CBA/IPEBLA Conference Pensions and Benefits in a Changing Global Environment. DC Governance: Comparative Table (Workshop 4)

Transcription

1 CBA/IPEBLA Conference Pensions and Benefits in a Changing Global Environment DC Governance: Comparative Table (Workshop 4)

2 CBA/IPEBLA Conference Pensions and Benefits in a Changing Global Environment DC Governance: Comparative Table (Workshop 4) DC plan structures Trust-based plans set up by employer and managed by a trustee board (employer often retains key powers eg powers of amendment and appointment and removal of trustees); or Contract-based plans, which are individual contracts between a financial institution (typically an insurer) and the employee. Employers arrange group personal pension plans but take no responsibility for administration other than to remit contributions and provide information prepared by insurer. UK Pensions Regulator is encouraging voluntary engagement by employers eg through a management committee with a monitoring and advisory role. ERISA requires that plan assets be held in a trust except for assets held pursuant to an insurance contract. Typically, there is a single one-stop shopping platform provider who has a bundled product under which all the services necessary to run the plan are provided eg account record keeping and marking accounts to market daily, a trust affiliate to act as trustee as required, administrative processing and forms such as election of investment options, loans, withdrawals etc. The alternative is to adopt an unbundled structure where different vendors are retained to provide different services. ERISA permits the plan sponsor (the employer) to allocate fiduciary and non-fiduciary responsibilities to different people. A common structure is for an investment committee to be designated as responsible for the selection and monitoring of the funds available for participant directed investment. The members generally consist of management personnel. A trust governed by a written trust agreement (trustee must be either a trust company or at least three individuals satisfying certain requirements); or Insurance contract between employer and insurance company. For DC plans in Canada, the most common structure is an insurance contract with a bundled product provided by the provider. The bundled product is similar to the US bundled product including all the services necessary to run the plan. It is possible to have an unbundled structure where an insurance contract is the funding vehicle, however these are not common. Trust-based and contract or insurance-based structures are required to qualify for tax favoured status. Contract-based in the UK is equivalent of the bundled provider arrangement in the US and Canada. In the US and UK the plan sponsor/ employer can allocate responsibilities (in the UK, this would only be under trust-based arrangements), although in the UK many of the administrative duties are given to the trustees and legislation requires that they have sole responsibility for investment. In Canada, there is a tendency to use insurance companies to structure DC plans UK is heading towards a similar model when it comes to DC pension provision. In DC arrangements in the UK, US and Canada members/participants are generally required to select their own investment options from a selection of funds chosen by an investment committee/plan fiduciaries/ plan sponsor. This is a practice but not required in the US. Notable differences US can unbundle insurance arrangements, although this is not common. In the UK, contract-based plans cannot be unbundled. However, this is commonly done under trust-based arrangements. The US market for bundled and unbundled products is highly competitive but it is less so in the UK and Canada (typically employers will go to one of a small number of providers).

3 Statutory requirements & other applicable laws Trust-based Extensive legislation covering: preservation of benefits for early leavers; revaluation of benefits; rights to transfer; disclosure of information to members; requirement for member-nominated trustees; trustee investment duties (including a requirement for a statement of investment principles, ability to delegate, duty to diversify etc.); trustee knowledge requirement; appointment of professional advisers (including dealing with conflicts of interest); reporting breaches of law; and consultation if making certain changes. Tax legislation stipulates type of benefits that can be provided and maximum allowances for tax-favoured savings by individuals. Contract-based Pensions legislation less extensive but still requires: revaluation of benefits; rights to transfer; disclosure of information to members; reporting on breaches of law; and consultation if making certain changes. In addition Financial Services legislation applies: provider must be authorised (or equivalent) by the UK Financial Services Authority (FSA) or exempt; and strict rules around promoting these arrangements (communications must generally be approved by an authorised person). ERISA provides a detailed regulatory framework, but within that framework considerable flexibility is left to the plan sponsor: The employer can allocate different fiduciary and non-fiduciary responsibilities to different parties. There are standards of prudence, exclusive benefit etc. but prudence is determined based on how a comparable fiduciary for a like plan would act. Certain transactions between a plan and a related party or a fiduciary are prohibited and can result in liability. In DC plans, the fiduciary responsible for investment activities is held to a standard of being prudent in the selection and monitoring of performance of the funds made available for participant directed investment. Under 404(c) of ERISA a fiduciary is not responsible for the actual decision made by the participant; does not negate obligation to be prudent in the selection and monitoring of the funds on the menu. In Canada, the statutory pension requirements vary from province to province across the country (and there is also legislation for federally regulated pension plans). For all registered pension plans, the federal Income Tax Act applies, which sets out maximum benefits that qualify for tax-favoured status, as well as certain requirements for registered plans. The commentary in this presentation is focused on Ontario law, unless specified otherwise. No detailed governance framework in Ontario pension benefits legislation (the Pension Benefits Act (PBA)) however there are overriding fiduciary principles in relation to: acting prudently; delegation to and supervision of agents; and conflicts of interest. To the extent that an agent is retained, the agent is held to the same prudent standard of care under the PBA. Legislation in Ontario does cover: disclosure of certain information to plan members; investment rules, including quantitative restrictions and a requirement to have a statement of policies and procedures in place with respect to plan investment; penalties for breaches of the statute, including breaches of the applicable standard of care. In the US, UK and Canada a trust-based or contract-based arrangement is required for tax favoured status. In the US the statutory structure provides for fiduciaries not to be responsible for actual investment decisions made by participants, but they are responsible in relation to selection and monitoring of menu of investments available. In the UK, this is provided for under the trust documentation as opposed to statute. The statutory framework in the US and Canada is based around a fiduciary responsibility structure which does not necessarily involve a trustee as establishing and monitoring fund alternatives. In trust-based arrangements in the UK, the trustees are fiduciaries and must act prudently and in the interests of the plan participants at all times. Notable differences In the UK, in trust-based arrangements, trustee bodies have to have membernominated trustees or directors and have primary responsibility for selection of appropriate menu of investment funds for participants and for administering the plan. This is not necessary in the US. Instead the sponsor typically appoints senior managers as fiduciary committee members. In the US and Canada a trustee, if appointed, is usually an institutional trustee and really only performs the role of a custodian of the plan assets. The plan sponsor usually appoints a committee to manage the plan and perform the necessary investment functions or, in Canada, it may manage these functions itself. Default options: In the US, the Department of Labor has issued a safe harbour for default options. There has been discussion in the UK about adopting a similar approach in the context of auto-enrolment but there are no proposals as yet. There is no similar statutory safe harbour in Canada. (The other requirements typically concern the insurer and not the employer.)

4 Regulatory requirements Trust-based Pensions Regulator codes of practice and guidance on such aspects of governance as: trustee knowledge and understanding; providing information to members; conflicts of interest; and administration best practices. Enforceable through issuance of improvement notices and fines and penalties. Ultimately plan fiduciaries can be replaced. Contract-based Pensions Regulator regulates work-based arrangements (where direct payment arrangements with employer). FSA regulates insurer to ensure efficient, orderly and fair market and to help customers achieve a fair deal. Department of Labor oversees ERISA, drafts regulations and advisory opinions, has enforcement capability, issues advisory opinions on questions presented to it and also grants individual and class exemptions from prohibited transactions (sometimes even retroactive exemptions). The Internal Revenue Code has many provisions comparable to ERISA. In terms of interpretations of these provisions, there is a jurisdictional agreement between the two agencies; the DOL opinions govern with respect to fiduciary and prohibited transaction provisions and the IRS governs with respect to plan eligibility, vesting and other similar provisions. There may be securities law implications eg plan which provides for participants to be able to invest in stock of the employer. The DOL often will consult with these other agencies because a decision by one can impact another. Securities law considerations generally arise when participants can direct investment in a fund consisting of employer shares. Governance guidelines exist these are not law seen as best practices model and generally followed: CAPSA Capital Accumulation Plan Guidelines these guidelines apply to all tax assisted investment or savings plans that allow plan members to make investment decisions among two or more investment options (which would generally include a DC registered pension plan). These guidelines cover issues such as setting up a Capital Accumulation Plan (CAP), investment information and decision-making tools for CAP members, introducing a CAP, ongoing communications and termination of a CAP. CAPSA Pension Plan Governance guidelines set out 11 principles of good governance for all pension plans. The guidelines are organized under 11 principles: (i) fiduciary responsibility, (ii) governance objectives, (iii) roles and responsibilities, (iv) performance measures, (v) knowledge and skills, (vi) access to information, (vii) risk management, (viii) oversight and compliance, (ix) transparency and accountability, (x) code of conduct and conflict of interest, and (xi) governance review. A focus on fiduciary duties, responsible investment functions and communication and disclosure of information are common themes across all three jurisdictions. Across all three jurisdictions there are prohibited transactions in relation to investment, lending etc. Notable differences In the US, there is a jurisdictional agreement dividing responsibility between the tax regulator (IRS) and the Department of Labor. This does not exist in the UK or Canada. In Canada there are more extensive investment restrictions that apply to registered pension plans. These restrictions include certain quantitative limits as well as related party restrictions. Both the UK and the US have broad prudence and diversification concepts. Governance guidelines also exist for federally regulated pension plans.

5 Common Governance Practices Trust-based Trustee board sponsor and member nominated Committees used in larger plans Plan administration generally outsourced so service level agreements with external administrators are common. Trust deed and rules and overriding legislation set out governance structure, including trustee investment powers and duties. Usually left to trustee board as to how it organises itself subject to trust law duties and regulatory oversight. Trustees select menu of investment choices, usually including a default fund, and plan members are free to choose from that menu how to invest contributions made to the plan. Contract-based All administration and governance handled by insurer. Employer s benefits team typically oversees interaction with the insurer and distribution of information to employees. Minimal employer responsibility and no plan fiduciaries. However, UK Pensions Regulator is encouraging voluntary engagement by employers in relation to contract-based arrangements eg through a management committee with a monitoring and advisory role. Revenue sharing fees reimbursed from mutual funds to record keepers; is there a possibility that the fees received by the record keeper are not reasonable in terms of the value of the services? Plan governance structures under a typical structure there will be: (i) written investment guidelines as to the guiding principles for the selection, monitoring and replacement of funds; (ii) a Charter for the committee setting out how often the committee will meet, what its responsibilities are and how it will address them. There also may be a Charter at the board level specifying the number of committees (an administrative and an investment) and the respective board committees to which they report. Service providers and service level agreements Focus on adequate and accessible communication to plan members. Pension committees often used in larger plans. Larger plans also more likely to have governance guidelines/policies and/ or Charters in place. Typically a plan sponsor will have in place a governance structure that takes into account the various CAPSA guidelines. Plan fiduciaries or sponsors select menu of investment funds and participants select the investments depending on appetite for risk. All have default funds (in the UK this is not compulsory but from 2012 will be required for auto-enrolment plans). The employer (or the applicable fiduciary in the US) deals directly with the insurance company in contract-based/insured arrangements. Use of committees to carry out different functions in US and Canada and in the larger trust based plans in the UK. UK Pensions Regulator is encouraging voluntary engagement by employers in relation to contract-based arrangements eg through a management committee with a monitoring and advisory role. In the US and UK there are written investment guidelines as to the guiding principles for the selection, monitoring and replacement of funds. The UK Pensions Regulator is developing specific regulatory framework and guidance for DC investment and DC governance generally.

6 Topical issues Auto-enrolment Investment decisions and decisions at retirement better support and communication for employees from employers/trustees Improvement of governance/ administration practices including tough new standards on accuracy of member data (to be introduced shortly) Company stock funds have resulted in a considerable amount of law suits. These stock drop cases usually arise in the context of a falling value for the employer shares and whether there is an obligation by the fiduciary to disregard the plan documents and sell the shares. Revenue Sharing: Similarly, there have been a number of class actions relating to alleged fiduciary breaches in the monitoring of expenses, fees and revenue sharing arrangements. Investment advice: Congress recently passed law facilitating the ability to provide investment advice to participants. This can be done on a person to person basis or via black box computers designed to provide advice ranging from asset allocation models to the actual funds on the menu that fit the participants investment profile. The key is that no additional consideration is generated by virtue of the rendering of the investment advice. Default funds Education vs advice Improvement of governance/ administration practices Selection and adequate supervision of service providers In both the UK and Canada, improvement of administration and good governance practices is topical (including selection of service providers). Additionally, educating members correctly, without actually advising them, is a priority in all three jurisdictions. Notable differences Company stock funds are not permitted in the UK or Canada. May 2010 US perspective: Howard Pianko, Seyfarth Shaw LLP Canadian perspective: Jana Steele, Goodmans LLP UK perspective: Maria Stimpson, Allen & Overy LLP

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