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Sound Pension Plan Administration
Pension plans are administered by pension committees. In pension plans with fewer than 51 members or beneficiaries, the employer may replace the pension committee if provided for in the plan text.
For many members, their pension plan will be their main source of income after retirement. Therefore, it is important that pension committees administer the plans effectively in order to protect the rights of those members and beneficiaries.
Several situations can adversely impact the sound administration of a pension plan and, in some cases, expose pension committee members to personal liability. Here are some examples:
- The members of the pension committee meet only once a year, before the annual meeting.
- The committee has assigned duties to certain people, but does not carry out a follow-up.
- The internal control measures are insufficient to ensure that contributions are paid monthly into the pension fund.
- Only one member of the committee makes decisions and monitors the administration of the plan.
- Certain members of the committee favour the interest of a specific group over the interest of all of the plan members and beneficiaries.
- Certain members lack the information and training they need to carry out their duties.
Pension plan administration must be organized in such a way as to allow the pension committee to carry out its duties in a competent and prudent manner. That is why it is necessary to establish rules for the sound administration of pension plans. Every member of the pension committee must be familiar with and apply these rules.
This part of the collection addresses sound pension plan administration and the basic principles underlying it. It sets out 11 steps to help you establish sound administration processes.
A
self-assessment questionnaire will help you determine whether you are administering your pension plan soundly.
The principles and steps in this part are the basis for the sound administration of a pension plan. The mechanisms that need to be developed to follow these principles and steps, however, will vary depending on the specific characteristics of each plan. Get to know these principles and steps so that you can establish rules adapted to your pension plan.
A list of the relevant sections of theSupplemental Pension Plans Actand the
Regulation respecting the exemption of certain categories of pension plans from the application of provisions of the Supplemental Pension Plans Act is provided in the
References section.
What does the sound administration of a pension plan entail?
The sound administration of a pension plan depends on the implementation of internal control mechanisms and processes ensuring that the pension fund is properly managed and that day-to-day administrative operations are monitored. These processes enable the pension committee to follow the principles and steps involved in the sound administration of a pension plan.
These processes are applied by the pension committee and other collaborators in the plan's administration (employer, financial institutions, expert advisers and other service providers). These collaborators perform several financial and administrative tasks for the pension committee.
The sound administration of a plan reflects the pension committee's
ethical values. It enables the committee to act appropriately in different situations. The motivation and involvement of pension committee members are integral to the sound administration of the plan and foster collaboration and communication.
Advantages of the sound administration of a pension plan
There are a number of advantages to the sound administration of a pension plan. Among other things, it makes it easier to:
- make decisions
- properly supervise the plan's administration
- better control risks
- share responsibilities among the various parties
- ensure accountability
- evaluate the performance of service providers
It also helps prevent:
- investments that are not in conformity with the investment policy
- contradictions between the plan and administrative practices
- noncompliance with theSupplemental Pension Plans Actor other legislation
- a lack of information and training among pension committee members
- charging inappropriate expenditures to the plan
- fraud
- conflict of interest
- a lack of information among members and beneficiaries.
In short, the sound administration of pension plans helps reduce the risk of error and increases the level of confidence of members, beneficiaries and the pension plan sponsor.
Basic principles of the sound administration of a pension plan
Administering a pension plan is like managing a company. Like anyone who manages assets that belong to someone else, the pension committee must act in a competent and prudent manner. To do so, it should respect the
6 sound management fundamental principles established by the Ordre des administrateurs agréés du Québec :
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Transparency presents reality in its entirety, without alteration or bias. Since the pension committee exercises power on behalf of others, it must account for its actions. Transparency is reflected in constant and open communication between the collaborators in the pension plan and the various others involved.
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Continuity allows for the uninterrupted administration of the plan. The committee must take measures to retain pension plan documents (for example, rules must be established concerning the transfer of pension plan data when there is a change of actuary or plan manager), prepare the next generation for changes in the committee's membership and ensure the plan's financial security in the short and long term.
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Efficiency combines the achievement of results with minimal use of resources. It is reflected in a systematic effort to minimize the use of financial, material and human resources without adversely impacting the collaborators in the pension plan. Moreover, administration costs must be proportional to the size of the pension plan.
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Balance refers to the equal proportion of opposite forces and ideas. The harmony resulting from this balance contributes to the sound administration of the pension plan. The pension committee must demonstrate its balance, in exercising its powers, through the unbiased choice of the means made available to it to achieve its objectives. In other words, to act cautiously, the committee must consider possible risks. It does not have to systematically rely on expert opinion to take low-risk actions.
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Integrity (abnegation) is the quality of pension committee members who forgo any personal advantage or interest other than that which has been contractually granted to them in the performance of their duties. Pension committee members may not place themselves in a situation of potential or real conflict between their own interests and those of members and beneficiaries.
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Fairness implies the fair and equal treatment of every member, beneficiary and key administrative player.
The pension committee must be guided by these principles, regardless of the type of pension plan (defined benefit or defined contribution), its size or its administrative structure. Only the processes and tools differ depending on the characteristics of each plan. For example, small plans rarely have an investment subcommittee.
11 steps to the sound administration of a pension plan
We suggest 11 steps to help your pension committee establish administrative processes that favour transparency, continuity, efficiency, balance, integrity and fairness.
You can also consult
Canadian Association of Pension Supervisory Authority (CAPSA) Guideline no. 4, Pension Plan Governance.
1. Understanding your role and responsibilities
As soon as a new member is appointed, the pension committee provides this person with information about:
- the role and responsibilities of the pension committee and its members
- the terms of the pension plan and its administration
- administrative objectives and issues
- the available training
In addition, it is important that committee members have access to all documents relating to the pension plan (see question 2 of the
self-assessment questionnaire) and that they understand their content. However, they cannot consult any personal information in these documents unless they need such information to carry out their duties.
An employer acting as pension plan administrator has the same obligations as a pension committee. The employer must also be familiar with his or her duties and how they should be carried out.
2. Establishing ethical rules
The pension committee and each of its members must act in the interest of all members and beneficiaries. To this end, the committee should adopt a code of conduct in order to ensure, among other things, its members' honesty, loyalty and integrity.
This will ensure that pension committee members:
- avoid acting in their own interest or in the interest of a specific group
- are aware if they are allowed to accept gifts and other advantages and under what circumstances, etc.
Example 1
A committee member appointed by active members makes decisions in the interest of these members, and a member appointed by the employer makes decisions that benefit the employer.
Committee members should consider the interests of all members and beneficiaries.
3. Making a distinction between day-to-day administrative operations and management duties
The pension committee's role is similar to that of the board of directors of a company. The committee makes strategic decisions, controls risks and oversees management.
In order to carry out its role with objectivity and transparency, it may delegate the supervision of day-to-day administrative operations to a third party, such as a representative of the employer, an external adviser or a financial institution.
4. Entrusting tasks to competent resources
Administrating a pension plan is a complex process. Pension committee members may not have the expertise required to carry out certain financial or administrative tasks. In such a case, the committee could seek out the services of experts in these areas to carry out these tasks. It may entrust these tasks via a mandate, the delegation of powers or a service contract. The difference between these types of contracts is addressed in section
Choose the type of contract of the part of this collection entitled
Role and Responsibilities of the Pension Committee.
The committee must make sure to entrust these tasks to experts. To do so, it could issue a call for tenders specifying selection criteria. For example, it could make sure that these people are members in good standing of their professional order and that no complaints have been filed against them.
5. Specifying the roles and responsibilities of different collaborators
When the pension committee entrusts tasks, it must specify their nature so that all collaborators are aware of their responsibilities. As a result, if some collaborators play more than one role, they will be able to distinguish the limits of each.
Often, day-to-day administrative operations are assigned to a representative of the employer who serves on the pension committee. This person therefore plays two roles. It may be difficult for him or her to determine which role takes precedence in a given situation, and he or she may overstep the assigned mandate.
In the case of a plan with fewer than 51 members and beneficiaries administered by the employer as provided for in the plan text, clear lines should also be drawn between the roles of plan administrator and employer. When the employer awards a contract for the pension plan, he or she must sign it in his or her capacity as the pension plan administrator and not as the employer.
6. Establishing oversight mechanisms
The pension committee is ultimately responsible for the administration of the pension plan. When it entrusts functions to other collaborators, it must establish mechanisms to ensure that the work is done properly and that the collaborators carry out their duties effectively.
Among other things, these mechanisms allow the committee to monitor:
Monitoring the plan can take different forms. The pension committee must establish the nature and frequency of the information and reports it receives. For example, the committee could require that the person responsible for registering eligible employees in the plan prove, within a given time frame, that he or she has fulfilled his or her duties.
Failure to establish adequate monitoring rules could expose pension committee members to personal liability.
7. Evaluating the performance of service providers
The committee must regularly evaluate the performance of its advisers and financial and administrative collaborators. When it does not have the necessary expertise, it should call on experts.
Performance evaluations must be based on measurable and reasonable criteria and impartial assessments. For example, the committee could require that a statement of cessation be provided within 30 days following the date it is notified of the end of a member's active membership, even if the
Supplemental Pensions Plans Act stipulates that such statements are to be provided within 60 days. Failure to meet the deadline could indicate a shortcoming.
Example 2
A pension committee has been working with the same actuary and the same auditor since the plan was introduced. It has automatically renewed the contracts for over ten years.
Regardless of whether there have been any difficulties, the committee must periodically evaluate the actuary's and the auditor's work, including their performance, the quality of their services and the competitiveness of their rates.
8. Requiring quality information and encouraging knowledge acquisition
The pension committee members and collaborators must have access to quality, up-to-date and accurate information. Among other things, they must have the latest version of the plan text.
In addition, the pension committee members must understand the information they are given. Trusting is not enough. Too often, a pension committee will be content with vague answers such as: "I've always done it that way. Don't worry about it."
The committee must be capable of identifying problems, making the right decisions and adequately overseeing the administration of the plan. For this reason, it must provide its members with training.
9. Controling risks
There must be mechanisms in place to allow the committee to rapidly identify risks, evaluate their scope and react appropriately.
Example 3
| Risk | Possible pension committee control mechanism |
|---|
| Contributions are not paid into the pension fund. | Require a monthly confirmation from the employer AND the financial institution certifying that the contributions were paid. |
| Employees were not registered at the appropriate time and the situation must be corrected retroactively. | Obtain information about the eligible employees from the employer. Make sure that membership conditions are respected in accordance with the plan text and the
Supplemental Pension Plans Act so that the employees' rights are not infringed. |
| Contributions are incorrectly calculated. | Ask the employer to confirm that all of the data required for the calculation of contributions based on the definition of salary and the contribution rates set out in the text of the plan have been taken into account. |
| Statements are not sent to members and beneficiaries. | Make sure that statements are sent out (follow up with service provider). |
| The investment policy is ill adapted to the characteristics of the plan. | Make sure that the investment policy evolves with the characteristics of the plan (maturity, division, plan closed to new members, etc.). |
| A pension is still being paid to a deceased annuitant. | Ask annuitants to periodically complete a declaration to avoid suspension and continue receiving their pension. |
10. Fostering communication and pension committee accountability
Transparency is predicated mainly on communication among the various collaborators, members and beneficiaries.
The pension committee must establish policies to inform members and beneficiaries of the plan's administration, their rights and obligations and any significant events. It should also specify the procedure for members or beneficiaries who would like to make a request or file a complaint.
Communication is important because it allows the pension committee to report on the plan's administration on a regular basis between annual meetings. This increases the confidence level and interest of members and beneficiaries in their pension plan. For example, in certain plans, members are regularly notified on the intranet site of the terms of the plan and its administration, the variations in the pension fund's returns, the arrival of a new committee member, etc.
It is also important to foster communication between the pension committee, the sponsor (in general the employer and, in some plans, the union) and the other collaborators in the plan's administration, since these people work together and collaborate actively in the achievement of the plan's objectives.
11. Evaluating your sound pension plan administration rules
The pension committee should regularly evaluate the effectiveness of the administration mechanisms and processes in place in order to make the necessary changes, and should notify members, beneficiaries and the employer of these changes.
You now have all the keys to sound pension plan administration. To assess the sound administrtion rules in place for your plan, complete the
self-assessment questionnaire. Certain information could help you implement rules adapted to your needs.
References1
Legal references
Sections of the
Supplemental Pension Plans Act and the
Regulation respecting the exemption of certain categories of pension plans from the application of provisions of the Supplemental Pension Plans Act (Regulation respecting categories)
| Topics |
Supplemental Pension Plans Act |
Regulation respecting categories |
|---|
| Access to documents and information about the plan's administration | 151.3 | |
| Plan administrator | 147, 149, 266 | 1 to 5 |
| Delegations | 152 to 155 | |
| Service providers | 154.1 to 154.4 | |
| Obligations of the pension committee | 151, 151.1, 158, 159 | |
| Internal by-laws establishing rules of operation and governance | 151.2 | |
| Pension committee responsibilities | 156, 180 | |
| Role of the pension committee's trustee | 150 | |
Other references