Pension and benefits service provider agreements: Some practical thoughts

Why care?
Pension plan administrators owe plan beneficiaries a fiduciary duty to administer a plan in the beneficiaries’ best interests. The Ontario courts have also suggested that employers maintaining other benefis plans, such as health and welfare plans and other retirement savings plans, at the very least owe plan beneficiaries a duty to administer the plan “competently.”

If an employer/administrator signs a proposed form of agreement as is and without sufficient review, plan beneficiaries and, if applicable, pension regulators, could raise serious questions as to whether the employer/administrator discharged its duty and met its legal “standard of care.” These could lead to claims and liability, including, in the case of pension plan administrators, statutory fines.

On the flip side, evidence that an employer/administrator made reasonable efforts to get the most favourable terms possible for plan beneficiaries will generally support a legal defence, even when the employer/administrator has succeeded in achieving few, or even none, of these terms.

Fees
Virtually all agreements with service providers involve some kind of fee arrangement. Moreover, fees tend to be highly visible to both parties. Accordingly, employers/administrators should consider the following key questions:

• Do the fee provisions and fee schedules reflect all discussions to date and promised discounts?
• Does the agreement list the specific fees payable, for example, in an attached schedule, or does it simply commit the employer/administrator to pay the “fees that the parties may agree from time to time.” While the more general obligation may be appropriate for some relationships and agreements, it lacks legal and commercial precision.
• Does the agreement provide the employer/administrator sufficient time to pay fees given its internal policies and procedures? For example, if an agreement requires fees to be paid within 10 days of month-end, an employer will not be able to comply with the agreement if its accounting department typically requires 15 to 20 days to review and approve payment of a month-end invoice. The employer, in this case, should negotiate to accommodate its actual practice.

Services
In the case of administrative services agreements, additional care is necessary to ensure that the services for which the employer/administrator is contracting and, if applicable, service standards, are completely and accurately reflected in the agreement. For comprehensive services, a detailed list of services is often best laid out in a schedule attached to the agreement.

Benefits and HR staff (and consultants) who are familiar with the needs of the plan(s) and day-to-day administration should ensure that services are completely listed and accurately described. In many cases, internal and external lawyers will not be able to identify all services that should form part of the mandate and identify all omissions. The employer/administrator’s team needs to work together.

Many agreements also spell out service standards. For example, if the service provider will provide a call centre for plan members, a service standard would guarantee that the call centre will be available during certain hours and plan members will not be kept on hold for more than an enumerated period. In this case, it’s usually beneficial to specify key performance indicators—consequences, often in the form of a fee rebate, if service standards are not met.

Key performance indicators ensure that the employer/administrator has remedies for relatively minor shortcomings under an agreement without having to make a costly and complicated claim for breach of contract. It’s important to note that while built-in fee rebates are generally enforceable, contractual penalties typically are not. Care should be taken to characterize fee rebates accordingly.

Termination
All good things must come to an end. This adage includes agreements and even entire business relationships with service providers. Here, too, are important questions to consider:

• Does the agreement allow the service provider to terminate unilaterally on a fixed period of notice? If so, would this notice give the employer/administrator a reasonable amount of time to find a new service provider (including time to liquidate any investments)? More notice is better if the services are complex or if the employer/administrator intends to run a competitive request for proposal process for the replacement.
• Does the agreement allow the employer/administrator to terminate unilaterally on a fixed period of notice? If so, does this period line up with other notice periods in the agreement in response to which the employer/administrator may need to exercise its termination rights? For example, if an agreement allows a service provider to increase fees unilaterally on 30 days’ notice but requires the employer/administrator to give 60 days’ notice to terminate, the mismatch means that the employer/administrator could be stuck with the increased fees for 30 days before being able to move to another provider.
• Does the agreement address the services (and fees) that may be necessary on termination to transition to another service provider? Often, some level of transitional services will be required and should, where possible, be addressed upfront. It sometimes seems counterintuitive to contemplate the relationship ending when it’s just beginning, but recognizing all stages of the business relationship in the definitive documentation can save both parties headaches later on.

The service provider’s perspective
Service providers, just like employers and administrators, also seek a fruitful and hassle-free business relationship. Their standard forms of agreement and positions often reflect what they view as reasonable given the risk-reward profile of a particular client relationship and their business more generally. These points are legitimate.

For example, many service providers agree to contractual limitations of liability that are based on the fees that they charge. While in principle an employer/administrator will likely want no limitation of liability, that may not be possible for the service provider from a business perspective without raising fees, perhaps significantly so. The parties should discuss these points with the employer/administrator always with an eye to what is in the best interests of the plan(s). But the end result will likely be a compromise that the service provider is comfortable with and that accommodates its legitimate business concerns. It’s important to remember that there is usually a spectrum of reasonable positions for any given agreement.

One thing is certain: the employer/administrator’s duty requires it to review and understand service provider agreements, and at least try to achieve as favourable terms for the plan as possible. In some cases, employers and administrators may even wish to propose their own form of agreement. For example, a pension plan administrator that engages a number of investment managers may wish to develop an investment management agreement template containing its preferred terms and negotiate from that baseline.

However these agreements are prepared, they must be reviewed and negotiated. Pension and benefits law does not judge outcomes, but instead judges processes (including the service provider selection and negotiation process).