The Joint Forum s Guidelines for Capital Accumulation Plans: the dust s settling... (G3) 1. November 18 Novembre, 2004

Transcription

1 The Joint Forum s Guidelines for Capital Accumulation Plans: the dust s settling... (G3) 1 G3: The Joint Forum s Guidelines for Capital Accumulation Plans: the dust s settling... G3 : Les directives du forum conjoint sur les régimes de capitalisation : la poussière retombe... November 18 Novembre, 2004 Moderator/Modérateur: Panelists/Conférenciers: Luc Dionne Nurez Jiwani, Director, Financial Services Commission of Ontario, Toronto, ON Joan Johannson, Managing Director, Integra Group Retirement Services, Oakville, ON Colin Ripsman, Principal, Mercer Human Resource Consulting, Toronto, ON Panelist Nurez Jiwani: Thank you very much for inviting me to speak to you about the Joint Forum guidelines for capital accumulation plans (CAPs). I think we now have one hour left for the session instead of the 75 minutes, so I ll try and do my presentation in 15 minutes to give the other speakers equal time. My friend Marcus told me that my speech yesterday in French didn t come across well, so I m going to speak in English. What I m going to do is cover the highlights of the guidelines which were released in May of this year. I was also going to talk about the industry reaction, but because of the time constraints, I m going to skip that because we have two experts from the industry who can speak to that. But more importantly I d like to talk to you about our plans for implementing the guidelines. Having spent four years developing the guidelines, we think it s important that they are effectively implemented in the industry. So, let me give you, briefly, the highlights of the capital accumulation plan guidelines. First of all, in the four years of work that we did we spent a lot of time trying to define what a CAP is and in the end we ve come up with this definition, which seems to work for the industry. So we ve defined a CAP as a tax-assisted investment or a savings plan which permits members to make investment decisions. And in these plans there are always two or more investment options. So, the plans where there is only one option, or the traditional defined contribution (DC) plan where the plan sponsor or the administrator makes all investment decisions, are not covered by these guidelines. So, the examples of CAPs would be a registered defined contribution pension plan, a group registered retirement savings plan (RRSP) and these two are really the majority of the CAPs out there but also deferred profit sharing plans, and group registered education savings plans. And we found through our work on CAPs that there are really three major participants in CAPs. The CAP sponsors, as we ve defined them, who are mostly employers but sometimes also trade unions and associations that establish CAPs. Then there are the CAP members, and we defined them as anybody who has assets in CAPs. And then there are a number of service providers, such as insurance companies, mutual fund companies, consultants, et cetera. There are really three purposes of the guidelines and these purposes really try to address the three significant issues that had initiated this whole project from the regulators. In case you are not aware, the Joint Forum which has developed these guidelines Proceedings of the Canadian Institute of Actuaries, Vol. XXXVI, No. 1, November 2004

2 Les directives du forum conjoint sur les régimes de capitalisation : la poussière retombe... (G3) 2 really brings together all the pensions, insurance and securities regulators across the country together under the banner of the Joint Forum. And what it tries to do is address issues that cut across the country and that cut across the three sectors. One of the first issues that was identified by the Joint Forum when it was established in 1999 was exactly these CAPs, and there are really three concerns. One was that there had been a significant trend over the past ten years or so towards the establishment of these CAPs where members are making investment decisions as opposed to the plan sponsor or the plan administrator. So what are the plan sponsor s responsibilities under these plans? Plan sponsors were asking what their responsibilities were. On the other side, CAP members were being asked to make investment decisions. Do they have the knowledge, the information, and the tools to be able to make significant investment decisions? And thirdly, we had pension regulation, insurance regulation, and securities regulation, with some regulation around these CAPs being probably inconsistent. So, how could we bring about a regime where there is a level playing field amongst all of these regulations? So, these were the three issues. That s the purpose of the guidelines, to address these three issues. So the, under the guidelines there are implications for plan sponsors. The sponsor is responsible for: setting up the plan; for providing investment information and decision-making tools to help CAP members make decisions; introducing the plan to the members; providing ongoing communication; maintenance of the plan; and as well as making sure that the plan is terminated in a proper way. We ve also allowed for, in the guidelines, delegation. This is recognizing the fact that the vast majority of the CAPs are sponsored by small to medium-sized employers, so you would not expect that they would have all of the expertise to fulfill all of the responsibilities that are outlined in the CAP guidelines. So we say that the CAP sponsors can delegate their responsibilities, for example, to service providers. But if there is this delegation, then the roles and responsibilities have to be carefully documented so it is clear what the sponsor is responsible for, and what each service provider is responsible for there might be more than one service provider. And, therefore, the implication for the service provider is that if they have this kind of an agreement with the sponsor where they have taken on certain responsibilities, then they now become responsible for following those guidelines in those particular areas. There are also implications for the CAP members. We were told earlier on in the exercise that in the guidelines you should recognize that the CAP members also have responsibilities. So, they have to make some significant decisions: how much are they going to contribute; how much are they going to contribute to the various options that are available; transferring amongst the options. They will also be provided investment information, and decision-making tools by the CAP sponsor along with the service provider. They have the responsibility to make use of this information and tools to make decisions. And in addition to using the information and tools that are provided, they may also consider obtaining independent advice in making decisions. So, we ve said in the guidelines that the CAP sponsor should define what the purpose of the CAP is because that would determine a number of other things. Many of these plans are for retirement purposes, but they re also designed for other purposes such as saving for education or profit sharing. So, the purpose should be defined. The CAP sponsor needs to decide up front whether they are going to use service providers. And, so in doing that the sponsor has to look at themselves and say do they have the knowledge and skills that are necessary to carry out their responsibilities. If not, they should be going to various types of service providers for that kind of assistance. They will need to then go through the process of selecting service providers. We re saying in the guidelines that when they do that they should establish criteria and use those criteria, for selecting the service providers. And we outline a number of factors that would go into determining what that criteria is, and I won t go through those right now. Once they ve selected their service providers, then they need to select the investment options. And again, they need to consider factors in determining what investment options to include in the menu that s provided for the members. And some of the factors to consider would be the purpose of the CAP if it s for retirement, or education purposes. The number of options to be made available, and the fees. You also need to consider your membership in terms of their diversity and demographics the diversification of the investment options, and the risks of the various options that you re going to provide to the members. Where the sponsor decides to use investment funds and we ve found that in most of these CAPs investment funds such as mutual funds, segregated funds are used then there are also additional factors to consider, such as the investment objectives, the risks of the various funds, and again considering the diversity in terms of the options that are presented to the members. Where investment funds are used, we ve said in the guidelines that if the CAP is a pension plan, then the investment rules under pension legislation must be followed. If the investment funds that are offered are mutual funds, then under securities law there are rules that need to be followed. If what s offered is an insurance product, then we are saying that you can either use the rules Délibérations de l Institut canadien des actuaires, Vol. XXXVI, n o 1, novembre 2004

3 The Joint Forum s Guidelines for Capital Accumulation Plans: the dust s settling... (G3) 3 under individual variable insurance contracts (IVICs), or the rules under mutual funds, or the pension rules one of the three sets of rules. The CAP members should be provided an opportunity to transfer amongst the investment options. The sponsor needs to establish a policy, and let the members know if they don t make an investment decision what happens is there a default? what happens when no investment decisions are made. We say that there is basic investment information that should be provided to CAP members because they are making some important decisions. And we ve outlined some basic investment information that we re saying should be provided to the CAP members. Similarly, we re saying the CAP sponsor should provide decision-making tools to help members make investment decisions. And some of the examples are asset allocation models, retirement planning tools if the purpose of the CAP is retirement projection tools so that the members can look at various scenarios in making their decisions on which investments, which funds, to select. Now, in addition to providing information and decision-making tools, we ve said that the CAP sponsor may choose and this is a may to enter into an arrangement with the service provider, or refer members to a service provider, to provide investment advice to the members. So this is optional on the part of the CAP sponsor. The CAP sponsor needs to introduce the plan to the members, and we ve outlined information that should be provided when the CAP is introduced. There should be information provided on the funds that are made available, such as the investment objectives of the various funds. There should be ongoing communication. We have said there should be at least an annual statement. We understand that the practice in the industry is getting more and more towards quarterly statements, but we re saying at least on an annual basis. There should be access to other information. Performance reports on the investment funds should be provided at least annually. We ve listed the type of information that should be contained in annual member statements, as well as information, performance reports that would be provided to the members on investment funds. We ve also provided guidance in terms of the maintenance of a CAP. We said earlier on that in selecting service providers, investment options, the CAP sponsor would establish criteria for making those selections. Periodically, we are saying that the service providers, the investment options, should be reviewed using the same criteria and necessary action taken. I m going to, as I say, skip the industry reaction part. Let me talk very briefly about how we are implementing the guidelines. It took us four years working with the industry. We had two rounds of consultation. We ve had an industry task force, which helped us significantly in finalizing these guidelines. We re now into the implementation stage. So, in the pension sector the Canadian Association of Pension Supervisory Authorities (CAPSA) has adopted these guidelines this is all the pension regulators across the country. They have said to registered defined contribution plan sponsors that they expect these guidelines to be followed. On the insurance side, we ve worked with the Canadian Life and Health Insurance Association (CLHIA). They have gone through their own process, and by next month the board of the CLHIA will formally adopt these guidelines as CLHIA guidelines which would mean that all member companies would be required to follow these guidelines. On the securities side, the Canadian Securities Administrators (CSA) has proposed an exemption from registration and prospectus requirements based on compliance with a number of the guidelines that are set out in the Joint Forum guidelines. But this, for the securities sector, is a significant step to level the playing field with the insurance side. There was a consultation on that exemption. We re expecting that that exemption will be in place shortly. The target was the end of the year. We think it will go a little bit into 2005, but by March or April we are expecting that exemption to be in place. So, these are the timelines. The guidelines were released in May. Securities exemption was targeted for December, shortly after that it should be in place. The CLHIA will have adopted it by the end of the year. We ve announced that we as regulators expect all CAPs to follow these guidelines by the end of next year. In 2006, we re going to step back and do an evaluation, and work with the industry on how successful the implementation of the guidelines have been. Moderator Luc Dionne: Thank you. Colin, please. Panelist Colin Ripsman: Thank you, Luc. I ll also try to keep my comments somewhat brief to keep us on schedule. I thought I d start talking a little bit about today s DC environment, just to give us a bit of a background or a sense of where the guidelines are coming from and that s what this slide looks at. Over the last five to seven years we ve seen huge growth in the defined contribution plans in Canada. I would suggest the vast majority of new plans that are designed and implemented today will all be defined contribution plans. So, a lot of things have come out of that change in the marketplace. Proceedings of the Canadian Institute of Actuaries, Vol. XXXVI, No. 1, November 2004

4 Les directives du forum conjoint sur les régimes de capitalisation : la poussière retombe... (G3) 4 We ve seen a greater focus on plan governance, both by the DC regulators and also by plan sponsors. More of a focus on monitoring of investments, monitoring record keepers, communications, and internal procedures. We ve gone through a period of extreme volatility in equity markets both good and bad. Volatility seems to be increasing in the markets year over year, which obviously impacts defined contribution plan members, and in turn plan sponsors. It s interesting, we saw a really big growth of defined contribution plans start to hit its peak towards the end of the 1990s. We saw growth starting at the beginning of the 1990s when you had pension reform, and tax reform in the income tax regulations bringing in the whole pension adjustment (PA) raising questions about the value of the defined benefit (DB) and the tax effectiveness of defined benefit. We didn t really see these plans picking up a lot of steam until the mid to late 1990s. A lot of these plans were introduced right in the heart of the bull equity market in Canada, and elsewhere during the tech bubble, with members having some pretty high expectations in terms of what they might realize in terms of long-term returns from these plans. But we ve seen some extreme volatility over the last six or seven years in equity markets, and that s not showing any signs of changing. There s greater support from third party suppliers and advisors. (We ll have Joan talk a little later on about that.) Joan s with one of the suppliers in the marketplace. I think she would agree that over the last ten years the role of the record keeper has increased considerably. When these plans came in originally, I think plan sponsors were looking for a record keeper to handle certain functions. I think more and more plan sponsors are looking for a record keeper that ll be a partner, and an opportunity to outsource as much as possible in terms of day-to-day operations. We ve seen together with that more reliance on providers, but a lot of change in terms of provider consolidation. You know, we can go through the change in terms of some of the big players today, and all the companies that they ve acquired that were in the defined contribution business once upon a time. Add to that the demutualization of some of the large insurance companies which tend to be some of the bigger players in the market and that s led to some real changes in the way these organizations operate and it becomes that much more important for a plan sponsor to be managing their relationship with their provider to make sure they continue to get what they need. We re seeing increased input from members about plan operations. Now that s come through legislation in some areas, like Quebec pension legislation. But even in places where it s not a requirement of the legislation, and even when you re dealing with savings plans, I think there s much more interest from the plan sponsors standpoint to get some direct member input in the operations of the plan. And whereas six years ago you might have been looked at a little strangely if you had suggested that you might want to have a rank and file employee sit on your DC pension committee, I think we re seeing more employers consider that as time goes by. I missed one looking at education versus communication. I think the views in the industry are changing on that issue as well. Ten years ago, the view was get the employee booklets to the employees, get some basic information in their hands, and you ve met your responsibilities. I think now we see more plan sponsors that are really focusing more on education, rather than communication, which is a two-way process where you actually try to assess what members are understanding, what you re doing well, what you re not doing well, and tailoring the message over time. And finally, the last point which in my mind this is one of the more important points is a greater awareness of fees and their impact of retirement income. Just the other day I was looking at fees in the retail investment market, and comparing them to some of the benchmarking that we do in the institutional market. I was looking at the median management expense ratios (MERs) that you see in a typical retail mutual fund. I was looking in this case at a balanced universe. The median MER in that retail universe was 2.37 percent or 237 basis points. In a typical DC plan, you might see the combined investment management fees and the record keeper spread that may be built in there ranging somewhere from 50 basis points to maybe 125 basis points, depending on the size of the plan and the specific parameters. That s a huge difference. I mean, what that says is that for a typical plan you might be looking at 150 basis points difference in terms of going out and doing your homework, and doing your shopping and bringing in the right investments to the plan. I don t have to tell people in this room you ve probably looked at these numbers yourselves reducing your net investment returns by 150 basis points, or conversely increasing them by 150 basis points, over a 30 or 35 year working career is huge. It has a huge impact. So, that is becoming more of an issue, and obviously a driver of some of the considerations and thinking processes that went into the Joint Forum process, and the CAPs guidelines. Délibérations de l Institut canadien des actuaires, Vol. XXXVI, n o 1, novembre 2004

5 The Joint Forum s Guidelines for Capital Accumulation Plans: the dust s settling... (G3) 5 The next couple of slides look at the significance of CAPs guidelines in our humble view, as well as some issues that come up, from our perspective, which I thought would be interesting to note. I think in terms of their significance and Nurez might take a different view I don t think that they change the existing governance environment in Canada. I think, for a large measure, for the most part they reflect current standards that are already out there in different places, like under the common law. Over time, common law cases relate to fiduciary responsibilities as they apply to pensions or other areas. Existing pension legislation which outlines fiduciary obligations, and your obligations to properly select, and monitor providers, et cetera. All these principles are already in there. Federal tax legislation in terms of some of the restrictions or things that you need to be looking at from an investment perspective. The guidelines don t replace any of these requirements. I think in terms of their object and spirit, really what they try to do is reflect them and in many cases enforce them and enshrine them. Having said that, I think that s a good thing. You are in a situation in the industry which probably motivated this in the first place where plan sponsors would set up their plans so as to stay out of specific pieces of legislation like pension legislation and then mismanage the plans. I think that what the guidelines are saying is that no matter what type of plan that you re under, you need to meet these same common sense governance principles. That s what the guidelines are doing. So, again, in terms of the significance of the guidelines, what they do do is underscore the importance of proper CAP plan management. And I think the fact that you have regulators from across all jurisdictions from across all regions that touch pensions sitting down in a room saying if we started with a clean page what do we think the standards should be and have them all agree to it after industry consultation and quite a bit of study that s a pretty strong statement that for anyone that this is the way this plan should be managed. And I think what they do say if I had to summarize them in a couple of sentences is that the key responsibilities of a plan sponsor really go beyond setting up a plan. I think that there was a big misconception out there. I think the thinking was that if you could keep yourself out of the pension box once you set up these plans employees were choosing their investments, it s their money you really didn t have to do anything. I think the guidelines are saying your responsibilities, as a plan sponsor, go beyond setting up these things. And they include important things like providing initial and ongoing information, decision-making support, selection and monitoring of providers, making sure that they re doing what you hired them to do. Now, the next slide looks at important issues, from my perspective. Things that come out of the guidelines that I think tell an interesting story, or raise interesting questions and thoughts, from our perspective. The first thing that I think is important that plan sponsors, consultants, people in the industry, are aware of is that many of the plan sponsor obligations under the guidelines can be delegated to the service provider, however, you ve got section 6 at the back that says that the plan sponsor on an ongoing basis is required to monitor the performance of those providers. You can bring in good people but at the same time you are responsible for making sure that they re doing their job. You know, people don t always do their jobs good people don t always do their jobs. You can t sit back and say, I ve delegated all these functions to good people good investment managers, good record keepers therefore my work is done. There really has to be that ongoing oversight. The second thing that jumps out at us and I ll confess, I really haven t talked to Nurez or any of the group about this investment advice is a really interesting area. And I m getting a message from the guidelines, and I don t know if it s the message that was intended. What the guidelines say if I can paraphrase regarding investment advice is that plan sponsors don t need to provide advice to members. When we re talking about advice, what we really mean is answering the question, Okay, I ve read all the stuff that you gave me, but how should I invest my money? Are you going to answer that question, or are you not going to answer that question? Are you going to bring in somebody to answer that question? That s what in my mind we re talking about when we re talking about advice. What the guidelines say is you don t have to offer advice, however, if you do offer advice, you ve got some obligations in terms of proper selection criteria, and proper monitoring. Those are some significant obligations. Frankly, I m not quite sure, based on the way our advice providers have set up and privacy laws in Canada, how you would effectively monitor an advice provider. On the other hand, there s no safe harbour built into the legislation that says if you do these things properly select your advice provider properly then you ll be protected from employee lawsuits down the road. What I think happens, or what comes out of those two sides of the coin or those two issues, is the fact that it s a difficult thing to do right. There s no protection even if you do feel that you re doing it right. I think, unfortunately, in Canada we re not going to see plan sponsors offer advice to their members through any third parties. Proceedings of the Canadian Institute of Actuaries, Vol. XXXVI, No. 1, November 2004

6 Les directives du forum conjoint sur les régimes de capitalisation : la poussière retombe... (G3) 6 That leads into my next point. Nurez talked a little bit about the fact that the guidelines were structured to look at obligations of three parties, and I think that s great. I think that makes a lot of sense. I think it recognizes the fact that from a plan sponsor s perspective, you can take your members three quarters of the way there: you can build a good plan; offer good investments; give them good decision support; but if they re not prepared to sit and read it, and they re not prepared to take the time to engage themselves and make effective decisions, there s nothing you can do to take them that last 25 percent of the way. The guidelines recognize that, and I applaud them for that. So, you have to outline the members responsibilities. The members responsibilities are to utilize the tools and information provided to make effective decisions. The other interesting piece in the member guidelines, or what members are supposed to be responsible for, is they need to consider obtaining independent investment advice. The way I read this is that there s no real answer for a plan sponsor who wants to offer investment advice, the answer lies with the employees. And really it falls to the employees to decide whether they need to go out and get independent investment advice or not but not look for it through the plan. The last point that I throw out there which I think maybe didn t get as much play or attention when the guidelines came out, but I think is really significant is the need to document all decisions, and have a clear policy on maintenance of records. The reason that I think it s significant is because it s a really important area, and plan sponsors really haven t given it enough thought at this point in time. I think they need to be giving it some thought in the years to come. I can classify this type of data in two ways: one category is decision support; the other category is member data. I can split it in another way, looking at the data or at decision support that you control internally as a plan sponsor, versus what you delegate to the record keeper to handle. You really have to consider all four of those types of information and documentation, and make sure that you have a clear policy, and make sure that you have your record keeper that signs on to adhere to those obligations and you have to monitor and make sure that they do. These things sound obvious. You know, my thought, until about six months ago, was that I d hire a record keeper to maintain the records for my plan, and they re going to maintain these records indefinitely. I had a case where I was hired by a plan sponsor to go in and take a look at a specific situation. They were offered a number of funds under a pretty large DC plan. They were notified by a particular record keeper that there d been an error in the application of fees to two of the funds that they offered to their members. And that the record keeper went ahead and adjusted it, and fixed the mistake. Which was great. It was proactive. They found it themselves. I think that s wonderful. What they were saying to us was, Well, how do we know that the other 19 funds were calculated properly and that the fees were done appropriately through that same three-year period? And we said, It s not that difficult for us to recreate. We can build a macro that looks at your fee schedule and looks at how the fees are applied. Take the gross unit values and then recalculate the net unit values for your plan, and compare them to the actual net unit values for your plan on each day. Long story short, all we needed was to get the daily net unit values for the plan in order to compare them. We were told by the record keeper that they keep the gross unit values on a daily basis, but it s a lot of data to keep the net unit values so they destroy those a month after they re actually been calculated which, quite frankly, blew our minds. So, I think it highlighted to us, just about at the same time that the final version of the guidelines were coming out, that you can t take these things for granted, and that you really have to be on top of these things. You have to sit down, be able to identify all the critical pieces that need to be retained, and negotiate that with your record keeper. The next two slides look at impact on plan sponsors. And really plan sponsors fit into two camps in our minds. I ve divided them in two camps on a pretty arbitrary type of criteria: size. It s a fact that the larger plans out there have really good governance structures in place, and had them in place prior to the guidelines coming out, than smaller plans. Having said that, that s not an absolute in all cases. I ve seen a lot of large plans that have absolutely no governance structures, and small plans that have really tight governance structures. But you ll have two groups of plans out there. Some of them have been doing a lot of these things for a long period of time. For those plans, really the Joint Forum guidelines are not going to have a huge impact. There ll be small changes to their practices in certain areas as they go through and assess compliance with the guidelines. They ll need to confirm and document plan purpose. It s not always stated as clearly as it should be, and held front and centre when you re making investment decisions. They ll need to review their communication strategy and content. That s an area that even some big plans I don t think have given as much thought as they should be doing. They ll need to negotiate some formal document retention strategy. They ll need to sit down with the record keeper and clarify their roles and responsibilities, and how they re Délibérations de l Institut canadien des actuaires, Vol. XXXVI, n o 1, novembre 2004

7 The Joint Forum s Guidelines for Capital Accumulation Plans: the dust s settling... (G3) 7 going to oversee them. And then, the last piece is just to review and confirm their monitoring process for both the investment options and the record keeper. Where you re going to see a huge impact is in a lot of small and mid-sized plans and again, it could include some large plans, as well that have no structure at all, and put in these plans four, five years ago with the thought that, Well, employees make the decision, they bear the risk, and we don t really have to look at these things ever again. In some cases, they ve been lucky, and the plans have managed themselves quite nicely. In other cases, things have fallen off the rails long ago. These plan sponsors are going to need to sit down, and build a new governance structure. In many cases, there s no pension committee. They re going to have to establish a new pension committee. They re going to have to take another look at the plan design to make sure it s achieving their objectives, review the record keeping relationships, and review their investment structures. Some of these things are in a mess, and need to be re-examined to ensure that the investments offered are consistent with the stated purposes of the plan. Establish a communication plan, and review existing communication material and tools. Introduce formal monitoring process. And, again, they have the same issue with document retention strategy. And then the last slide just looks at what your plan sponsors do as a first step. I think what they need to be doing as a first step is ask themselves the question, Does our plan qualify as a CAP? There are some issues, which I m not going to get into, in terms of this whole single investment choice option. I don t think it was designed to move people into reducing their investment options to one to stay out of the guidelines. My own personal belief is that creates more legal and risk exposure to you as a plan sponsor, despite the fact that you don t fit into the guidelines. You re still covered by fiduciary law, you re still covered by pension law, in some cases. I think you re in a much worse position, in terms of being able to defend your decision, if you re forcing employees into an investment option that you know is not going to be optimal for some of them. But you have to determine whether your plan qualifies as a CAP. Nurez went through what does qualify as a CAP in some detail. Then I think you need to be looking at what processes that you have in place to ensure effective plan management. How do we periodically assess our plan and our processes? That s the starting point in terms of thought processes. They need to establish a formal governance structure, regular committee meetings, properly document their meetings and decisions, and formalize reporting structures and accountability structures within the company. And then I think the next step is to audit current practices against the standards established by the guidelines, and identify those gaps, and make changes where those gaps exist. And then look at that on an ongoing basis. It s going to be a moving target. Community standards change over time, and I think periodically they should reassess and do that gap analysis. So that s where I m going to stop here for today, and I m going to turn it over to Joan. Moderator Dionne: Thank you, Colin. Panelist Joan Johannson: While they re getting set up I d just like to say thank you very much. I very much appreciate being invited here to speak to such a critical topic. To structure today s presentation, I ve outlined three key overarching principles to follow, the core processes required for compliance, and some of the most essential tools I believe that are required to facilitate and prove guideline compliance. Although today I am with Integra Group Retirement Services, which is a trust and securities-based service provider, a year ago I was Vice President of Group, Pensions and Benefits for a major insurance company. Therefore, I ve been specifically asked to speak to a broader perspective, commenting on the readiness of the industry as a whole, including the insurance-based service providers. I ll do my best. In opening, there are three key policies presented here. There is an even playing field for both the trust and insurance-based providers relative to assisting with adherence to these policies. Differences are primarily found relative to processes and tools, which I ll discuss a little later. Colin mentioned this before, and let me reiterate. In real estate the core and enduring value is, of course, location, location, location. In DC plan management, it s really documentation. This is a plan sponsor s proof of due diligence and an ongoing high standard of care. No matter how well run the plan, every lawyer will agree, documented proof is essential. And what do you document? Basically everything from plan s start up through its entire life. All aspects must be documented and kept up to date. Sadly, this is an area long overlooked by many plan sponsors. With the publication of the CAP guidelines, we have a fresh opportunity to review prior decisions and document them before next December 31st. I want to put a special focus on defining, and of course documenting, the plan purpose and the roles and responsibilities of all key players. The plan purpose is a foundation for many key decisions around the plan, and it should be given specific attention Proceedings of the Canadian Institute of Actuaries, Vol. XXXVI, No. 1, November 2004

8 Les directives du forum conjoint sur les régimes de capitalisation : la poussière retombe... (G3) 8 from both a plan member and a plan sponsor point of view. For example, often the purpose is to attract and retain top employees by providing a retirement savings vehicle. But there could be other objectives, such as rewarding members commensurate with company performance. Also to consider, is a savings plan exclusively for member retirement, or could it be used for other savings objectives? And from a sponsor perspective, providing a program at a reasonable cost for the benefit is always a key consideration. Documentation should be kept up to date to reflect all roles and responsibilities. This is not just a great way to prove who was responsible for which steps in front of a court, but it is also the most efficient way to ensure you ve created a plan, and related processes, which effectively serve the sponsor s needs and those of its members. Note that the CAP guidelines emphasis on the member s role: defining their obligation to take advantage of educational facilities, and take charge of their own future. Their understanding of this role is a critical part of risk management for plan sponsors. Due to the ramifications of these decisions, this is a key role for consultant involvement both to recapture decisions of the past, and on a go forward basis. Service providers should have documentation of their processes and policies available, guaranteeing the type and level of service expectations that you can rely upon. I have listed several here. Let me select a couple of key examples. For the service provider, it s all about record keeping. There should be documented policies on how long you can rely on these records to be accessible. Pension laws across Canada neglect to stipulate standards, and the guidelines do not mention this, however, here is an area where all the CAP guideline work could be for naught if records are not retained. We should always look to service providers to let us know what their policy is. Disclosure, now officially embraced by the CAP guidelines, is basically a new requirement to the insurance industry. I ll get into this more later. But here is a further area where a service provider should indicate what their specific policy is. And of course, compliance with the CAP guidelines themselves is an implied requirement of the guidelines. Service providers should be able to provide a certificate of their own compliance status. Although service providers on the insurance side of the business may have some catching up to do relative to some areas of compliance such as disclosure requirements they should be able to speak to current policies and timing of total compliance. Now let s move along to the core processes to be adopted according to each section of the guidelines and the essential tools required for each process. The CAP guidelines speak to seven distinct areas, which I ll discuss in order. Service providers should be in a position to offer now a comprehensive solution speaking to each of the seven sections of the guidelines as well. As mentioned, overarching policy when running a plan according to the CAP guidelines is to define all roles and responsibilities. These happen to be our documents but there s no reason why any service provider cannot have their equivalent documents which could be revised as they reach new levels of compliance. Consultants that I know often have roles and responsibilities guides of a similar nature. Service providers guides should be modeled to work alongside the consultant guides to maximize effectiveness for the sponsor. These are extremely useful tools for the plan sponsor. They help to avoid later confusion around who was supposed to take specific steps. This is a very important area for involvement of the consultants as it includes major decisions around structuring a plan, such as determining the type of plan or plans required, and selecting appropriate investment options. Service providers, however, can assist by having a non-biased platform. That means it s open to any fund suitable to the plan, as well as guaranteed investment certificates (GICs) and even company stock. I believe this is a critical area for existing plans, as well as new ones. There are not many new ones these days, although we do see some activity of DB moving to DC. But the CAP guidelines publication and the December 2005 deadline, are terrific prompts for full review, and reconfirmation or change of plan structure decisions which may now be outdated. The big difference for existing plans is that they can take advantage of all the member information that s already available. This leads me to essential tools for just this situation. When reviewing a plan structure and key elements, it s important to do so in light of the objectives of the plan sponsor, and a thorough understanding of the plan membership. Here s a list of reports which can be useful in support of this process, as together they provide a membership profile encompassing a picture of member sophistication, areas where members support is most frequently required, preferred media for education and communications, and some vital information around investment selection against the demographic profile. Let s take a quick look at just one of these reports. This is one tool which we find particularly useful. It s pulled from Know Your Client or KYC Information, which we are required to maintain for each member. It therefore provides a very accurate portrayal of a plan sponsor s membership relative to investment knowledge. This can be used to support decisions around educational materials and decision support tools and is documented proof of ongoing monitoring. Délibérations de l Institut canadien des actuaires, Vol. XXXVI, n o 1, novembre 2004

9 The Joint Forum s Guidelines for Capital Accumulation Plans: the dust s settling... (G3) 9 Helping members invest. These sections of the CAP guidelines deals with selecting appropriate information and tools that will help plan members invest for their future retirement. There needs to be a formal and comprehensive process defined to the specific profile of the sponsor s membership to best assist the plan member with managing their own retirement savings plan. This slide touches on the key functions to include in this process. Fund performance information, possibly including branch marketing, to help the member understand what they are investing in. The development of a self-education program for the member using a variety of media such as hard copy, CDs, the Web, personal phone in support services as different members learn in different ways. Provision of instructions in tools for creating their own self-tailored retirement plans, and ideally inclusion of a monitoring process for the member to know that they are staying on course as they make various new investment decisions over time. Now, what are the essential tools for helping a member take responsibility for their own plan and investment decisions? Clearly, providing the right tools here will help the member, and demonstrate a high standard of care on the part of the plan sponsor. All major service providers have a selection of profiling tools, calculators and extensive fund information, which are made available to plan members through various media. Calculators should allow for running different what if scenarios. For trust-based service providers, KYC information is required to be acquired and retained. Note that there s nothing to preclude an insurancebased provider from doing the same, but it would require extensive programming and increased data storage. What is does provide to the member is a mirror profiling what type investor they truly are. But even with tools like simplified colour coding on asset allocation, how do you ensure that the members stay true to their plans long after the tools have been put away? This leads us to what I believe is the number one governance tool to help plan members stay the course, and act as documented proof of a continuously high standard of care and that s member investment trade reviews. This links the KYC profiling to the individual investment or trade decisions each time to ensure that members stay on course. It provides a warning, and in the case of group RRSPs, even prevents an inappropriate trade. Members must then either revisit the investment decision were they tempted by market performance to move too aggressively, for example or their profile have they experienced a lifecycle change, for example, marriage, divorce, inheritance which requires a change to the profile. It is totally in their control. This is the only way to ensure the member is appropriately protected for every trade. I call it having a financial guide by your side. Although unique to trust and securities-based regulations, there is once again nothing to preclude an insurance provider from introducing a similar program except for the exceptional re-programming required, and the likely absence of historic data for existing members. Now, how do we implement these programs? This is the next core process according to the CAP guidelines. At implementation, we have the greatest likelihood of creating thorough documentation of all processes, but for those who have not compiled this documentation, again, now is the most opportune time. Here are some process suggestions to consider relative to the service provider s role. I mentioned electronic enrolment due to its reduction in the opportunity for error. It is, however, important to establish proof of excellence at implementation which can be relied upon over time to validate decisions. For example, satisfaction surveys. Look for service provider confidence that they will live up to expectations, say, financial penalties if satisfaction levels are not met. Establish criteria to monitor appropriate details of disclosure. More on this later. Acquire service provider policies around cash flow and market timing exposure. These have been much in the news of late. Understand where there is any real degree of risk and how it can be best mitigated. This will differ depending upon whether the plan is on insurance or trust-based platform. Now, I ve included this slide so as to speak to the industry as a whole, as requested. There are basic differences between trustbased service providers and insurance-based. Now there s nothing wrong with how the insurance-based providers have been reporting and retaining information. It s usually completely in keeping with the Insurance Companies Act that governs them. But it must be remembered that this act, and the residing business practices, were built around insurance concepts like the sharing of risk, and resulting pricing for similar demographic groups. This risk sharing and shared pricing is not the case on the securities side. You as a member directly hold the units in each fund, and simply pay for what you get with full disclosure required around costs and therefore a very clear picture also of performance. As there are no embedded fees as you might find in a segregated fund wrapper and as units are directly held and therefore always match against what is on fund management records, I refer to this as clean accounting. (Please forgive my bias, and remember that I am, after all, from the trust side of the business.) I believe it speaks highly of the development process that the guidelines have embraced the securities-based Proceedings of the Canadian Institute of Actuaries, Vol. XXXVI, No. 1, November 2004

10 Les directives du forum conjoint sur les régimes de capitalisation : la poussière retombe... (G3) 10 principle of full disclosure, especially considering that the guidelines were created by a cross section of the industry inclusive of the insurance-based providers. Clearly there is a reason for this. It simply makes for better governance. It is also requiring for most insurance-based providers a likely re-thinking of pricing and cost allocation, as well as extensive re-programming, new accounting practices, likely longer record retention requirements, and statement redesign. In some cases, the new emphasis on disclosure may lead to an element of surprise for the plan member, and perhaps even the plan sponsor. Relative to the member, communications will have to be created to ensure that the value of the retirement benefit as a whole is not lost in light of what might appear as new fees. This could also lead to questions about prior fee levels, hence my emphasis earlier on determining your service provider s record retention policy. Compliant trust-based service providers will already have this in place. A further significant difference is around ownership. Trust-based providers only offer direct holding of units in the funds. Insurance-based providers must provide segregated funds in which the insurer actually owns the units, but provides notional ownership to the plan members in what is essentially a fund of funds with associated costs included. In effect, this creates a smaller universe of various funds in which cash flow implications, and other occurrences, can have a greater proportional impact. A working analogy is throwing a rock into a pond versus into the ocean. The impact is much more noticeable in the pond. To deal with this very simply, without a segregated fund wrapper, there is no additional level of exposure to this practice from within a plan s membership in a trust-based program. These are a couple of the basic differences in how the two platforms operate, which lead me to truly believe that there are some important governance advantages embedded within the trust and securities-based platform. Communications is clearly a very important core process. Time does not permit my going into the full suite of communications tools that are essential to a good governance program. Here, again, is an area where the insurance and trust-based businesses share common ground. This slide lists a number of types of communications and possible subject matter for your consideration. Feel free to contact me at any time should you wish any further information. I will mention, however, that it is vital that many of these tools are customized to the specifics of the sponsor s plan. These are examples of custom tailored communications tools showing just the funds appropriate to the plan, detailing plan rules, etc. Most service providers should be able to provide this information. From a governance perspective, a differentiation factor might well be the degree to which the service provider will customize these materials for a plan sponsor. Of course, once the plan is up and running, it s essential to have various diagnostic tools to show how healthy it is. Again, this is just a matter of good governance. Here are a selection of possible reports which provide the plan sponsor and retirement committee with important information about their membership and plan. Again, in many cases all service providers should provide you with a good selection of these reports. One tool that I will draw to your attention is the simplified automated Annual Information Return (AIR). We ve seen new clients, who have not filed for even three years, find this support an absolute godsend in terms of saving them from serious problems in the case of an audit. Whether the focus is an individual member leaving a plan, a group of members leaving say, in the event of a merger or a plan wind-up, this is the time when accuracy of accounting will be most valued, including the ability to provide a precise picture of performance, holding and costs. Also of great importance are the communications surrounding this process. Clarity around options and tax implications. This material must be easy to understand. And finally, I would recommend that the help desk or call centre is thoroughly briefed on the process, and frequently asked questions and answers. In summary, in providing this tremendous benefit to plan members, it s important that the plan sponsors do all they can to protect the members and themselves. To do so, they should take advantage of all support available. Use consultants, rely on service providers especially once their policies and processes are understood turn to the CAP guidelines for guidance on industry standards because these are generally expected to be referenced by the courts in the time of litigation in future. And always, always, always document, document, document. On behalf of Integra Group Retirement Services, and myself, I wish to thank you all for your attention. And the Canadian Institute of Actuaries for the opportunity to meet with you today. Thank you. [Applause.] Moderator Dionne: On behalf of the Canadian Institute of Actuaries and all of ourselves, thank you Nurez, Colin and Joan for these comments. Délibérations de l Institut canadien des actuaires, Vol. XXXVI, n o 1, novembre 2004