Canadian Institute of Actuaries Institut Canadien des Actuaires

Transcription

1 Canadian Institute of Actuaries Institut Canadien des Actuaires September 14, 2001 Ms. Carla Adams c/o Financial Services Commission of Ontario 5160 Yonge Street 17th Floor, Box 85 North York, Ontario M2N 6L9 Dear Ms. Adams: PROPOSED REGULATORY PRINCIPLES FOR CAPITAL ACCUMULATION PLANS The Canadian Institute of Actuaries is the professional organization of actuaries in Canada. Over 2,300 qualified actuaries are Fellows of the Institute. A significant number of those actuaries practise in the areas of design, administration, valuation and funding of pension plans. We are pleased to make this submission in response to the April 27, 2001 discussion paper titled Proposed Regulatory Principles for Capital Accumulation Plans released by the Joint Forum of Financial Market Regulators Working Committee on Investment Disclosure in Capital Accumulation Plans. General comments We are generally supportive of the Committee s desire to develop a regulatory system that ensures uniform protection to members of capital accumulation plans (CAPs) across jurisdictions and across regulated sectors, and that provides appropriate tools to enable members to make informed investment decisions. We also support the Committee s objective to clarify the duties of employers and administrators with respect to CAPs. The four regulatory principles proposed in the discussion paper provide a reasonable framework for protecting the interests of CAP members. But we believe that there are other public policy principles that should be balanced against the consumer-oriented focus of the Committee s proposals. The following are areas where we recommend that the Committee consider refining or moderating its proposals for the regulation of CAPs. Secretariat: Albert, Ottawa, ON K1R 7X7 (613) FAX: (613) secretariat@actuaries.ca Document S20105

2 Promoting employment-based retirement plans Employment-based retirement plans (including CAPs) are beneficial to society and should be encouraged and promoted through government policy. Many plan sponsors consider excessive regulation to be a major impediment to the formation and maintenance of retirement plans. The recent trend away from defined benefit pension plans and towards CAPs has been due, in part, to the increasingly onerous regulatory burden for defined benefit pension plans. If the burden on CAPs becomes equally onerous, there is a risk that sponsors will withdraw support from retirement plans altogether. Aspects of the Committee s proposals that might discourage the formation and maintenance of CAPs include: Increased costs associated with mandatory disclosure and access to investment decisionmaking tools. Increased legal liability of plan fiduciaries. On the other hand, the Committee s goal of achieving greater harmonization of legislation would be a positive step towards promoting the growth of retirement plans. The lack of uniformity in existing pension legislation across Canadian jurisdictions adds unnecessary complexity to the administration of nation-wide plans, so we would welcome efforts to increase harmonization in the regulation of CAPs. Administrative costs The proposals for increased disclosure and access to investment decision-making tools (including registered sales representatives) would increase administrative costs for many plans. We recognize that such costs are necessary and unavoidable in many situations. But we suggest that legislation in this area should be sufficiently flexible to allow reasonable exemptions, or to allow differing levels of resources to be available depending on the knowledge, skills and preferences of plan members. An example of this type of flexibility may be found in recent changes to securities law which allow individual investors using a discount broker to bypass the review of every trade by a registered representative if the investor is not receiving advice from the broker. CAPs have historically enjoyed significant cost advantages over personal investment arrangements, due to group purchasing power and the absence of retail fees and commissions to cover promotional and distribution costs. An increase in administrative costs for CAPs would narrow the gap and would make group plans less attractive. The impact of cost increases would ultimately be felt through a combination of lower profits for employer-sponsors, reduced compensation to employees, higher charges to plan members investment accounts, and/or increased terminations of CAPs. 2

3 Liability of plan fiduciaries The discussion paper proposes a very high fiduciary standard for employers and plan administrators in the areas of plan design and monitoring, disclosure of information, and assistance with members investment decisions. While such a broad standard might be appropriate for plans that require employees to participate as a condition of employment, we do not see that all of these responsibilities would necessarily apply to plans that allow voluntary participation, or to plans that do not receive employer contributions. The fiduciary duties should vary according to the circumstances. For example, suppose an employer provides a compulsory defined benefit pension plan as well as an optional group RRSP. The pension plan is intended to be the employer s primary retirement income vehicle. The group RRSP is offered only as an alternative to employees personal RRSPs or other investments. The group plan might be attractive to some employees because of lower fees, convenience of payroll deductions, reduction of withholding tax at source, or other factors. But employees are not compelled to participate in the group RRSP, and they are free to spend or invest their disposable income as they see fit. Given the limited scope and purpose of the group RRSP in this case, it is arguable that the employer s fiduciary obligation should be limited only to the disclosure requirements. In any event, the fiduciary standard should be less stringent than what is proposed in the discussion paper. Another concern about the proposed requirements is the lack of safe harbour protection for plan sponsors who meet the required standard of fiduciary care. Some of the benefits of safe harbour rules would include: Clarifying the responsibilities of plan sponsors, by outlining explicit actions that should be taken to fulfil their fiduciary duties. Clarifying the responsibilities of plan members, by setting limits on sponsors legal liability for poor investment decisions. Avoiding an exodus from retirement income plans by plan sponsors who might otherwise be unwilling to accept the legal risks associated with the fiduciary duties proposed in the paper. Privacy The discussion paper suggests, as an alternative to using a registered investment advisor, that plan sponsors monitor the investment decisions made by individual plan members for appropriateness. We believe this may violate privacy laws. The member s holdings in the CAP represent only one part of his or her investment portfolio. Viewed in isolation, the investment decisions within the CAP might appear to be inappropriate, even if the member is following a sound strategy in the context of his or her entire portfolio. To make a proper assessment of investment choices, plan sponsors would need to compile know your client profiles which require members to disclose potentially sensitive personal financial information to their employers. 3

4 Compensation policies A retirement savings plan is only one component of an employee s total compensation, and employers have a finite amount of money for that purpose. If one element of compensation is too costly in relation to the benefits offered, the compensation dollars will be allocated elsewhere. This may result in the termination of CAPs and their replacement with cash compensation. CAPs have generally been adopted by plan sponsors who believe that members are willing and able to accept a greater level of personal responsibility in planning for retirement. Many members welcome the opportunity to take control of their investments, and they find such an arrangement to be more valuable than other forms of compensation, such as a defined benefit pension plan. While we recognize that sponsors of CAPs must ensure that members possess a reasonable level of knowledge and understanding about the plan, the regulatory environment should not force sponsors to be unduly paternalistic if that is contrary to the business culture and compensation objectives. Investment rules We agree with the Committee s proposal that minimum investment rules should ensure adequate diversification, appropriate risk levels and avoidance of conflicts of interest. But we would question the proposal that funds should be invested to ensure that CAP members will be able to withdraw their retirement funds at any time, or change their asset allocation by moving some or all of their funds to other investment options under the CAP. First, we would point out that pension legislation prevents plan members from withdrawing funds while employed, and locking-in rules restrict access to retirement funds after termination of employment. Under CAPs that are not subject to pension legislation (e.g., group RRSPs), it would not be unreasonable to have some restrictions on withdrawal of funds while employed, particularly if there is some level of employer matching contributions. We therefore do not see that the possibility of withdrawals at any time should necessarily be a factor in the plan s investment policy. Secondly, we believe it is appropriate for CAPs to restrict members ability to change investment options, or to impose penalties for excessive changes beyond reasonable limits. Reasons for such restrictions include: Controlling transaction costs. Discouraging members from attempting to time the market, while encouraging them to take a longer-term perspective. Enabling plans to offer certain classes of investments that are relatively illiquid (e.g. real estate), but which are nevertheless suitable for a portion of the portfolio of some plan members. 4

5 Conclusion We agree with the fundamental objectives of the Committee s work, and believe that the proposed regulatory principles are a good starting point for protecting the interests of CAP members. As part of the process of implementing these principles, we recommend that they be balanced against other competing considerations in the areas of administrative costs, liability of plan fiduciaries, privacy, and compensation policies. The ultimate goal should be the development of a regulatory regime that does not impede the formation and maintenance of employment-based retirement plans. Sincerely, Original signed by: Jean-Louis Massé President 5