From the article:

‘Kuruliak notes that plan sponsors are looking at managers and pushing fee issues to make sure their interests are aligned, and they’re getting what they pay for. “Certainly, the awareness and understanding of fees has gone way up, and people want to understand what they’re being charged—to know they are getting value for that.”’

Effective January 1, 2012, new regulations relating to the division of pension assets on the breakdown of a marriage will come into effect in Ontario. Please see this recent Pension Update from Proteus for more information.

Other Benefit Canada Expert Panel articles written by Ryan are a archived here.

Check back often for more articles in this series along with other topics of interest to institutional investors and pension plans.

His discussion covered the future of DB plans in Canada from a governance perspective. His discussion was covered in Benefits Canada.

For DC plans, risk management starts with defining the responsibilities and reporting requirements for the various stakeholder levels. Typically, these levels include the board who hold ultimate responsibility for the program; the pension committee who are delegated with operational oversight responsibility; and, of course, plan members who are the beneficiary of the plan.

Further Defined

Responsibilities are further defined for sub-advised or delegated functions such as record-keepers, consultants, custodians, and investment managers. In short, define the levels of responsibility and the expectations for those within the board, operational, or plan membership role – keep in mind that ultimate responsibility falls on the highest level of stakeholder.

The next process, after identifying the requirements for various stakeholder levels, is delegation of responsibilities in managing risks associated with the plan. This includes having documentation and a structured process for monitoring items such as investments, suppliers, communications, funding, and compliance. While many organizations have the best intentions at heart for oversight, a lack of documented structure can undermine the best efforts of those charged with plan responsibilities. Develop, monitor, and follow the governance documents for your program – these documents are not static and should be updated at least annually. This ritual forms the process for annual oversight and documentation of this internal oversight process and is what forms the governance history for the plan.

The documents that are used by all levels of stakeholders must be relevant, understandable, and provide direction. Plan member communication that does not appropriately describe the actions required by employees to join a plan, select an investment mix, or elect a contribution level is not altogether uncommon. Review of employee communication for new members and communication for those who have been in the plan for years is an important process which should be conducted regularly to manage the risks of not just what you say, but how you say it.

Helpful Document

The same document requirement elements of relevance, understandability, and direction hold true for pension committee documents such as the investment policy. It is likely that the investment policy is not written by the user, but it most definitely should be a helpful document in the conduct of investment oversight by the pension committee member. There is no question that not having a document poses a risk – having one that is not followed or reviewed periodically to see if it is still applicable is clearly a larger risk. Plan sponsors that do not have extensive resources dedicated to pension oversight structure and document needs would be well advised to find a consultant to assist in a holistic overview of the process and elements in place and items that require attention.

The three levels of stakeholders noted above (board, pension committee, and plan members) require feedback on delegated responsibilities. For the board, this can be in the form of a report summarizing the plan and its funding for the current and coming year as well as material changes for suppliers, legislation which could impact the pension plan, and confirmation compliance and governance documents have been followed and reviewed. For plan members, there should be an annual statement to members outlining the activities of the pension committee. This flow through of communication helps in the transparency needs of good governance and provides better value for the activities conducted. As pension committees are looking after the interests of plan members, it is indeed logical to report on these activities.

Sound Governance

So, are there risks associated with sponsoring a DC plan? Absolutely, but one could argue that almost all of these risks can be managed through a sound governance structure. Some outcomes are not absolutely in control of the plan sponsor. For example, there is no requirement or expectation for a DC plan sponsor with a voluntary plan to ensure all employees join the plan – the expectation is that all employees have received the appropriate communication regarding the ability and benefits of joining the plan. Likewise, a volatile and protracted period of market volatility and declining asset values cannot be controlled by the plan sponsor – there is an expectation that members have received adequate resources to manage their accounts despite market volatility. The most significant risks for plan sponsors generally stem from lack of oversight or poor documentation of the oversight process.

Clearly, organizations that sponsor a pension program feel the risks of not sponsoring a pension plan (for example, the inability to attract and retain valuable employees) are likely greater than the risks above if managed correctly.  I agree with this completely.

Jeff Gray is a vice-president at Proteus Performance Management Inc.

Organizations can best benefit from selecting a governance consultant that can work with them to build, manage, and regularly review their pension governance framework. This results in an overall framework that is facilitated by an expert in the various areas of required fiduciary responsibility. Periodic and fragmented use of professional support is generally less effective in terms of results and for the time required by pension committee members who are charged with responsibility for core operation activities. In short, plan sponsors should find a pension governance partner and work with them on a regular basis for all areas of plan governance to achieve the best results. We are strong proponents of this “governance partner” approach – 100% of our business is related to pension governance and investment consulting support and over 90% of our business is for “governance partner” relationships.

Another tip to effectively manage the governance process is managing plan governance documents and governance activity information.  Pension committees often have an information oracle – while having someone who manages the plan documents and history of governance activities seems logical it does have shortfalls.  Plan information is not always readily available to other committee members in this format and the plan documentation is not always stored in a logical format to serve for historical reference. To address the need to store and provide information access to multi-member / multi-location committees – Proteus builds a custom portal for client programs. We have had unanimous agreement from our clients that this is an improvement for information availability to committee members – it is indeed a wonder why this is not universally used by all plan sponsors

Jeff Gray, Vice President

Proteus Performance Management Inc.

•Immediate vesting upon joining plan
•Elimination of partial plan windups
•Increase in small benefit unlocking amount
•Advance notice of plan amendments required, to all plan members, former members, retired members and trade unions before amendments are registered
•Provision of ‘other’ statements in addition to annual statement to members
•Expansion of required disclosure to include retired members and spouses
•Option to transfer information electronically, with individual’s consent
•Requirement of administrator to assist plan members establishing advisory committees
•Elimination of certain administrator plan registration documents
•Establishment of requirements for reciprocal transfer agreements

Some of the proposed changes could have a significant financial and operational impact on Plan Sponsors, especially immediate vesting and added communication requirements to non-active members.

The current reading of Bill 236 does not differentiate between defined benefit and defined contribution pension plans, therefore, we assume both plan types will be affected.

Premier McGuinty has announced that he will prorogue the Ontario legislature commencing March 4, 2010 with the legislature resuming on March 8, 2010. According to the Premier “we will preserver every one of our bills. Nothing will be lost.”

Proteus is reviewing the proposed changes and will provide further comment as the Bill progresses through the legislative process.

Here is a link to additional information on Ontario’s Proposed Pension Reforms.