Proposed Guidance: Pension Plan Administrator Roles and Responsibilities Guidance

1.1 This Guidance provides FSRA’s interpretation of the role and responsibilities of pension plan administrators (administrators).^[1]

1.2 As fiduciaries in an ever-changing world, administrators are responsible for prudently managing risks in their pension plans, making decisions in the best interest of pension plan beneficiaries,^[2] and administering the plan in accordance with the filed plan documents and all applicable laws.

1.3 Voluntary employment-based pension plans are an important component of retirement income security for employees and their families in Ontario. Good pension plan administration helps all stakeholders and enhances confidence in the ability of these plans to deliver their intended outcomes.

1.4 FSRA’s guiding principles for the supervision of the pension sector are set out in its Pension Sector Guiding Principles. This Guidance supports FSRA’s statutory objects to promote good administration of pension plans and to protect and safeguard the pension benefits and rights of pension plan beneficiaries.^[3]

2.1 An administrator is responsible for all aspects of the administration of the pension plan and the related pension fund, including:

• providing information to plan beneficiaries
• complying with plan documents and applicable laws
• establishing, maintaining, and investing the pension fund in accordance with the plan terms
• maintaining complete and accurate plan records
• ensuring that appropriate contributions are made to the pension plan
• making benefit payments to plan beneficiaries

2.2 As a part of the administrator’s governance activities (see below regarding governance policy), the administrator’s role also includes responsibility for implementing processes to ensure plan risks (investment, funding, operational, legal, etc.) are understood and addressed. Especially important in the context of defined benefit pension plans are those risks that might impact the security of the promised pension benefits, such as the financial risks to the plan’s investments and the employer’s ability to withstand variations in its funding commitments.

2.3 The administrator’s role differs from the roles of the plan sponsor and employer.^[4] The plan sponsor’s responsibilities include designing, establishing, amending and terminating the pension plan.^[5] The responsibilities of the employer include making contributions and providing sufficient funding to provide the promised pension benefits.^[6] For many defined benefit pension plans, the employer’s responsibilities also include understanding the risks that might impact the security of the promised pension benefits and its ability to withstand variations in its funding commitments based on the plan’s funding and investment strategies.

3.1 An administrator must be a person, body or entity specified by the Pension Benefits Act (PBA).^[7] For most plans, the administrator is also the same entity as the employer of plan members and the plan sponsor. Another common form of administrator is a board of trustees.

3.2 The individuals who make decisions for the administrator may delegate decision-making authority to other individuals within or outside of the organization. Notably, section 22(7) of the PBA provides that an administrator must carry out such supervision of the agent as is prudent and reasonable. When delegating decision-making authority to an agent, an administrator retains their fiduciary duties under section 22, and must ensure that the agent fulfills their delegated responsibilities. Administrators should have in place controls and reporting requirements to ensure their responsibilities are fulfilled and pension benefits are protected.

3.3 For some pension plans, the same individuals will have decision-making responsibilities for the administrator, the employer and/or the plan sponsor. In these situations, those individuals need to clearly understand and document when their decisions are taken as an administrator, an employer or a plan sponsor and be mindful of the potential for conflicts of interest among their roles (see below regarding fiduciary duties).^[8]

4.1 Administrator responsibilities are set out in the pension plan documents, the PBA and other applicable law. Administrators also have responsibilities as fiduciaries under common law (see below regarding fiduciary duties).

4.2 To assist administrators in carrying out their responsibilities, FSRA has published regulatory guidance.^[9] The Canadian Association of Pension Supervisory Authorities (CAPSA) has also published documents describing leading practices.^[10] Administrators should be able to demonstrate that they have considered these practices in their administration and investment activities.

5.1 Administrators are subject to fiduciary duties under common law and minimum standards prescribed by the PBA.

5.2 It is well established in law that a fiduciary is required to act with the utmost good faith and in the best interests of beneficiaries. This means that administrators must be honest, act in good faith and treat plan beneficiaries impartially. They must also avoid or manage conflicts of interest – i.e., the individuals and legal entities acting as administrators must not permit their interests to conflict with the interests of plan beneficiaries.^[11] In addition, if an administrator owes a duty to another person outside of their role as plan administrator, they must not permit that duty to conflict with the interests of plan beneficiaries.

5.3 At a minimum, section 22(1) of the PBA provides that the “[a]dministrator of a pension plan shall exercise the care, diligence and skill in the administration and investment of the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person.” Section 22(2) of the PBA provides that the, “[a]dministrator of a pension plan shall use in the administration of the pension plan and in the administration and investment of the pension fund all relevant knowledge and skill that the administrator possesses or, by reason of the administrator’s profession, business or calling, ought to possess” (collectively referred to as the “standard of care”).^[12] This increases the minimum standard of ordinary prudence to one in keeping with the administrators’ abilities, experience, and profession.

5.4 Individuals carrying out administrator functions must be knowledgeable about their responsibilities and the standard of care they must meet. Depending on the circumstances, the standard of care may require the administrator to obtain the appropriate level of knowledge from third-party advisors.

5.5 In determining whether the administrator’s standard of care has been met, attention is paid to the policies and procedures put in place by the administrator and how they were followed in the course of administering the plan. Appropriate policies and procedures, including written records of administrator decisions and activities, can help ensure and demonstrate that in respect of decision-making, only proper factors are considered (e.g., interests of plan beneficiaries, compliance with plan documentation and applicable law, etc.) and that the standard of care is complied with.

5.6 For pension plans where the administrator is also the plan sponsor and/or employer, there is a greater risk of potential conflicts of interest. For example, the directors and officers of a corporate employer must act in the best interests of the corporation. But, in carrying out administrator duties, those same individuals must act in the best interests of plan beneficiaries. In the context of multi-employer pension plans, individual trustees need to be mindful of potential conflicts of interest that may arise if they also occupy senior roles within the sponsoring union or a participating employer. Service provider engagements can also be a source of conflict of interest if the service provider, particularly those providing professional advice, provides services to the administrator and the plan sponsor or the employer (see below regarding service providers).

5.7 A helpful perspective for dealing with conflicts of interest is to consider how an independent administrator would act in the specific circumstances. This might require obtaining independent, expert advice. Also, a written policy on conflicts of interest, included as part of the administrator’s governance documents (see below regarding governance policy), is an effective way to identify potential conflicts of interest that may arise and the measures through which they can be effectively managed.

5.8 An administrator’s fiduciary duties apply in the context of ensuring that contributions to the plan are paid when due and the plan is sufficiently funded to pay the promised benefits.^[13] For defined benefit pension plans, an administrator’s fiduciary duties may require it to consider the plan’s probability of delivering its promised benefits in situations of increased funding risk, such as an employer’s financial distress, and what actions are appropriate in light of its standard of care.^[14] Depending on the circumstances, an administrator’s fiduciary duties may require it to consider formal legal action to enforce the payment of contributions and/or ensure that sufficient assets are retained within the employer to fund the plan.^[15]

6.1 Administrators often engage third-party service providers.^[16] Service providers may provide advice as consultants or perform administration and investment activities for the pension plan. Such activities include, for instance, the preparation of a valuation report and investment decisions for the plan fund or for members’ investment options, as applicable.

6.2 Consistent with their fiduciary duties and applicable law, administrators need to understand how third-party advice informs their decision-making, and also prudently document and supervise the activities performed by those service providers.^[17] Service providers should be subject to clear reporting obligations and have established policies and procedures that can be reviewed and monitored.

6.3 Service providers that are employed by administrators to carry out any act required for the administration and/or investment of the plan, are subject under the PBA to the same standard of care as administrators.^[18] Such service providers cannot contract out of the legislated standard of care.^[19]

6.4 While the use of service providers does not relieve administrators of liability, their use can be an effective means for administrators to meet their standard of care and manage their exposure to liability. Administrators should ensure their reliance on service providers is reasonable in accordance with their standard of care, e.g., through their supervision activities and by asking questions to understand and verify the reasonableness of relying on any advice received. An effective process for selecting service providers is important in determining whether it is reasonable to rely on a service provider with respect to a particular activity.^[20]

7.1 It is generally permissible, subject to the plan documents and the PBA, to pay reasonable expenses for the administration and investment of the pension plan out of the pension fund.^[21] Permitted expenses are determined on a case-by-case basis. Such expenses should be appropriate for the circumstances of the pension plan and in the interests of plan beneficiaries.^[22] Expenses paid out of the pension fund in connection with the role of the plan sponsor or employer are impermissible.^[23] An administrator should consider having a written expense policy and/or obtain expert advice regarding the ability to pay expenses out of the plan where appropriate. An expense policy forms part of an administrator’s governance policy (see below regarding governance policy).

8.1 Pension plans have long term time horizons. Administrators must manage and retain records relating to the pension plan and pension fund in a manner that complies with their fiduciary duty, the PBA, and applicable law.

8.2 In order to demonstrate adherence to the standard of care, FSRA’s interpretation of section 22 of the PBA, including applicable law, is that administrators must retain relevant records and ensure such records are available so long as they are needed:

• For good plan administration
• To demonstrate the plan has fulfilled its obligations to plan beneficiaries and others, including by complying with the PBA.

Where the administrator does not maintain relevant records, this could adversely affect the administrator’s position should a dispute arise.^[24] It is also possible the administrator may be in breach of its obligations under section 22 of the PBA.

8.3 Administrators must be able to demonstrate that they are effectively satisfying the standard of care. In order to be able to demonstrate adherence to the standard of care, administrators should consider:

• Putting in place records management and retention policies. These may vary based on the size and complexity of the plan as well as the Administrator’s relationship with third party service providers.
• Integrating such policies with the plan’s risk management practices relating to data (e.g., data integrity, cybersecurity, and disaster recovery).
• Ensuring that any record keeping arrangement with a third party service provider allows the administrator to demonstrate compliance with its own policies and obligations with respect to maintaining plan records.^[25]

8.4 The PBA does not prescribe timelines for retention of different types of records.^[26] In order for administrators to meet the standard of care, FSRA’s interpretation of the PBA and applicable law, is that administrators must determine appropriate retention timelines for different types of plan records. In doing so, administrators should consider:

• Putting in place a schedule of reasonable retention periods that balances different factors such as the cost and challenges associated with retaining the records relative to the nature of the records, and whether and to what extent they may be, helpful to effective plan administration.^[27]
• In certain instances, such as for terminated members whose benefits have been settled, retaining only summary information.
• Whether there are any conditions that would justify electronic records not being retained given the relative ease and expense of electronic document retention.

Administrators must also ensure that their record retention practices comply with all applicable laws with respect to document protection and retention.^[28]

8.5 Administrators are required to make available for inspection the specific types of records set out in section 29 of PBA. The administrator must keep these records indefinitely to meet the requirements of section 29.

9.1 In order for administrators to meet the standard of care, FSRA’s interpretation of the PBA and applicable law is that administrators must observe high standards of integrity and honesty, and act in good faith and in the best interests of beneficiaries when responding to complaints and inquiries.

9.2 Administrators must be able to demonstrate that they are effectively satisfying the standard of care. In order to be able to do so, administrators should put in place written complaint and inquiry handling policies and procedures that align with the principles in FSRA’s Complaints Resolution: Policy Framework and Best PracticesGuidance such that they are:

• accessible
• fair
• timely
• transparent
• effective

Policies and procedures should also respect general principles of natural justice. For example, beneficiaries should be made aware of any issues relevant to their inquiry or complaint and should be given a reasonable opportunity to respond. Beneficiaries should feel respected and fairly treated even if they disagree with a decision.

9.3 The content of a complaint and inquiry handling policy may vary depending on the number, frequency, and complexity of complaints and inquiries handled by the plan, as well as whether any service providers are involved. That policy should:

• provide contact information to which beneficiaries may direct questions or concerns about their pension
• describe the various roles and responsibilities of those involved in the complaint or inquiry process
• describe the complaint or inquiry process and set out expected timelines for beneficiaries
• direct beneficiaries’ complaint to FSRA to the extent the complaint is not satisfactorily resolved by the administrator

Administrators should be able to demonstrate proper adherence to any complaint and inquiry handling policies and procedures developed and that effective controls and processes are put in place for operationalization and oversight.

10.1 In order for administrators to be able to demonstrate adherence to the standard of care, FSRA’s interpretation of the PBA and applicable law is that administrators must provide appropriate information to beneficiaries that:^[29]

• communicates plan terms and legislative requirements in a clear manner
• is accurate, up-to-date, and reflects the terms of the plan as applicable to the beneficiary
• reflects any changes made to the plan within a reasonable period of time

10.2 Administrators must be able to demonstrate that they are effectively satisfying the standard of care. In order to do so, and in recognition that even inadvertent errors in communications may impact the rights and entitlements of beneficiaries,^[30] administrators should:

• put in place written policies and procedures to ensure that information accessed by beneficiaries is always current and correct
• communicate any benefit changes made to the plan in plain language, in addition to statutory notices required under the PBA^[31]
• If providing communications electronically, put in place policies and practices for electronic communications to ensure compliance with the PBA, the Electronic Commerce Act, 2000 (ECA), and CAPSA Guideline #2 Electronic Communication in the Pension Industry.

11.1 As outlined by CAPSA in its Pension Plan Governance Guideline,^[32] having a documented governance framework or policy is considered a key practice for pension governance. FSRA’s supervisory activities frequently include a review of plans’ governance frameworks. Failure to have and follow a governance framework exposes the administrator to potential sanction and liability for having breached its fiduciary duty and standard of care.

11.2 Administrators, in developing their governance policies, should refer to CAPSA’s Pension Plan Governance Guideline, including the Self-Assessment Questionnaire and FAQs, and consider other best practices as may be relevant. A key component of a governance policy is a prudential framework. This framework is intended to identify and assess the magnitude and probability of potential risks, including the ability to absorb future fluctuations in funding contributions, based on reasonable assumptions, and to put into effect appropriate risk management practices.^[33]