Canadian Investment Review

Canada’s “Safe Harbor” Rules

Written by Gerry Wahl on Thursday, October 6th, 2011 at 6:00 am

187265_life_preserverThe roles and responsibilities of sponsoring a Capital Accumulation Plan (CAP) and compliance and with legislation and the CAP Guidelines are onerous and pose a potential legal and financial risk for sponsors and administrators. It is often suggested that these risk factors are one of the reasons why more employers don’t offer pension programs. If legislation is enacted to provide some protection to sponsors and administrators it will reduce the underlying concern, administrative cost and the risks associated with CAPs.

For many years the Canadian pension community has suggested that “safe harbor” legislation, similar to ERISA in the US, is needed in Canada. ERISA-type protection will encourage more employers to offer CAP pension programs in Canada. ERISA safe harbor legislation is prescriptive in nature and outlines nine requirements that must be met in to achieve a safe harbor. The wording of the nine requirements is general in nature and subject to interpretation, hence open to being legally challenged. In the US, the question remains whether the US “safe harbor” legislation really has been effective in reducing litigation.

The Alberta and B.C. Joint Expert Panel on Pension Standards (JEPPS) also considered but shied away from prescriptive ERISA-style safe harbour legislation. JEPPS recommends that a more principles-based approach be used, relying on a “pension judgment rule” to offer protection to sponsors and trustees, similar to the “business judgment rule” approach that protects corporate directors. JEPPS reasons that this will encourage plan sponsors and administrators to follow prudent governance processes and procedures–the emphasis is on due diligence and good governance. JEPPS however recognizes that some areas should be addressed in legislation i.e., a prescriptive approach is appropriate.

Parliament passed Bill C 47 in January 2011 which amended Section 8 of the Federal Pension Benefits Standards Act by adding Subsections 4.3 and 4.4. This change may also be adopted by the provinces for provincially registered pension plans.

Subsection 4.3 states “if a pension plan permits a member … to make investment choices the administrator must offer investment options of varying degrees of risk and expected return that would allow a reasonable and prudent person to create a portfolio of investments that is well adapted to their retirement needs.”

Subsection 4.4 states “if an administrator offers investment options in accordance with subsection (4.3) and the regulations, that administrator is deemed to comply with the subsection”.

The wording in Section 4.3 “investment options of varying degrees of risk and expected return that would allow a reasonable and prudent person to create a portfolio of investments that is well adapted to their retirement needs” is open to interpretation and legal challenge however it is in keeping with the desire of Canadian pension regulators and JEPPS to have “principles-” vs. “rules-” based legislation.

The amendments to the PBSA Section 8, while not as prescriptive as the safe harbor provisions in the US, do provide a higher degree of safety for Canadian CAP sponsors. The importance of having a strong governance framework and actively using it to manage a pension program is one of the expectations of Canadian pension regulators (see CAPSA consultation paper of Nov 30, 2009 “The Prudence Standard and the Roles of Plan Sponsor and Plan Administrator in Pension funding and Investment”). The amendment to the PBSA Section 8 is in keeping with the pension industry’s and regulators wish for more principle based pension legislation.

Has anything really changed? The answer is yes, in the sense that the underlying principle of a strong governance framework and processes which will assist in making prudent decisions, and which has always existed, is clearly stated in pension legislation.

As a CAP sponsor do you have the necessary strong governance framework in place i.e., a Charter, Terms of Reference, a Statement of Investment Policies and Procedures and a Statement of Investment Beliefs? Equally important – do you have the expertise and a reporting system that highlights issues before they become problems? If the answer is yes then the safe harbor amendments work in your favor.

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