What do the new guidelines for pensions, CAPs mean for employers?

The Canadian Association of Pension Supervisory Authorities (CAPSA) recently released updated guidelines for managing pension and capital accumulation plans, including Guideline No. 3 for Capital Accumulation Plans (CAP) and Guideline No. 10 for Risk Management for Plan Administrators.

The first guideline replaces the 2004 version, reflecting “significant developments in the financial services industries over the past 20 years,” says CAPSA.

“The new guideline reflects regulators’ views on the responsibilities of CAP sponsors, administrators and service providers in the current marketplace. It also clarifies expectations surrounding information to be communicated to members.”

The second guideline looks to “consolidate approaches to pension risk management” on topics such as cyber security, service providers, investment governance and environmental, social, and governance (ESG).

So, what are the implications for employers, plan sponsors, and administrators? Canadian HR Reporter spoke with two experts to gain their insights.

Time for a change: updates to CAP guidelines

The evolving nature of compensation and savings options as a key reason behind the CAPSA updates, according to Level Chan, partner at Stewart McKelvey in Halifax.

"While before there would be the focus very much on retirement savings, the [new] CAP guidelines were important to take into account that now there are education savings plans and first-home savings accounts — new types of plans that are provided by plan sponsors or employers that have slightly different risks... different timelines," he says.

If we go back 20 years, there were group RSPs and defined contribution (DC) pension plans, but defined benefit (DB) pension plans were still made up the majority of the assets for a lot of members, says Marc-Antoine Morin, head of member engagement at Manulife in Montreal.

“Now that the world continues to shift, and there's less and less of those guaranteed pension plans, it makes sense that we refresh the guideline to align with the more recent best practices.”

‘Double-edged sword’: Best practice versus regulation

Although the guidelines set out by CAPSA are not legally binding, Chan points out that they carry significant weight as a reflection of regulatory expectations.

"By establishing these guidelines, that gives some direction of what the regulators would expect and would be looking for."

While not mandatory, the guidelines represent "strongly encouraged best practice from the regulators," he says, suggesting that plan sponsors would be wise to adhere to them to meet industry standards.

But the fact that they are guidelines and not regulations is a double-edged sword, says Morin, citing the challenging landscape of Canada which involves provincial legislation and federal regulations.

“It's very difficult, if not impossible, to align all these legislative processes together. So, the fact that there are guidelines is very practical — it gives at least one common set of guidelines across the country, which is great for us as providers, [and] also great for employers that have employees in in different provinces,” he says.

“But, on the flip side, they are also 'just guidelines' — they don't necessarily have teeth by themselves. So, it's an interesting balance balancing act. And... because it's not a law, there's nobody to draw a line to say, ‘Here's exactly what it means.’”

Most professionals in the industry will treat these as best practice for risk management, says Morin.

“If there's any issue happening with the governance of your plan, if you follow the guideline, it's a reasonable assumption that a judge or a court would be more favourable to what you've done,” he says.

“If you don't follow the guideline, it's a reasonable expectation that the court would turn to you and say, ‘There's this nice recipe that's out there, that's best practice, that's commonly agreed to, and you didn't follow it.’”

Tailored governance frameworks

The new CAPSA guidelines stress the need for tailored governance frameworks that reflect the complexity and scale of each plan, “and that includes the duties that apply to those plans, and also the ways that you may be communicating to employees and the tools that are available… and the options,” says Chan.

He notes that the updated guidelines clarify expectations around the expectations of service providers. This involves not only selecting appropriate providers but ensuring ongoing compliance with service agreements.

"From a governance perspective, what the guidelines clarify and provide is some guidance in terms of how an employer, one, is responsible for giving clear directions and expectations to that service provider, but [two] also on an ongoing basis, making sure that the service provider is meeting the promise — whether it be an agreement or contract — that has been reached… to provide the plan and manage the plan in accordance with that agreement as well as applicable law."

It’s important that the guideline be applied differently depending on the complexity of the CAP, says Morin.

“We have clients that have hundreds of millions in their CAP, and they have a strong management process, they have governance, they might also have a pension plan along with a group RSP, group TFSA… defined benefit pension plan. So, they're used to having a strong governance framework. It's absolutely unreasonable to think that the same could be done in the smaller end of the market.”

Governance and conflict of interest

When it comes to the governance framework, most of the guideline in isolation makes sense, he says.

“But when you compound all of them together, it becomes a little bit of a mountain of effort.”

For example, if you’re a large organization, you probably have conflict of interest policy already with your different service providers, says Morin.

“But what the guidelines are saying is not that you need to manage your conflict of interest, they also say you need to have a documented framework and process around that,” he says.

“How do you actually set up a process around conflict of interest if you don't even have one for your business? Why would you have one just for your CAP? It doesn't really make sense when you think about it. So, the industry is working hard at saying, ‘What's a good enough way to actually do that documentation?’ And what we're trying to avoid is documentation for the sake of documentation.”

Communicating financial education to CAP members

Communication remains a central aspect of the CAPSA guidelines, especially as plan sponsors provide tools and resources for employees to manage their investments.

 Chan notes that the focus is on enhancing existing communication efforts.

 "There's a lot more of these different options... there's these different tools now, largely online, that are available, but also [it’s about] providing more clarification on the expectations of members to use those tools and update the information that they would provide to the plan administrator and plan sponsor, that would affect how they ought to be making decisions on that plan.”

This is mostly about catching up to existing best practice, says Morin.

“Everybody acknowledged that you need to educate members, not only about investment, but about saving, about retirement planning, and then even go beyond and educating members toward financial wellness topics, and it's common with most providers.”

The latest guideline suggests you should also have an education strategy and resources to help members make decisions around their CAP — and maybe even beyond that, he says.

“We're happy to see it recognized in the guideline, but it's not going to be disruptive as, let's say, the governance framework or some other component.”

Investment advice from employers

A critical area addressed by the CAPSA guidelines is the boundary between offering tools for investment decisions and providing financial advice, which can carry risks for employers.

"There’s not an expectation for employers or plan sponsors to be providing financial advice to employees," Chan says; instead, employees can be offered tools to make informed decisions as they “are strongly recommended to get their own financial advice," he says.

Chan underlines the importance of due diligence, especially regarding the fees and services provided by third-party providers.

"There is the ongoing monitoring and also... making sure that the fees are reasonable for what’s being provided, and the risks that are associated with those services.”

Default options for CAP investments

Basically, the new guidelines are formally saying that the job of a plan sponsor is not just to minimize fees, but to balance things on fee versus value, which is “common sense,” says Morin.

CAPSA has also enhanced the section around default options, which is important because many members don’t make an election when they are enrolled into a CAP, he says.

“If you do auto-enrollment, you're probably not going to pick your investment on the day one; at least, you might change them later down the road. So, they've taken a rather, I would say, firm stance on what constitute the right default investment.

“And they went as far as saying, ‘When you as a plan sponsor, when you select a default, you shouldn't select it as a default, you should select it as a suitable investment for the purpose of your plan.’”

Risk management guideline addresses emerging concerns

CAPSA's new Risk Management Guideline consolidates advice on managing various risks, such as cybersecurity and ESG considerations, into a single document.

"Employers should be looking at establishing a risk management framework that adapts to those new risks that will arise," says Chan.

This consolidated approach ensures that administrators are prepared to address both existing and emerging risks, such as cybersecurity, he says.

"It’s really putting the emphasis on making sure that employers, plan sponsors and administrators have a framework that constantly reviews what types of risks arise — and then has a process to identify ways to address those risks.”

Future planning: Automatic features and AI

While auto enrolment and auto escalation are table stakes in the U.S., legislative challenges in Canada, both provincially and federally, have largely prevented such a development, says Morin.

“What's interesting is the guidelines are already preparing the governance of the plan to say, ‘Hopefully, when these things become available and you decide to implement them in your CAP, here are the things to consider, in terms of communication and transparency to members.’

“So, I think it's worth celebrating that they're forward-looking in terms of things that might happen in the near future, so that they don't have to publish a new set of guidelines in three, four, five years.”

However, emerging technologies like artificial intelligence (AI) present new challenges, says Chan.

"It certainly is being used more and more with respect to plans and investments — whether that would as clearly fall under an automatic feature, that’s one of those things that may need to be further clarified… I think we’ll see some more guidance in the future on that.”