Prudence and process: a primer on pension investment law

2019 Risk Management Conference

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mitch-frazerMany years ago, there was not much pension investment–related law, but with the rise of Canadian pension funds investing globally, this has changed, said Mitch Frazer, partner at Torys LLP, when speaking at Canadian Investment Review‘s 2019 Risk Management conference.

“You see pension funds buying assets around the world, and it’s really a very interesting time,” he said.

The law is developing at a rapid rate and there are certain processes and guidelines plan sponsors should be aware of.

A key one is the Canadian Association of Pension Supervisory Authorities’ guideline on pension plan prudent investment practices.

This includes a two-hats principle, where an employer is the plan sponsor and the administrator. “The sponsor has no fiduciary duties,” Frazer said. “The sponsor establishes the plan, could wind up the plan and deals with funding. Everything else is the administrator. And the administrator under the pension plan will have two duties: they’ll basically [have] statutory duties and they will have common law fiduciary duties.”

The statutory functions are to exercise care, diligence and skill, and to use all relevant and special knowledge the plan sponsor has, he noted. “You’ve got to manage the funds in a prudent way. You’ve got to retain financial consultants for independent advice. You’ve got to delegate investment responsibilities as appropriate. These are all key things that you’ve got to do in order to make the proper investment.”

The prudent person rule focuses on behaviours and processes rather than outcomes, Frazer said, because no one has a crystal ball. “But, in law, the important thing is to know that you’ve done the process right  have you thought about these things? Have you gone through and done your objective analysis?”

This involves using the skill and knowledge a plan sponsor ought to possess  so the requirements would be different for a small plan versus a large plan, he noted.

“It’s very different, but there’s still generally the same principles: It’s make sure you understand all your documents, make sure that you’re legally compliant. You want to develop good governance practices.”

And keeping good records is key to demonstrating the process because, at the end of the day, some investments won’t work out as planned, he said.

Finally, it’s important to have well-defined objectives. “If you understand where you’re going to go, you could manage your risk better,” Frazer said.

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