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FSRA issues governance guidance for plan administrators

FSRA issues governance guidance for plan administrators

September 28, 2021

On July 28, 2021, the Financial Services Regulatory Authority of Ontario (FSRA) issued Interpretation No. PE0296INT, a guidance document setting out the roles and responsibilities of pension plan administrators.  

Responsibilities of plan administrator

The guidance covers the following topics related to plan administrator responsibilities:

  • The role of the administrator in communicating with plan beneficiaries, compliance, investment of the plan fund, maintaining plan records, ensuring contributions are made, making benefit payments and risk management;
  • What types of entities may serve as administrator;
  • Sources of administrative responsibilities, including the Pension Benefits Act (PBA), regulatory guidance and the common law;
  • The sources and content of an administrator’s fiduciary duties, including the additional complexity that arises where the administrator is also the plan sponsor and/or employer; and
  • Administrators’ responsibilities when engaging third-party service providers, including the importance of review, monitoring and establishing clear reporting obligations.

Conflicts of interest

FSRA points out the greater risk of potential conflicts of interest for pension plans where the administrator is also the employer. 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 interest of plan beneficiaries.

FSRA suggest that 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.

Defined benefit funding

FSRA indicates that an administrator’s fiduciary duties apply in the context of ensuring that contributions to the plan are paid when due and that the plan is sufficiently funded to pay the promised benefits.

FSRA suggests that, 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. 

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.  FSRA suggests that legal actions might include actions based on breach of the administrator’s fiduciary duty, breach of contract, corporate statute (e.g., derivative or oppression claims) and the Fraudulent Conveyances Act.

Governance documentation

The new guidance adopts the recommendation found in the Canadian Association of Pension Supervisory Authorities (CAPSA) Guideline No. 4: Pension Plan Governance Guideline that pension plans have a documented governance framework or policy, including a prudential framework to identify and assess the magnitude and probability of potential risks to the plan. The adoption of a governance policy is a longstanding CAPSA recommendation and is required in some other Canadian jurisdictions. The new guidance also includes a recommendation that plans consider adopting an expense policy as part of its governance policy.

Administrative expenses

With respect to administrative expenses, FSRA indicates that, while it is generally permissible to pay reasonable expenses for the administration and investment of a pension plan out of the pension fund, fees and expenses whose primary purpose is to benefit the employer or plan sponsor (such as the preparation of off-cycle valuation reports where the primary goal is to reduce employer contributions) are generally impermissible expenses.

Conclusion

The new FSRA guidance is aimed at assisting administrators of Ontario-registered pension plans in meeting their fiduciary and other obligations.  Plan administrators, in particular of defined benefit pension plans, should consider this guidance as part of its governance approach.

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