After a two-year consultation period, the Canadian Association of Pension Supervisory Authorities released its 2024 guideline for capital accumulation plans in September.
With a focus on improving plan governance and member outcomes, the 2024 guideline significantly increases compliance responsibilities for CAP sponsors. Updated regulatory guidelines are rarely shorter than their predecessors and the 2024 CAP guideline is no exception to that rule, with an additional 10 pages of content and significantly more ‘shoulds’ with respect to sponsor and servicer provider duties.
Read: How CAPSA’s updated CAP guideline will impact plan sponsors, members
Compliance clearly matters and it requires dedicated resources on the part of the plan sponsor. However, ensuring fulsome observance of the 2024 guideline will be particularly challenging for small- and medium-sized employers, which often don’t have the resources or internal expertise to perform or even supervise performance of the many tasks for which a CAP sponsor is responsible under the guideline. Some of the most daunting of these tasks are:
- Establishing a comprehensive governance framework, complete with conflict-of-interest policies, risk management protocols and detailed oversight mechanisms.
- Conducting periodic reviews of member-paid fees and expenses, service providers, investment options, fund performance and risks, member behaviour and education and decision-making tools.
- Identifying and managing “perceived or actual conflicts of interest,” particularly in relation to service providers.
The 2004 guideline doesn’t suggest a code of conduct or mention conflicts of interest. In this latest iteration, the CAPSA seems to be sending a clear message that conflicts of interest are of concern for its members. Plan sponsors will be prudent to take note of this and be able to demonstrate that processes for selecting service providers and negotiating service agreements put CAP members’ interests first. With respect to investments, a key point for CAP sponsors to consider is the degree to which a service provider’s compensation depends on which funds are offered by the CAP sponsor and/or selected by members.
Read: CAPSA’s draft CAP guideline alters industry standards, say ACPM, CLHIA, PIAC
How employers can address the new compliance obligations
For employers without dedicated human resources and legal staff, taking on CAP compliance internally may well feel overwhelming. However, there are several strategies that can ease the burden:
- Build a strong governance framework:
Governance is about process, documentation, checklists and proper scheduling of recurring tasks. Whether independently or with a service provider, employers will need to develop policies for regulatory compliance, risk management, conflicts of interest and regular performance reviews. Once an inventory of governance documentation and scheduled tasks is developed, demonstrating compliance will become easier.
- Pay attention to fees and investment performance:
Good governance is about focusing on what matters most, which, in the case of CAPs, is typically investment returns and fees. By working closely with service providers, plan sponsors can ensure they have the support needed to evaluate and disclose fees and investment performance clearly and benchmark them regularly against industry standards.
Section 6.2 of the 2024 guideline states “low costs are important,” followed by “higher cost options may lead to better overall outcomes.” The latter statement seems hard to reconcile with multiple studies finding that lower costs correlate with higher returns and that higher-cost strategies often fail to deliver sufficient value to justify the expense. There are about 4,600 mutual and exchange-traded funds available in Canada. From those funds made available on providers’ platforms, CAP sponsors will have to select the investments that will be made available to members — a difficult task, given that CAP sponsors are typically not investment experts. In the absence of compelling evidence that a higher-fee product will perform better, the most prudent approach for CAP sponsors may well be to favour lower-fee investment products.
A service provider should have the requisite expertise to ensure that a sponsor can demonstrate compliance with relevant legislation, regulations and CAPSA guidelines. Employers should use any internal resources or expertise available to manage their service provider and ensure they develop and implement a compliance plan. If their provider can’t do it, they need to find one that can.
While the 2024 guidelines aren’t law, compliance shouldn’t be regarded as optional. The CAPSA’s guidelines are authored by all of the pension regulators as a group, and regulators explicitly reference these guidelines in the guidance that they individually publish. Any practice or policy of non-compliance with these guidelines is likely to be viewed in a negative light by regulators and increase legal and financial exposure for sponsors in the event of disputes arising in relation to the performance of a CAP and the expectations of its members.
It’s important for CAP sponsors to consider taking the following actions in the near term:
- Review the 2024 guideline with a view to understanding their impact on their plan;
- Engage with service providers or consultants to conduct a gap analysis and develop a compliance plan; and
- Consider alternatives to sponsoring a CAP.
Read: What can the Canadian pension industry learn from U.S. CAP litigation?
James Pierlot is the chief executive officer of Blue Pier.