 9

Documenting Processes, Policies and Procedures .............................................................. 9

PENSION PLAN PRUDENT INVESTMENT PRACTICES GUIDELINE

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CONTEXT FOR THE GUIDELINE

This guideline is intended to help plan administrators demonstrate the application of prudence to the investment of pension plan assets.

Prudent Investment Practices

Prudent investment practices require appropriate processes that include due diligence in selecting, reporting and monitoring investments.

The goal of the investment function in the pension context is to generate returns taking into account the plan’s liabilities and cash flow needs to meet short term and long term obligations, as well as the risk tolerances of the affected parties.

The plan administrator is responsible for the investment function. The manner in which assets are invested, and the way the investments are managed and supervised by the plan administrator are crucial to the success of the pension fund and delivery of the pension promise. The investment management function should be undertaken in accordance with the prudential principles of security and cash flow management, using appropriate risk management concepts. The plan administrator needs to achieve a balance between risk and reward considerations.

Each jurisdiction has its own legislation that governs registered pension plans. The legislation sets out the role of the plan administrator and the statutory standard of care that applies to the pension plan and pension fund. The legislation also sets out the role of the plan sponsor regarding the pension plan and pension fund. The legislation includes general and specific requirements for investing the pension plan’s assets prudently, and in accordance with specific limits and restrictions.

The demonstration of the application of prudence in the investment of the pension plan’s

assets is assessed principally by the process through which investment strategies are developed, adopted, implemented and monitored, in relation to the plan portfolio as a whole. Any specific investment should be considered in relation to the whole plan portfolio. For example, high-risk investments may not be imprudent if they are part of an overall investment strategy that is based on prudent risk management. Prudent investment practices take into account the nature of the pension plan’s liabilities, the timing of pension payments, the pension plan’s anticipated future experience, and the demographics of the pension plan beneficiaries (any person with an entitlement under the plan).

While different types of pension plans exist, all plans subject to pension legislation invest assets and should use prudent investment practices. Plan administrators are encouraged to review the guideline to determine how the guideline applies to their specific plan.

Although the emphasis in pension plan asset investment varies depending on the type of plan, the guideline is relevant to all plan types (defined benefit, defined contribution, combinations of defined benefit and defined contribution, jointly sponsored and multi-employer pension plans (MEPPs)).While the structure and design of the different pension plan types vary, the plan administrators have similar responsibilities regarding the investment function.

Defined contribution plans where the plan administrator provides a list of investment choices from which the plan beneficiaries select investments to construct their own individual investment portfolios will have different prudent investment practices criteria than a pension plan where this option is not available.

Plan administrators of defined contribution plans are encouraged to refer to CAPSA Guideline No. 3 for Capital Accumulation Plans, which provides guidance for plan sponsors and members about their duties and obligations for these types of plans, and to refer to any other


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CAPSA publications which deal with defined contribution plans.

Prudent investment practices criteria for MEPPs that are collectively bargained with negotiated fixed contributions will take into account the target benefit levels specified in the plan documents.

Self-Assessment Questionnaire

A self-assessment questionnaire on prudent investment practices accompanies this guideline.

The questionnaire has been designed to help plan administrators review the investment practices of the pension funds for which they have responsibility, to assist the plan administrator in satisfying the requirements of the prudent person rule, and to identify areas of strength and areas for improvement.

Plan administrators may select from the questionnaire those question groupings which apply to the particular circumstances of their pension plans. It should be noted that completion of the questionnaire does not guarantee that the administrator has met all prudent standards and other legislative requirements.

Role of the Plan Administrator

The plan administrator is responsible for the overall administration of the pension plan, which includes managing the pension fund, establishing a written statement of investment policy/Statement of Investment Policies and Procedures (SIP&P), or a Statement of Investment Policy and Goals (SIP&G) and investing the pension fund’s assets in accordance with the investment policy/SIP&P and SIP&G, other pension plan documents and applicable legislation. The plan administrator has a fiduciary responsibility to ensure the pension fund’s assets are invested in a prudent manner and should establish, implement and adhere to policies and procedures that support its responsibilities.

For purposes of this guideline the reference to a SIP&P will include a SIP&G or any other similar document required by legislation.

Role of the Plan Sponsor

The plan sponsor is responsible for determining the design of the pension plan, setting the benefit structure for various classes of members, and establishing, amending or terminating the pension plan. The plan sponsor is also responsible for determining the level and nature of pension benefits. During these activities, the plan sponsor is not held to a fiduciary standard of care in relation to the pension plan and the pension plan beneficiaries.

The type of pension plan impacts on the specific role and responsibilities of the plan sponsor, for example in multi-employer pension plans the plan sponsor obligations may be limited solely to the contributions as set out in the collective agreement and providing information to the administrator as required by the legislation. Benefit levels rather than contribution levels may need to be adjusted when there are funding deficiencies.

While not a requirement under any current pension legislation, it is a good practice in establishing the plan’s governance structure for plan sponsors to consider developing and adopting a funding policy that takes into account the applicable minimum funding requirements. Plan sponsors may find the CAPSA Guideline No. 7 Pension Plan Funding Policy Guideline helpful in developing the funding policy.

When the plan administrator is a different entity from the plan sponsor there needs to be communication and interaction between the plan administrator and plan sponsor regarding their respective risk tolerances, volatility concerns and return expectations because they may impact on both the investment and funding requirements of the pension plan.

Both the plan administrator and the plan sponsor must stay current with developments that may impact on their roles and responsibilities, and


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should seek advice if there is any uncertainty about their respective roles and responsibilities.

Dual Role of the Employer as Plan Administrator and Plan Sponsor

For many pension plans the plan administrator is the employer who is sponsoring the plan. In these situations, the employer is held to a fiduciary standard of care when the employer acts as the plan administrator. The employer also retains certain rights and powers with respect to the pension plan when the employer acts as plan sponsor.

The roles and responsibilities of the plan sponsor are very different from those of the plan administrator. In the plan sponsor role, the employer is entitled to act in its own best interests, but may be subject to an implied duty of good faith.

In the plan administrator role, the employer is responsible for ensuring the pension fund is administered and invested prudently in accordance with the investment policy/Statement of Investment Policies and Procedures (SIP&P), other pension plan documents and applicable legislation. When the employer acts as the plan administrator, the employer is a fiduciary whose actions and decisions must take into account the best interests of the pension plan beneficiaries.

When the employer is both the plan administrator and plan sponsor, it is very important for all individuals involved to have a clear understanding of when they are fulfilling plan administrator responsibilities and when they are carrying out plan sponsor functions.

Communication between Plan Administrator and Plan Sponsor

When the plan administrator and plan sponsor are different entities, or if the functions of the plan administrator and plan sponsor are

delegated to different individuals, committees or service providers, the parties should ensure they communicate with each other in the development of prudent investment practices and, where applicable, in the development of a funding policy.

Communication between the plan administrator and plan sponsor is essential to achieve consistency in investment and funding processes. If changes are made to the investment and funding documents and/or practices, these changes should be communicated to the other party. When there are conflicts or inconsistencies, the plan administrator and plan sponsor are responsible for disclosing and resolving them.

Communication with Plan Beneficiaries

It is a legislative requirement that plan administrators communicate specific prescribed information to pension plan beneficiaries in specific circumstances. Communication is of particular importance when the pension plan beneficiaries have responsibility for making investment decisions, as is the case with some defined contribution pension plans. Ongoing communication with pension plan beneficiaries ensures the beneficiaries are provided with the information and assistance they need to make their investment decisions. Plan beneficiaries should be provided with sufficient details about the pension plan investment options to be able to make informed investment decisions.

CAPSA Guideline No. 3 for Capital Accumulation Plans provides detailed guidance on the type of investment information and decision-making tools plan sponsors should provide to beneficiaries of plans providing defined contribution benefits. The guideline also discusses what information the plan sponsor should provide when an individual becomes eligible to enroll in the plan, and ongoing communication to beneficiaries.


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Plan beneficiaries need to understand their plan benefit, need to be assured the benefit is adequately funded, and need to understand what the risks are related to receiving their entitlements.

Prudent Investment Practices Guideline

The plan administrator has a duty to invest the pension fund’s assets in a prudent manner, while taking into account the particular needs of the pension plan and pension fund. An assessment and analysis of the pension plan’s liabilities should be conducted, and appropriate investment strategies should be developed for the pension fund’s assets. Plan administrators should be guided by the principles of prudence when designing and implementing an investment strategy for the pension fund, recognizing that returns on the portfolio of investments along with plan contributions should be sufficient to provide the pension plan benefits over time.

CAPSA encourages all plan administrators to assess their current pension plan investment practices, to ensure prudent practices are in place. Plan administrators should ensure they have established a robust, process-oriented decision-making framework, within which investment management activities can be conducted. Plan administrators are also encouraged to consider the guideline and its application to their specific plans, as well as the legislative requirements in their particular jurisdiction.


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PRUDENT INVESTMENT PRINCIPLES

Prudent Person Rule

The Prudent Person Rule is a substantive rule of law that is intended to lead to balanced decision making, rather than dictate particular outcomes. It is an objective standard of conduct which references the actions of a prudent person. One statement of the rule is:

A fiduciary is expected to discharge its duties with the care, skill, prudence and diligence a prudent person acting in a like capacity would use.

For registered pension plans, the Prudent Person Rule is modified by legislation that may introduce a higher, more subjective standard. One example is that the administrator shall use the skill and knowledge the administrator possesses or ought to possess by reason of their profession, business or calling.

The Prudent Person Rule focuses on behaviours and processes rather than solely on outcomes. Its application requires individuals with responsibility for managing the assets of the pension fund to do so in a reasonable and professional manner having regard to the best interests of the pension fund and the pension plan beneficiaries.

In the pension investment context, a key element of the Prudent Person Rule is that fiduciaries should exercise due diligence. This includes making decisions based on proper consideration of adequate information, documenting the final decision, documenting the reasons for the decision and documenting the circumstances that were considered.

Since this rule emphasizes processes, it stresses the importance of having a good governance structure, deliberate decision making, appropriate documentation and record keeping.

An important part of this rule is the ability of the plan administrator, regulator, plan beneficiaries and others who may have an interest, to monitor and assess investment management practices. In order for effective monitoring to occur, there must be adequate information available.

Policies must be established and processes must be documented to support the decisions that are made and actions that are taken.

Prudent Delegation

Investment decisions about the pension fund should be made by those individuals or organizations that have the authority, skills, knowledge, expertise, information and resources to effectively make the decisions. The plan administrator should assess the extent to which the administrator has the right internal structures, processes, resources, skills, knowledge and expertise to effectively perform its duties with respect to investing and administering the pension fund.

If the plan administrator determines it does not have the structures, processes, resources, skills, knowledge and expertise in place, it would be prudent for the plan administrator to delegate these tasks. It is important that investment related tasks be properly delegated to parties with sufficient skills, knowledge and expertise, because the required activities for investing and administering the pension fund must be performed according to the standards of the Prudent Person Rule.

If a plan administrator decides to delegate certain tasks to external third party service providers, internal committees or staff, then the written governance documents of the plan should clearly set out the authority to delegate, the requirement of the delegate to report back to the plan administrator and the obligation of the plan administrator to monitor the delegate. Similarly, the delegation itself should clearly set out the terms of delegation, including what functions are being delegated, the delegate’s obligation to report back to the plan administrator and


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whether or not the delegate has authority to subdelegate.

The plan administrator must be prudent when delegating functions, as the plan administrator remains responsible for the delegated activities and should monitor and review the delegated activities to ensure they have been appropriately and prudently carried out. This includes monitoring and reviewing service provider activities based on established policies and performance procedures.

Investment Objectives

The investment objectives need to be well defined so that the risks associated with the objectives are understood, are consistent with the pension plan’s risk tolerances, and steps can be taken to actively manage the risks. The investment objectives should be consistent with the pension plan’s retirement income objective, the liabilities of the plan, the plan’s demographics and the ability of the plan to deal with volatility in investment returns.

The investment objectives should take into consideration relevant legal provisions and investment principles, such as asset allocation, diversification and liquidity, to ensure the investment of the pension plan assets is consistent with the pension plan’s obligations.

Risk Tolerances

The pension plan’s primary risk is not being able to pay pensions. Risk should be managed by taking into consideration the plan’s investment and funding objectives when setting and implementing the investment policy, and evaluating ongoing performance of the fund and effectiveness of the investment policy.

The risks associated with the investments need to be clearly identified to actively manage the risks. Some of the risk factors to be managed include but are not limited to investment risk, interest rate risk, foreign exchange rate risk, credit risk, liquidity risk, market risk, funding

risk, demographic risk, longevity risk and legislative/regulatory risk.

Investment Policy/Statement of Investment Policies & Procedures

The investment policy reflects the investment objectives of the pension plan. The investment policy also sets out investment principles, strategic asset allocation, performance objectives and risk tolerances. It sets out the processes for the regular monitoring and review of the objectives and tolerances, the persons delegated responsibilities for the administration and investment of the assets and the established processes. It should also include a process for selecting and replacing asset managers, as well as ways to monitor and review performance and change asset allocation.

It is a statutory requirement for the plan administrator to establish a written Statement of Investment Policies and Procedures (SIP&P). The SIP&P must include the key elements identified by the applicable legislation. While the SIP&P by itself may be used as the plan’s investment policy document, pension plans may decide to have a broader investment policy including or referencing other documents. The plan administrator is to consider whether a comprehensive investment policy in several documents or the SIP&P on its own best suits the plan’s specific circumstance.

The investment policy, which may include the SIP&P, guides investment decision making and sets out how the plan administrator is to comply with investment principles that:

• identify the kinds of investments that could be held;

• indicate the allocation between different kinds of investments;

• address the nature and extent of risk that is anticipated in the investment portfolio; and

• identify expected return on investments.


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Asset Allocation

Asset allocation refers to the process of apportioning the plan’s total assets among major asset classes or other types of investments.

Asset allocation is a key element in determining long run investment performance and outcomes, and is a significant component of the pension plan’s investment strategy. Asset allocation should reflect the characteristics of the pension plan’s liabilities, demographics and risk tolerances. Decision makers should consider a full range of possible investment opportunities.

For each asset class or type of investment in which the pension fund is invested, decision makers should consider whether active or passive management is more appropriate, given the efficiency, return expectations, liquidity and level of transaction costs in the given market. For active management, consideration should be given to what expertise is required and whether the decision makers possess the necessary expertise.

Investment Selection and Due Diligence When considering particular investments the plan administrator or its delegate should use appropriate methods to research the investments and to review the investment decisions once they have been implemented. Due diligence includes carrying out an independent and thorough investigation to determine the advantages and disadvantages of a particular investment before making an investment decision.

Monitoring

The plan administrator needs to have adequate information to perform its duties, to monitor the risks facing the plan and to map out strategies for managing those risks. To monitor the pension plan and fund for compliance with statutory requirements and policies that have been adopted by the plan administrator, sufficient information

should be provided to appropriate individuals, and an effective reporting and disclosure regime is needed. Appropriate mechanisms should be in place to monitor an activity, transaction or investment. Investment activities should also be monitored to ensure policies are being followed. The plan administrator should:

• review investment objectives and risk tolerances

• ensure that adequate investment procedures are in place

• review key decisions regarding pension investments

• ensure that service providers are monitored, measured, and evaluated

• review the investment performance of the pension fund.

Documenting Processes, Policies and Procedures

The governance documents of the pension plan and pension fund need clear information on the roles and responsibilities of the plan administrator and plan sponsor, delegated authority, decision making and approval processes, and the rights of pension plan beneficiaries and their obligations.

The plan administrator should set up a process for documenting decisions and activities, and have documented processes, policies and procedures to help demonstrate that the Prudent Person Rule has been applied and plan administrator obligations have been fulfilled. Any time a key decision is made, it should be well documented, and include the reasons and circumstances that were considered.

This guideline identifies prudent investment practices and prudent investment principles. The Self-Assessment Questionnaire on Prudent Investment Practices provides more detail regarding topics the plan administrator should consider when establishing and reviewing the investment practices in place for its pension plan.

GUIDELINE NO. 7

PENSION PLAN FUNDING POLICY GUIDELINE

November 15, 2011

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TABLE OF CONTENTS

CONTEXT FOR THE GUIDELINE ............................................................................................. 3

Pension Plan Funding Principles and Objectives ..................................................................... 3

Purpose of a Funding Policy .................................................................................................... 3

Role of the Plan Sponsor ......................................................................................................... 4

Role of the Plan Administrator ................................................................................................. 4

Dual Role of the Employer as Plan Sponsor and Plan Administrator ........................................ 4

Developing a Funding Policy .................................................................................................... 4

Elements of a Funding Policy ................................................................................................... 5

Special Considerations for Multi Employer Pension Plans (MEPPs) ........................................ 7


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CONTEXT FOR THE GUIDELINE This guideline is intended to provide guidance on the development and adoption of funding policies for pension plans that provide defined benefits.

As the development of a funding policy involves a wide range of issues, CAPSA recognizes that some of the considerations described in this Guideline may not apply to all pension plans.

Pension Plan Funding Principles and Objectives Funding requirements promote benefit security. The goal of funding defined benefit pension plans is to ensure that sufficient assets will be accumulated to deliver the promised benefits on an ongoing basis; and to protect pension benefits in situations that involve employer insolvency or bankruptcy. Due to the emphasis on solvency funding under minimum funding requirements and the fact that the performance of plan assets may not be matched with the change in plan liabilities, funding rules can result in large annual fluctuations in funding requirements.

Funding decisions have a significant impact on pension plan sponsors and beneficiaries. These decisions impact the pace of funding, the security of members’ benefits, and the ongoing viability of the plan itself. Therefore, they should not be made on an ad hoc basis. Practical financing considerations, including capital market movements, and other laws and rules that affect pension plans and plan sponsors, may also affect or impose constraints on funding decisions.

Plan sponsors generally seek year-to-year funding requirements that are as predictable as possible, given the variability resulting from investment experience, interest rate changes and other factors.

Purpose of a Funding Policy The purpose of a funding policy is to establish a framework for funding a defined benefit pension plan taking into account factors that are relevant to the plan and the sponsor. These factors could include:

• benefit security

• stability and/or affordability of contributions

• the financial position of the sponsor and competing organizational demands for cash

• the demographic characteristics of the plan’s beneficiaries (any person with an entitlement under the plan)

• the minimum funding requirements under applicable pension legislation

• the financial position of the pension plan

• the terms of the plan documents and any related agreement, such as a collective bargaining agreement, between the plan sponsor and plan beneficiaries

• Income Tax Act maximum limits applicable to pension plans

• legislative and plan provisions with respect to utilization of funding excess


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A funding policy should support the decision making process and be consistent with the purpose and goals of the pension plan.

Role of the Plan Sponsor While not a requirement under any current pension legislation, it is a good practice and good governance to develop and adopt a funding policy. In the course of activities related to the establishment of a funding policy, the plan sponsor is not held to a fiduciary standard of care.

Role of the Plan Administrator The plan administrator has certain responsibilities once the funding policy is adopted by the plan sponsor, such as ensuring that the investment policy is consistent with the funding policy and the required contributions are made. The responsibilities for the implementation of the funding policy should be understood by both plan sponsor and plan administrator. The role of the plan administrator should be documented in the funding policy.

Dual Role of the Employer as Plan Sponsor and Plan Administrator For many pension plans the plan administrator is the employer who is sponsoring the plan. In these situations the employer is held to a fiduciary standard of care when acting as the plan administrator. The employer also retains certain rights and powers in respect to the

pension plan, since it is both the sponsor and plan administrator. The roles and responsibilities of the plan sponsor are very different from those of the plan administrator. In the plan sponsor role the employer is entitled to act in its own best interests but it may be subject to an implied duty of good faith.

In the plan administrator role, the employer must also ensure the pension plan and pension fund are administered prudently in accordance with applicable legislation and pension plan documents. As plan administrator the employer is a fiduciary whose actions and decisions must be made in the best interests of the plan’s beneficiaries in an even-handed manner.

Developing a Funding Policy There are a number of advantages in developing a funding policy:

• The exercise of developing a funding policy improves the identification, understanding and management of the risk factors that affect the variability of funding requirements and the security of benefits. Undertaking this exercise should lead to more robust governance.

• The adoption of a funding policy could increase the plan sponsor’s discipline around funding decisions. This could contribute to more predictability in funding.

• Having a written summary of the funding policy that is accessible to plan beneficiaries should help to improve the transparency of funding decisions and increase the beneficiaries’ understanding of pension funding issues.


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• Having a funding policy may also provide guidance to the plan’s actuary when selecting actuarial methods and assumptions in accordance with actuarial standards of practice and within the plan’s risk tolerance limits.

The investment policy details the plan administrator’s objectives and expectations relating to the investment and management of the plan’s assets. The funding policy documents the plan sponsor’s funding objectives and methods for achieving them.

It is important to ensure that the two documents are consistent with each other, and changes may be required to either the investment policy or the funding policy to achieve this consistency. Where there are conflicts or inconsistencies, the plan administrator and the plan sponsor are responsible for disclosing and resolving them.

Plan administrators may find the CAPSA Guideline No. 6 Pension Plan Prudent Investment Practices Guideline helpful in developing the investment policy.

The party responsible for the adoption and maintenance of the funding policy may vary according to the circumstances of the plan. For most single employer pension plans, the employer is responsible for making funding decisions and should therefore be responsible for the development of the funding policy.

The plan actuary may provide valuable input in the development of a funding policy.

Elements of a Funding Policy When plan sponsors document their funding objectives, they should outline their understanding of the risk factors that influence future financing obligations, their risk tolerance,

and specific policies related to matters that affect the funding of the pension plan. The following elements constitute what CAPSA believes is best practice for issues that should be considered in establishing a funding policy. Ideally, a written funding policy would address the following issues as they relate to the plan.

Other issues may also be relevant, depending on the specifics of the plan. To the extent that some of these elements may be addressed in the investment policy, it would be reasonable to avoid duplication and refer to the investment policy as needed.

It is also understood that these issues do not apply equally to all pension plans and that the funding policy should fit the particular circumstances of the plan.

1. Plan Overview

The funding policy should include an overview of the features of the plan, related financial information and characteristics of the plan sponsor that are relevant to the establishment of the funding policy.

2. Funding Objectives

The funding policy should indicate how the funding objectives integrate with the plan’s investment policy, as well as the plan sponsor or plan objectives. These objectives can be stated as they relate, for instance, to benefit security, stability of contributions, and to contribution or benefit levels. The policy could also document circumstances in which funding in excess of the legislated minimum would be considered.

3. Key Risks Faced by the Plan

The funding policy should describe the key risks that are faced by the plan from the


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perspectives of various stakeholders. These risks can include the extent to which the plan’s assets are mismatched against its liabilities and the demographic characteristics of the plan beneficiaries. Due consideration should be given to how these risks may affect the security of beneficiaries’ benefits.

4. Funding Volatility Factors and Management of Risk

The funding policy should document the structure of the plan’s liabilities as it affects funding risk. It should describe the plan’s tolerance for volatility in funding requirements. The policy should also take into account the characteristics of the plan’s liabilities and the link of the plan’s liabilities to the performance of the plan assets. The policy could include any scenario testing practices that are used as a tool to evaluate the effect of different hypothetical situations on the plan’s funding position and requirements. Details on scenario testing practices could include the frequency, the timeline for projections and the specific risks that are being evaluated.

5. Funding Target Ranges

The funding policy should describe any funding targets, contribution target levels and established cost sharing arrangements (if they are relevant to the plan’s structure). Funding targets can be expressed in relation to liabilities for a going concern, solvency, wind-up, or some other measure, depending on the plan’s funding objectives. The funding policy can also describe any mechanisms that would allow flexibility in funding and accommodate potential short term operational requirements.

6. Cost Sharing Mechanisms

If relevant, the funding policy could include considerations for cost sharing mechanisms between plan beneficiaries and the employer. This could include establishing total target contribution levels and determining the extent to which costs will be shared between both parties.

7. Utilization of Funding Excess

While utilization of funding excess is subject to the terms of applicable plan documents and legislative requirements, the funding policy should describe the plan sponsor’s policy on using funding excess for an ongoing entity, and if appropriate, could cover its use in the event of plan termination.

If funding excess can be used for contribution holidays or benefit improvements, the policy should establish the factors that may be considered in deciding how and when to use the funding excess. This includes any desired margins that the plan sponsor wishes to keep before using the funding excess.

8. Actuarial Methods, Assumptions and Reporting

The plan sponsor can provide useful guidance to the plan actuary in selecting actuarial methods and assumptions that are appropriate for the plan sponsor’s risk management approach. This guidance can include the going concern actuarial cost method, desired margins or provision for adverse deviations and acceptable asset valuation methods and ranges. The plan administrator would provide information on data, investments, historical experience, etc. to assist the actuary in developing these assumptions. This combined input would


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normally be reflected in the actuary’s selection of methods and assumptions – in particular, the margins for adverse deviations – provided they do not lead to assumptions that deviate from accepted actuarial practice.

The actuary’s report would normally outline the range of contributions that are permitted. This includes the minimum contributions that are required under applicable pension standards legislation and the maximum contributions that are permitted under tax statutes. As a result, the plan sponsor would need to make additional decisions on funding that could be guided by the plan’s funding policy.

9. Frequency of Valuations

The plan sponsor may establish standards for the frequency of valuations, subject to any legislative requirements. These are useful for internal monitoring purposes and for the production of reports that are filed with regulators.

10. Monitoring

Management and implementation issues around the establishment and ongoing maintenance of the funding policy should be documented, including the circumstances or events that should trigger a review or amendment of the policy. This includes documenting the roles, responsibilities and oversight of the funding policy, as well as the frequency of review.

11. Communication Policy

Sharing funding information is strongly encouraged. The plan sponsor or plan administrator should consider what, to whom and when information would be

available. A summary of the plan’s funding policy that is accessible to plan beneficiaries can help them understand a number of factors affecting their pension plans. These can include factors that affect the security of beneficiaries’ benefits and the variability of funding costs, as well as the risks that are faced by both their pension plan and others. In addition, it can help plan beneficiaries appreciate the funding decisions that are made by their plan sponsor or plan administrator. In communicating information on the funding policy to plan beneficiaries, it is understood that the plan sponsor will not communicate information that is counter to its commercial interests.

Special Considerations for Multi Employer Pension Plans (MEPPs) Different funding considerations may apply to single employer pension plans, than to other types of pension plans such as multi employer pension plans (MEPPs). Some of these considerations may also apply to some extent to other types of pension plans that exhibit similar characteristics. For MEPPs, benefit levels rather than contribution levels, will typically need to be adjusted to reflect the funding level of the plan. Although contribution levels are fixed, volatility in the plan’s financial position can translate into fluctuating benefit levels. In the case of a MEPP, the plan administrator would typically be responsible for the adoption of the funding policy. However, there may be situations where responsibilities are shared between different plan stakeholders, and the funding policy might be covered by more than


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one document. In either case, the funding policy should clearly define the roles the plan sponsor and plan administrator have in its establishment and implementation. In the discussion of other elements of the funding policy for a MEPP any role that is assumed by the plan sponsor would be assumed by the plan administrator. However, the development of the funding policy for a MEPP would recognize that the administrator does not control the level of contributions made to the plan.

Although each of the elements listed in the previous section applies to all defined benefit pension plans, special considerations apply to MEPPs. The funding policy for a MEPP should describe the approach followed to set benefit levels and issues relating to the use of fixed contributions. These issues could include how the plan’s financial position affects benefit levels and in what manner benefit levels may be adjusted. These plans should also document the respective decision making roles of trustees, employers and collective bargaining agents (as applicable). The issues of how to apply an even-handed treatment of beneficiaries, both the current and future generations, in different circumstances and the policy on benefit reductions or restructuring (when applicable), should also be discussed.

It is recognized that decisions on benefit levels would take into account the circumstances of the plan at the time the decision is made; however, the funding policy can establish the long-term policies of the administrator on these matters.

guideline no. 3 may 2004 -...

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