Good Governance

Good Governance
Risk management and pension plans in Quebec

By Gilles Bernier, professor of finance and insurance, Laval University

On December 13, 2006, Bill 30 was adopted in Quebec.1 Its purpose is twofold: to improve the funding of defined benefit (DB) plans; and to enhance the governance of pension plans and better define the scope of the responsibilities of pension committee members and other parties involved in the administration of pension plans. Among the new governance measures included in Bill 30 is the requirement for pension committees to adopt internal bylaws that must cover, among other things, risk management measures intended for the plan.2 During my presentation, I raised the question of whether Bill 30 makes it easier or not for pension committees to manage risk in a more integrated way, and what is needed to do so.

My own prediction is that Bill 30 should gradually lead to more integrated risk management on the part of pension plans registered in Quebec. In my view, this has to do with the fact that plans will now have to adopt a risk management process [risk identification, assessment, control, financing and monitoring] to help them focus on risk management issues. For DB plans in particular, the adoption and application of a risk management process will also gradually require pension committees to recognize the importance for a plan’s sponsor (ultimate payer) to reveal its goals, priorities and risk tolerance in a formal funding policy.3 As such, that’s very good news.

It is well known in the field of pension (for example, see Labrosse (2005)) that a formal funding policy is the basis for doing the modelling that will help committees: (1) identify risks to which sponsors and members are exposed; (2) find out ways for better managing risks (e.g., applying ALM or LDI); (3) choose a more proper asset mix; (4) better communicate and explain to interested parties the plan’s financial situation; (5) optimize the plan’s operations; (6) better align the plan’s financial obligations with the needs and financial objectives of the sponsor and, (7) adopt governance best practices.

With Bill 30, Quebec did not go as far as directly forcing plans’ sponsors to elaborate a funding policy. Perhaps it should have. This is what the expert committee recommended as the basis of a balancing act describing what the relationships among key players in a DB plan ought to be.4 Instead, Quebec took an indirect approach by imposing a focus on risk management in a plan’s bylaws. Hopefully, this will very likely lead to the same outcome.

In closing, while Bill 30 was being written, politicians from the opposition raised the possibility for Quebec to set up a guarantee fund that would protect pension benefits of workers, such as in the USA (PBGC) and in Ontario (PBGF).5 After a great deal of discussion, the government of Quebec finally did not retain this option.

Bibliography
Comité d’experts, « Rôle des comités de retraite dans les régimes complémentaires de retraite et surveillance de la Régie des rentes du Québec », Rapport final, May 10th, 2006;
D’Amours, C., « Nouvelles mesures en matière d’administration des régimes complémentaires de retraite entrée en vigueur en 2006 », La lettre RCR, Régie des rentes du Québec, Juin 2007, 6 pages.
Deschênes M. and I. Clément, « Formation des membres de comités de retraite », Printemps 2007, Mercer (MMC).
Labrosse, B. « Politique de provisionnement », Insight Information Co. – Présentation du 17/11/2005, Société Watson Wyatt Canada.
Montour, M. « Le rôle de la gouvernance dans le financement d’un régime de retraite: Le cas du RRQ », Présentation devant le Collège des administrateurs de sociétés, Université Laval, Montréal, le 1 juin 2007.
Perreault, M-C. & V. Lemelin, « New funding and governance rules for DB pension plans: the legislature takes a position », In fact and in Law, by Lavery, DeBilly, July 2006.

Endnotes:
1. Bill 30 is entitled An Act to amend the Supplemental Pension Plans Act, which first became law on January 1, 1990.
2. See the bibliography for more information on the content of Bill 30.
3. Not everybody will agree with my position. For many observers in Quebec and elsewhere in Canada, plans’ funding policies will become more prevalent and formal only if it is somehow required to adopt one.
4. See discussion of this recommendation in the final report of the committee released on May 10th, 2006.
5. This was raised in the wake of the difficult class-action suit case of Jeffery Mines following the firm’s bankruptcy, which then led to a contagious impact for its pension plan. Retirees are now just entitled to about 50% of their promised benefits. Needless to say that this case became highly political in Quebec.