On September 9, 2024, the Canadian Association of Pension Supervisory Authorities (CAPSA) released Guideline No. 3 – Guideline for Capital Accumulation Plans (CAP Guideline), replacing the 2004 Guidelines For Capital Accumulation Plans (2004 CAP Guideline), and Guideline No. 10 – Guideline for Risk Management for Plan Administrators (Risk Management Guideline). This bulletin provides a high-level summary of the key changes in the CAP Guideline relative to the 2004 CAP Guideline, as well as an overview of the Risk Management Guideline.
CAPSA guidance does not replace applicable legal requirements but is designed to support legal compliance and the development of “best practices.”
The CAP Guideline
Expanded Application
The CAP Guideline expands the types of capital accumulation plans (CAPs) falling within its scope to include not only arrangements with a retirement savings focus but also arrangements to provide retirement income and certain other vehicles that provide non-retirement savings opportunities. Specifically, while the 2004 CAP Guideline referred expressly only to defined contribution pension plans (DCPPs), group registered retirement savings plans, registered education savings plans and deferred profit-sharing plans, the CAP Guideline now also covers locked-in retirement accounts, registered retirement income funds, life income funds, pooled registered pension plans, voluntary retirements savings plans, Tax-Free Savings Accounts and First Home Savings Accounts.
Where the 2004 CAP Guideline referred only to supporting the development of industry practice, the CAP Guideline explicitly states that it sets out the regulators’ expectations of best practices in the maintenance and administration of a CAP.
Responsibilities of CAP Sponsors and Service Providers
The CAP Sponsor
The CAP Guideline provides that CAP sponsors have responsibilities towards members, articulating a number of responsibilities of the CAP sponsor that did not appear, or were dealt with more generically, in the 2004 CAP Guideline. The CAP Guideline acknowledges that, under many CAP arrangements, the CAP sponsor relies extensively on service providers and provides that, in such cases, the CAP sponsor’s primary activities with respect to the CAP are likely to involve communication with members and supervision of the service providers and investments.
The CAP Guideline expressly states that a CAP sponsor’s responsibilities to members “may” include fiduciary responsibilities. The CAP Guideline notes the statutory fiduciary obligations of plan administrators of DCPPs, but does not address the possibility of overlap between the potential fiduciary obligations of a plan Sponsor referenced in the CAP Guideline and the administrator’s fiduciary obligations in relation to a DCPP, nor does it provide guidance on the nature of a CAP sponsor’s fiduciary obligations or the legal basis for such obligations in respect of a CAP that is not a DCPP.
CAP Service Providers
The CAP Guideline expands the definition of service providers to include any provider of services or advice with whom the CAP sponsor has an agreement for the performance of duties relating to the establishment and/or the ongoing operation of a CAP. The CAP sponsor is responsible for defining and documenting the service provider relationship.
Service providers who interact with members should inform members of whether those interactions are meant to be investment advice. Service providers should also disclose to the CAP sponsor, and in some cases CAP members, the monetary benefits the service provider may receive from a decision of the CAP sponsor or CAP members in addition to fees that have otherwise been disclosed.
Setting Up a CAP
Setting Up a Governance Framework
The CAP Guideline adds a new requirement for a CAP sponsor to establish and document a governance framework for the administration of the CAP. The framework should be proportional to the size, complexity, and characteristics of both the CAP and the CAP sponsor, and can include the following:
- A description of the roles, responsibilities and accountabilities of any stakeholders or parties involved in the governance of the plan
- A communication process, including a process for addressing member complaints
- A code of conduct, including a policy to manage conflicts of interest
- A risk management framework (as may be applicable to the CAP)
- A framework for the regular review of the performance of service providers, including investment managers
- A process for the regular review of the governance process
Automatic Features
A new section on automatic features, which may include (i) automatic enrollment, (ii) automatic escalation of CAP member contributions, (iii) automatic rebalancing of investments, (iv) default electronic communication, (v) default investment options, and (vi) default elections at termination of employment and retirement, has also been added.
Where a CAP includes automatic features, such features should be disclosed to members upon enrollment or when the automatic feature is added, with the ability to opt out if applicable. Where an automatic feature will directly impact a member, reasonable advance notice should be provided where possible.
Deciding Whether to Use Service Providers
The CAP Guideline does not substantively change the 2004 CAP Guideline provisions regarding the decision to use service providers, but it highlights the CAP sponsor’s ultimate responsibility for maintaining and overseeing the CAP even where service providers are retained.
Selecting Service Providers
The CAP Guideline adds additional factors for the CAP sponsor to consider when selecting service providers, including (i) potential conflicts of interest, (ii) reputation, (iii) historical and expected stability of the service provider team, (iv) controls in place to secure CAP members’ personal data, and (v) an appropriate level of access to information from the service provider.
Investment Options When Setting Up a CAP
Selecting Investment Options and Investment Funds
The CAP Guideline advises CAP sponsors to consider the number of investment options to be provided, noting that a larger number of investment options can lead to a greater governance burden on the CAP sponsor and make member decision-making more complex.
Where investment options include investment funds, the CAP Guideline expands the criteria to be considered before adding a particular investment fund to include certain fund-specific factors.
Policy Regarding Failure to Make Investment Choice
The CAP Guideline now clearly states that CAP sponsors should establish a policy that describes the default investment option that will be applied to the member’s assets if the member does not make a choice within a given period of time, and provides a list of criteria for doing so. The CAP Guideline also lists specific factors that should be considered when establishing a default investment option.
Maintenance and Retention of Records
While the record retention portion of the CAP Guideline remains mainly unchanged, it does now provide that CAP sponsors should consider the controls required to secure members’ personal data.
Educating Members About the Capital Accumulation Plan
The CAP Guideline adds language that emphasizes the importance of providing ongoing member education that reflects the purpose and intended outcomes of the CAP and is designed to improve member decisions and outcomes.
Information on the Nature and Features of the CAP
This section of the CAP Guideline has been expanded to include additional information that should be provided to CAP members. This now includes the purpose of the CAP, its intended outcomes, features and how members can positively influence the potential outcomes. CAP sponsors and service providers should make this information available on a continuous basis and should use plain language where possible in communications with plan members.
Outlining the Responsibilities of CAP Members
The CAP Guideline adds considerable detail relating to the responsibilities of CAP members (which are to be clearly communicated to CAP members), including the need to understand the investment risk associated with their investments, have knowledge of the automatic or default features, use educational and decision-making resources provided by the CAP sponsor and ensure the ongoing accuracy of their personal information on file.
Educating Members About Investment Options
The CAP Guideline outlines in much more detail than the 2004 CAP Guideline information that should be provided to CAP members regarding the investment options under the CAP, including investment restrictions and historical performance.
Transfers Between Investment Options
The CAP Guideline expands the information that should be provided to CAP members about transfers between investment options to include any specific account restrictions due to suspension of trading and the rules pertaining to automatic transfers between investment funds.
Description of Fees and Expenses
The CAP Guideline describes in detail the information regarding fees and expenses that should be provided, in plain language, upon the introduction of the CAP, when there is a material change to the fees and expenses, and at least annually after that.
Decision-Making Tools and Investment Advice for CAP Members
The CAP Guideline emphasizes the importance of providing members with decision-making tools to assist members in achieving their desired outcomes and sets out a list of tools that CAP sponsors should consider making available, including asset allocation tools, retirement planning tools, calculators and projection tools.
Investment Projections and Assumptions
Regarding investment projections, the CAP Guideline indicates that CAP sponsors or their service providers should ensure that the process for setting assumptions is prudent and should periodically review the assumptions and/or modelled output for reasonability (which assumptions should be disclosed to CAP members).
Investment and Financial Planning Advice
The CAP Guideline expressly contemplates that a CAP sponsor may enter into an arrangement with an appropriately qualified service provider to provide investment or financial planning advice, providing CAP sponsors with guidance on selecting these service providers. Where such providers are selected, the CAP sponsor should clearly communicate to members the nature of the advice from the service provider, including any limits on the scope of services, how the service provider is compensated, who is paying for their services and any conflict of interest or lack of independence on the part of the service provider relating to the CAP sponsor’s role in selecting or compensating the service provider.
Ongoing Communication to CAP Members
The CAP Guideline indicates that communications to members should be geared towards the outcome intended by the CAP and include regular reporting on members’ accounts and the performance of investment options. As outlined below, the content of member statements has been broadened and additional requirements have been added to the guidance on investment performance reports.
Member Statements
The information required in a member statement is expanded to include, among other things, the allocation of contributions invested in the chosen investment option, notice of any upcoming requirement or ability for a CAP member to commence retirement income, and the CAP member’s personal rate of return. If a statement includes the calculation of a personal rate of return for CAP members, the method used to produce the calculation should be provided.
Performance Reports for Investment Options
The investment performance reports for each investment fund should be updated at least annually and be consistent with the prevailing market practice for that type of fund.
Maintaining Oversight of a CAP
The CAP Guideline contains detailed guidance on reviewing plan features and the governance framework, service providers, fees and expenses, investment options, member education and decision-making tools, and the maintenance of records regarding the CAP. Some highlights of this guidance include:
- Regarding fees and expenses, the CAP sponsor should periodically review all member-borne fees and expenses for reasonability and competitiveness, including based on a list of considerations that the CAP sponsor should take into account as part of this review. The CAP sponsor should also determine whether fees and expenses are delivering value for CAP members.
- With respect to service providers, the CAP sponsor should consider evolving CAP requirements and updating criteria to reflect the current marketplace, reassessing any conflict of interest and assessing the CAP sponsor’s and CAP members’ satisfaction with the services provided in developing criteria for the review of service providers.
- Developing appropriate criteria for the review is also a focus of the guidance on investment options and funds. Additional factors to be considered include market changes, the impact of any changes to the investment manager’s firm, team or strategy and the alignment of risks, returns and investment option characteristics with expectations.
Member Communications on Cessation of Participation
Communication to CAP Members on Termination of Active Participation
The CAP Guideline specifies that a CAP sponsor may continue to owe a duty of care to an individual even after the employment relationship has ceased because they may remain a member of the CAP. It expands the list of information that must be given to CAP members after termination to include any ability to remain in the plan, any requirement to move to an alternate plan or to receive income from the plan, an explanation of how to transfer money to products outside of the CAP, an explanation of the fees and expenses if the funds remain in the CAP itself, and any tax consequences, market value adjustments, early withdrawal penalties and other fees.
Communication to CAP Members on Termination of a CAP
The CAP Guideline removes much of the content from this section, and instead relies on the Termination of Active Participation section.
The Risk Management Guideline
Application
The Risk Management Guideline is applicable to pension plan administrators of defined benefit, defined contribution, pooled registered, target benefit or hybrid plans. The Risk Management Guideline defines elements of a risk management framework and sets out principles to identify, evaluate, manage and monitor material risks. The Risk Management Guideline notes that it is intended to complement other CAPSA guidelines that reference risk management, including Guideline No. 4 – Pension Plan Governance and Guideline No. 7 – Pension Plan Funding Policy.
CAPSA’s Key Takeaways From the Risk Management Guideline
- The plan administrator should create a risk management framework to identify, evaluate, manage and monitor material risks.
- The plan administrator should review the risk management framework regularly.
- The design of each pension plan’s risk management structures and practices will vary based on the plan’s characteristics and circumstances and the risks being assumed.
Scope
While the intention is that the Risk Management Guideline be relevant for all pension plans regardless of plan type, complexity of administration and investment strategies, size of plan membership, and the amount of plan assets, the Risk Management Guideline acknowledges that the method of implementing some of its concepts may differ from one pension plan to another. The Risk Management Guideline encourages plan administrators to adapt their risk management practices to reflect the plan’s investment beliefs, specific circumstances and risks.
What is Risk Management?
According to the Risk Management Guideline, risk management involves each of the following:
- Establishing sound governance and oversight commensurate with the pension plan’s complexity and size
- Establishing processes and methodologies for identifying, evaluating, managing, and monitoring risks that may adversely impact a pension plan’s ability to operate as intended and deliver benefits to plan beneficiaries
- Establishing effective controls (in the form of systems, procedures or arrangements) to understand, manage and mitigate those risks
The Risk Management Guideline also considers several areas in which a risk management framework should help identify risks relating to plan administration, including the way the plan is governed, managed and administered, the way the plan’s assets are invested, the way the plan’s liability, funding and benefit adequacy are managed, and the way the plan communicates with members.
The Risk Management Guideline notes that risk management is an important consideration for plan sponsors as well as administrators. The Risk Management Guideline indicates that plan administrators and plan sponsors need to work together to identify and manage risks and specifically addresses the situation in which the plan administrator and plan sponsor may be the same entity, stating that, in this case, “the plan administrator should consider the potentially conflicting responsibilities and how it will resolve any conflicts that arise by virtue of its dual role.”
Defining Overall Risk
The Risk Management Guideline notes that plan administrators should establish — in the form of a written statement — their overall risk appetite, risk tolerance and risk limits and incorporate these into the plan’s governance and risk management frameworks.
Risk Management Four-Step Process
The Risk Management Guideline sets out the following four-step process for risk management:
- Step One: Identify Risks – Plan administrators should document the risks identified and, for each risk, the stakeholders that are impacted. The Risk Management Guideline contains a helpful table setting out common risks plan administrators may face.
- Step Two: Evaluate Risks – Plan administrators should develop a process, based on the nature, size and complexity of the plan, for evaluating and prioritizing the risks according to the overall threat that they pose to the plan’s viability and their potential impact on the plan’s stakeholders, both separately and in combination.
- Step Three: Manage Risks – Plan administrators should implement suitably designed controls to manage risks, including risks relating to errors, irregularities and fraud.
- Step Four: Monitor Risks – Plan administrators should consider information drawn from various available sources, such as audit reports, member surveys, valuation reports, and administration and investment reports.
Several tools for identifying and evaluating risks are included in the Risk Management Guideline, as well as a list of common financial risk assessment tools.
Risk Considerations for Specific Topics
The Risk Management Guideline also outlines risk considerations for the following specific topics while noting that not all of the concepts discussed may be applicable or feasible for all pension plans and stressing the need for plan administrators to adapt risk management practices to reflect their plan’s investment beliefs, specific circumstances and risks:
- Third-Party Risk: The Risk Management Guideline defines this as the risk to the plan’s operational and financial resilience or reputation due to a third party failing to provide goods and services, protect data or systems, or otherwise carry out activities in accordance with the arrangement with the plan administrator. The Risk Management Guideline highlights the plan administrator’s fiduciary obligations even where certain services and responsibilities are delegated to others and the need for plan administrators to take steps to define and document third-party responsibilities and implement effective oversight of third-party service providers and advisors.
- Cybersecurity: The Risk Management Guideline defines cyber risk as the risk of financial loss, operational disruption, or reputational damage from the unauthorized access, malicious and non-malicious use, failure, disclosure, disruption, modification, or destruction of information technology systems and/or the data contained therein, which can have both internal and external components. The key takeaways from the Risk Management Guideline relating to cybersecurity are as follows: (i) Cyber risk is a key risk for all plans and it is an evolving risk requiring a dynamic response; (ii) A plan administrator’s fiduciary responsibilities require an administrator to have access to the skills, expertise and/or training to understand and manage cyber risk; (iii) Roles and responsibilities relating to cyber risk need to be defined, assigned and understood; and (iv) Plan administrators should have a strategy to deal with responding and reporting cybersecurity incidents.
- Investment Risk Governance: While no comprehensive definition of “investment risk” is provided, the Risk Management Guideline indicates that a key consideration regarding investment risk is identifying the categories and level of investment risk that the plan administrator is willing or expected to take, so as to ensure that the impact of unexpected market shocks that could impact members’ benefits are mitigated. A number of investment risk management practices are identified and explained.
- Environmental, Social, and Governance (ESG) Issues: The Risk Management Guideline sets out a number of principles to guide plan administrators in assessing and responding to ESG issues. ESG information may be relevant to governance, risk management and investment. The Risk Management Guideline notes that a plan administrator that ignores, or does not consider, ESG information that might materially affect the fund’s financial risk-return profile could be in breach of their fiduciary duty, but recognizes that approaches to ESG information will vary depending on plan circumstances and considerations relating to cost-efficiency.
- Use of Leverage: According to the Risk Management Guideline, leverage will exist if a technique or strategy is used to increase a plan’s economic exposure to investment assets beyond what it could achieve by investing its capital in financial assets. The Risk Management Guideline addresses common risks of leverage, including market risk, liquidity risk and counterparty risk and discusses risk management practices specifically focused on the risks associated with leverage.
