Pension Law and Fiduciary Duties Instructor: Dominique Roelants Executive Officer, B.C. College, Public Services and Teachers Pension Boards
Plan Governance The structure and processes under which a pension plan is administered and monitored to ensure that fiduciary and other obligations with respect to the plan are fulfilled.
New PBSA The BC Government passed a new Pension Benefit Standards Act in 2012 and it includes many new provisions one of which is: Must have a governance policy (s. 42) And this policy must meet the prescribed criteria.
Plan Governance May differ by type of plan: Single employer; Multi-employer; Jointly sponsored.
What is a Fiduciary? A fiduciary is anyone who is in a position of trust and who has a special responsibility to the beneficiary of the trust.
Main Fiduciary Duties Two Overarching Fiduciary Duties: 1) Duty of prudence. 2) Duty of loyalty.
Duty of Prudence In the administration of a pension plan, the administrator must: (a) act honestly, in good faith and in the best interests of the members and former members and any other persons to whom a fiduciary duty is owed, and (b) exercise the care, diligence and skill that a person of ordinary prudence would exercise when dealing with the property of another person. PBSA, s. 8(5) New PBSA s. 35(3)
Duty of Prudence Pension plan assets must be invested in a manner that a reasonable and prudent person would apply in respect of a portfolio of investments made on behalf of another person to whom there is owed a fiduciary duty to make investments without undue risk of loss and with a reasonable expectation of a return on the investments commensurate with the risk. PBSA, s. 44(2) New PBSA s. 60(2)
Duty of Loyalty The provisions of subsection (5) are in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of a trustee. PBSA, s. 8(6) Not in new PBSA
PBSA comparison (7) If an administrator employs an agent to carry out some of the duties of the administrator, the administrator must be satisfied of the agent's qualifications to perform the duties for which the agent is employed, and must carry out such supervision of the agent as is prudent and reasonable. (8) An agent or employee of an administrator is subject to the standards that apply to the administrator under this section. PBSA, s. 8(7) and (8) (7) If an administrator employs an agent to exercise one or more of the powers or perform one or more of the duties of the administrator, the administrator must (a) (b) be satisfied that the agent is qualified to exercise the powers or perform the duties for which the agent is employed, and carry out reasonable and prudent supervision of the agent. New PBSA, s. 35(7)
Code of Conduct Trustees must act: In good faith and in the best interest of plan members. With prudence and reasonable care. With skill, competence and diligence. With independence and objectivity. Without conflicts of interest. In accordance with laws.
Roles and Responsibilities Know the Trust Agreement and policies. Oversee pension staff, service providers, financial reporting. Review strategic plan and risk assessment. Oversee communication of plan. Conduct and review audits.
Standard of Care and Delegation Act with skill, competence and diligence. If lacking sufficient knowledge, the Trustee must advise and seek further information and advice to make an informed decision. Trustees may delegate to appropriate person/agent.
Conflicts Union positions/interests. Employer Trustees positions/interests. Plan costs versus member requests. Confidentiality of plan information. Individual member representation vs plan issues. Gifts offered by service providers.
Addressing Conflicts Check plan provisions. Check plan communication provisions. Check plan policies. Seek direction from legal counsel. Consult trade union. Clarify rules and policies re roles.
Accountability Ensure that policies are clearly outlined and understood. Set goals with expected outcomes. Monitor and evaluate effectiveness of Board function and policies. Ensure independence of Board and Management.
New PBSA The BC Government passed a new Pension Benefit Standards Act in 2012 and it includes many new provisions one of which is: Must have a funding policy (s. 44) And this policy must meet the prescribed criteria.
Duty of Impartiality Trustees can differentiate amongst members, with equal consideration. Does not mean equal treatment All relevant considerations must be assessed. Properly record decision making. Trustees duty of loyalty is to the plan.
New PBSA The BC Government passed a new Pension Benefit Standards Act in 2012 and it includes many new provisions one of which is: Must have a Statement of Investment Policies and Procedures (s. 43) And this policy must meet the prescribed criteria.
Fiduciary Duty Investments Maintain an optimal rate of return within acceptable levels of risks. Maintain adequate diversification within accepted levels of risks. To act in the best financial interests of the plan members.
Fiduciary Duty Investments (RI) Pension plan investments, loans and other pension plan financial decisions must be made in accordance with this Act and the regulations and in the best financial interests of plan members, former members and other plan beneficiaries. PBSA, s. 44(1) New PBSA s. 60(1)
Effective Boards Positive performance of the plan is impacted by effective decision making. Things to consider include: Who makes the decisions. Proper skills, knowledge and resources. Checks and balances (reporting and approvals).
Effective Boards Exercise problem solving skills. Able to assess and address probabilities. Avoid hasty decisions. Diversity of Board Member skills. Optimal leadership. Structured decision making.
Trustee Protection from Liability Document all proceedings when making a decision. Get expert advice when making decisions. Get indemnification clause/agreement from plan (or union).
Trustee Protection from Liability Review all plan documents/trust documents for issues. Act in accordance with the plan s trust agreement, investment policy and the law. Act in the long-term best interests of plan members and beneficiaries. Obtain liability insurance through plan.
Union Protection from Liability Make appointments on time etc. in accordance with trust agreement. Union must not control trustees when they are performing duties. Obtain a clause in trust agreement limiting liability of union for acts/omissions of trustees.
Selection of Trustee Nomination Vote Selection Criteria Length of Appointment Evaluation of Trustee
Selection of Trustee Consideration for the appointment of trustees Experience, aptitude and interest. Prepared to learn, not afraid to ask questions. Significant time commitment. Recognize the significant responsibility.
Expectations of a Trustee Develop knowledge and skill. Prepare for meetings. Attend meetings. Take an active role in meetings. Understand role and responsibilities. Communicate, be accountable.
A Successful Trustee Is aware of plan member concerns and interests. Acts in the best interests of plan members Reports and supports communication. Attends educational opportunities. Allocates sufficient time to prepare and understand plan issues.
Union Trustees Union Trustees are decision makers. They are appointed by their union to: Pension Boards Pension Committees Benefit Committees Benefit Representative for Bargaining
Role of the Union Union must support Trustee by: Supporting attendance at plan meetings. Supporting attendance at educationals. Facilitate opportunities for reporting. Allow successor planning for replacement Trustees. But Union may not direct Trustee.
Role of the Union Ensure the best Trustee is appointed. Require updates and reports. Establish criteria for Trustee appointments and evaluate their effectiveness. Replace Trustee if necessary. Keep Trustee informed of relevant issues pertaining to benefit plans.
Role of Unions in Plan Governance Varies according to the plan Different types of models: Jointly trusteed Employer trusteed Union trusteed Unions may have a role in appointing or electing pension trustees
Role of Unions in Plan Governance Unions can play a critical role in developing current and future trustees Through training Through mentoring Through committee appointments prior to becoming trustees Overhead 3.3
Unions and Member Engagement and Awareness A major challenge can be member apathy. Unions can help educate members about differences between plans. Unions can also promote awareness and training of plan members. The Plan is responsible for plan communication.
Trustee Practices 1. How does your union determine benefit Trustees? 2. What are the reporting mechanisms for Trustees to report to the Union? 3. What conflicts have arisen? How were they addressed?
What Should the Trustee Do? 1. Union wants to increase pension investments in local businesses? 2. Investment firm offers free tickets to a special presentation? 3. Union member unhappy with a plan decision and wants special consideration?
What Should the Trustee Do? 4. Pending plan changes, should they be reported? 5. Pensioners lobbying for a plan improvement for pensioners?
Capital Stewardship Instructor: Peter Chapman Executive Director, SHARE
CAPTIAL STEWWARDSHIP Responsible Pension Investment Definition Responsible pension investment is the integration of environmental, social and governance (ESG) considerations into investment management processes.
CAPTIAL STEWWARDSHIP UN Principles for Responsible Investment Principle 1: Principle 2: Principle 3: Principle 4: Principle 5: Principle 6: Incorporate ESG issues into investment analysis and decision-making. Be active owners. Incorporate ESG issues into ownership policies & practices. Seek appropriate disclosure on ESG issues where we invest. Promote investment industry acceptance & implementation. Work together to enhance effective implementation. Report on activities and progress.
CAPTIAL STEWWARDSHIP UN Principles for Responsible Investment Growing mainstream acceptance 1100+ signatories AUM = $33 trillion dollars Labour fund representatives involvement in governance Learning and collective action in a community of peers Annual reporting tool for signatories Research on asset classes, fiduciary problems, investment
CAPTIAL STEWWARDSHIP UN Principles for Responsible Investment Some Canadian signatories Asset Owners BC Municipal Pension Plan Caisse de depot et placement CPP Investment Board Batirente Fonds de Solidarite Healthcare of Ontario PP OPSEU Pension Trust Univ. Montreal Pension Plan Asset Managers Alberta Investment Management Co. Bentall Kennedy BC Investment Management Co. Fiera Matrix Asset Management NEI Investments TD Asset Management Vancity Investment Management
CAPTIAL STEWWARDSHIP Responsible Investment Strategies Asset Selection Screening Active Ownership Proxy Voting Public Policy Legal and Regulatory reform Integration Engagement Voluntary initiatives Targeted/Impact Investment Securities Class Action
CAPTIAL STEWWARDSHIP Financial Market Failure: Climate change On current trajectories: the economy will contract by up to 20%. - Stern Report (2006)
CAPTIAL STEWWARDSHIP Financial Market Failure: BP gulf oil disaster 1100+ signatories AUM = $33 trillion dollars Labour fund representatives involvement in governance Learning and collective action in a community of peers Annual reporting tool for signatories Research on asset classes, fiduciary problems, investment
CAPTIAL STEWWARDSHIP Financial Market Failure: Soaring executive pay Average CEO at Canada s top 100 public companies earns 189 times more than the average wage; Increased 27% since 2009; Risky pay structures can harm shareholder value; and Growing inequality inhibits vibrant economies, sustainable growth and healthy communities.
Number of companies More Canadian companies are voluntarily giving shareholders an advisor vote on executive compensation (aka "say on pay") More Canadian companies are voluntarily giving shareholders an advisor vote on executive compensation (aka "say on pay") CAPTIAL STEWWARDSHIP Trends We re Watching Say on Pay votes on executive compensation More Canadian companies are voluntarily giving shareholders an advisory vote on executive compensation 130 120 110 100 90 80 70 60 50 40 30 20 10 0 27 68 86 120 2010 2011 2012 June 2013
CAPTIAL STEWWARDSHIP Percentage shareholders voting against executive compensation in say-on-pay votes is increasing 10% 9% Average votes against executive pay 9.09% 8% 7% 6% 5% 4% 7.57% 6.16% 4.90% 2010 2011 2012 Jun-13
CAPTIAL STEWWARDSHIP Implementing Responsible Investment What can plan members and unions do? Educate yourselves and pension board representatives Promote best practices for investment of union funds Ask pension plans to become PRI signatories Ask for an annual report on how the plan takes ESG issues into account in asset selection and ownership rights Establish union policies Other ideas?
CAPTIAL STEWWARDSHIP Implementing Responsible Investment What can plan members and unions do? Annual Key Proxy Vote Survey proxyvotesurvey.ca How did your investment manager vote on important issues? Proxy survey provides a snapshot of how plan members share ownership rights are being used.