NEW Amendments to the Pension Benefits Act

The New Rules

On November 27, 2014, new amendments to the Pension Benefits Act (Ontario) came into force, relating to Statements of Investment Policies and Procedures (SIPPs). One of the most significant changes proposed in this amendment was the requirement to disclose in a plan’s SIPP if environmental, social, and governance (ESG) factors are incorporated into the investment process, and if so, how. The deadline to file a SIPP with reference to the plan’s stance on ESG factors will be within the first 60 days of 2016. Further, the regulations now require that member statements outline that the administrator of the plan must establish a SIPP (even though this has been a requirement for many years), and that the SIPP must contain information on whether ESG factors are incorporated into the investment policy. The member statement must also note that the SIPP must be made available for inspection by any member upon request. The Regulator (FSCO) will provide member access which can complement availability directly from the Administrator. The first member statement with these changes enacted must be distributed by July 1, 2017 for plan year 2016.

Why have these changes been proposed?

ESG issues in investing have been brought to the forefront by some past conflict with trustees’ fiduciary duty to maximize returns for pension plan beneficiaries. It is logical and typical to include quantitative financial criteria when making investment decisions. However, qualitative ESG factors can also play a role. There is research to support the notion that companies that focus on good governance and long-term sustainability outperform their peers with less business risk. As such, plan administrators/trustees can reasonably defend a policy to select investment managers based on that manager’s inclusion of ESG considerations in their security selection process. This amendment is intended to make plan members aware if their savings are being invested with ESG factors explicitly in mind.

Implications for plan administrators

This disclosure rule stems from a 2008 Report by the Ontario Expert Commission on Pensions. The Report states that it “remains somewhat uncertain precisely how, in practical and legal terms, the decision of trustees and administrators to pursue socially responsible investing (SRI) can be reconciled with their duty to maximize the plan’s investment returns for the benefit of its active and retired members. However, there is a growing global consensus that trustees must at least have a considered and informed discussion on the issue.” In other words, does a plan have to make use of ESG considerations? No – but the SIPP does have to disclose the plan administrator/trustees’ stance on ESG factors and be able to defend their position. If a plan does take an explicit ESG inclusive approach then trustees will have to monitor that their investment manager is following this, though there would be no expectation to get independent verification of compliance.

The important distinction is that the disclosure requirement focuses on how the administrator incorporates ESG factors into the plan’s investment policies and procedures. Since most Defined Contribution (DC) plans invest in pooled funds offered through an insurance company’s investment platform, the plan administrator has no say in the individual investment selection process. Likewise, Defined Benefit (DB) plans often invest in pooled funds offered by investment managers. Therefore, even if the administrator does not explicitly incorporate ESG considerations in hiring investment managers, investments may still be selected with ESG factors considered. For this reason, it is anticipated that many SIPPs will disclose that ESG factors are not explicitly considered as a requirement by the administrator.

To sum up, the three action items for plan administrators going forward is as follows:

1. Discuss ESG concepts. Decide if ESG factors should be incorporated into the investment selection process and if so, how. This discussion should be documented in the meeting minutes.

2. Amend the plan’s SIPP to include a statement on if and how ESG factors will be incorporated as per the outcome of step 1.

3. In the case of plans where some funds integrate ESG factors while others do not, consider disclosing if and how ESG factors are factored into each manager’s investment selection process.