Objectivity must be exercised by plan administrator and its agents
If you are involved in managing or overseeing a pension plan, the importance of closely supervising your providers cannot be underestimated. The need for objectivity in the administration of a pension plan and in the monitoring of service providers, such as actuaries, is essential. Objectivity must be exercised by both the “administrator” (defined below) and its agents.
The Ontario Court of Justice released its decision in Ontario (Superintendent of Financial Services) v. Norton on Feb. 23, 2007. J. Melvin Norton provided actuarial services to Slater Stainless Corporation for two pension plans. Norton prepared actuarial reports as of Jan. 1, 2002, in May of that year. A year later, in June 2003, Slater filed for creditor protection under the Companies Creditors Arrangement Act.
Both pension plans were defined benefit plans and Slater made all contributions to the plans. Employees did not contribute to the plans. The preliminary valuation results showed solvency deficiencies (shortfalls calculated on a wind-up basis) of about $20 million. Following some discussions between Norton and Slater, Norton used an asset smoothing method to artificially inflate the value of the assets. The assets were inflated sufficient to eliminate the underfunding. As a result, Slater didn’t have to worry about additional contributions to amortize the deficits.
The chief actuary at the Financial Services Commission of Ontario (FSCO) questioned the use of the asset smoothing. It appeared to be overly aggressive and was a marked departure from the methodology used in the past. The chief actuary ordered new valuations be prepared using methodology acceptable to FSCO. However, before a hearing could be held to determine whether Slater would be bound to comply with this order, the company filed for creditor protection.
FSCO began litigation against the officers and directors of Slater and the lawsuit was settled. FSCO also laid charges against Norton for failing to use actuarial methods and assumptions that were consistent with accepted actuarial practice. The judge dismissed the charges against Norton on the basis the expert evidence introduced by FSCO was biased. There are strict rules concerning the use of expert evidence that, in the view of the judge, were not respected by FSCO.
Pension legislation across Canada, as well as principles developed in court cases, set certain standards that must be met in the administration of a pension plan and a pension fund. Under the Ontario Pension Benefits Act, the “administrator” of a pension plan is required to use requisite care, diligence and skill that a person of ordinary prudence would use. The “administrator” is defined as the person or persons that administer a pension plan and, in many cases, is the employer, the employer’s board of directors or a committee established by the employer.
The administrator is also required to use all relevant knowledge and skill it possesses or ought to possess. If the skillset is not resident within the administrator, as is most often the case with actuarial services, the administrator may then employ agents, where it is reasonable and prudent to do so.
There is a legal question whether or not an actuary is an agent of the administrator, or simply an advisor. That issue aside, agents must use the same degree of care, diligence and skill as the administrator and must also use all relevant knowledge and skill they possess. Because of an actuary’s specialized knowledge, the bar is set a little higher for actuaries than administrators.
The PBA also clarifies that if an administrator employs an agent, it must personally select the agent. It must be satisfied of the agent’s suitability to perform the services for which it is hired and must also supervise the agent as is reasonable and prudent. It’s a common and prudent practice to evaluate all third party service providers (agents and advisors) annually.
It’s very important both the administrator and the agent(s) avoid conflicts of interest. Under the PBA, they “shall not knowingly permit” their interests to conflict with their duties and powers in respect of the pension fund. For example, if a plan sponsor’s business is failing, the administrator (which may be the Board of the plan sponsor) either alone or in concert with the actuary, should not change actuarial assumptions and methods to accommodate its business, to the detriment of the pension plan members. Pension plan administrators depend upon the specialized expertise of actuaries, investment consultants, investment managers, custodians, recordkeepers and legal counsel. While not all of these third parties are agents (legal counsel, for example, are clearly not agents), it is essential that the pension plan administrator closely and effectively monitors the quality, timeliness, cost and effectiveness of the services being provided. This is particularly the case in which the fees of the third parties are being paid from the pension fund.
The pension plan governance guidelines established by the Canadian Association of Pension Supervisory Authorities (CAPSA), provide a useful framework for the management and oversight of a pension plan. Those guidelines promote a regular review of governance. The decision to use third parties and then the selection and on-going monitoring of those persons is only one part of governance, albeit a very important one.
For more information see:
• Ontario (Superintendent of Financial Services) v. Norton, 2007 CarswellOnt 1425 (Ont. C.J.).
Mark Newton is a lawyer with Heenan Blaikie in Toronto and chair of the Ontario Bar Association’s Pension and Benefit Section. He can be reached at (416) 643-6855 or [email protected].
The Ontario Court of Justice released its decision in Ontario (Superintendent of Financial Services) v. Norton on Feb. 23, 2007. J. Melvin Norton provided actuarial services to Slater Stainless Corporation for two pension plans. Norton prepared actuarial reports as of Jan. 1, 2002, in May of that year. A year later, in June 2003, Slater filed for creditor protection under the Companies Creditors Arrangement Act.
Both pension plans were defined benefit plans and Slater made all contributions to the plans. Employees did not contribute to the plans. The preliminary valuation results showed solvency deficiencies (shortfalls calculated on a wind-up basis) of about $20 million. Following some discussions between Norton and Slater, Norton used an asset smoothing method to artificially inflate the value of the assets. The assets were inflated sufficient to eliminate the underfunding. As a result, Slater didn’t have to worry about additional contributions to amortize the deficits.
The chief actuary at the Financial Services Commission of Ontario (FSCO) questioned the use of the asset smoothing. It appeared to be overly aggressive and was a marked departure from the methodology used in the past. The chief actuary ordered new valuations be prepared using methodology acceptable to FSCO. However, before a hearing could be held to determine whether Slater would be bound to comply with this order, the company filed for creditor protection.
FSCO began litigation against the officers and directors of Slater and the lawsuit was settled. FSCO also laid charges against Norton for failing to use actuarial methods and assumptions that were consistent with accepted actuarial practice. The judge dismissed the charges against Norton on the basis the expert evidence introduced by FSCO was biased. There are strict rules concerning the use of expert evidence that, in the view of the judge, were not respected by FSCO.
Pension legislation across Canada, as well as principles developed in court cases, set certain standards that must be met in the administration of a pension plan and a pension fund. Under the Ontario Pension Benefits Act, the “administrator” of a pension plan is required to use requisite care, diligence and skill that a person of ordinary prudence would use. The “administrator” is defined as the person or persons that administer a pension plan and, in many cases, is the employer, the employer’s board of directors or a committee established by the employer.
The administrator is also required to use all relevant knowledge and skill it possesses or ought to possess. If the skillset is not resident within the administrator, as is most often the case with actuarial services, the administrator may then employ agents, where it is reasonable and prudent to do so.
There is a legal question whether or not an actuary is an agent of the administrator, or simply an advisor. That issue aside, agents must use the same degree of care, diligence and skill as the administrator and must also use all relevant knowledge and skill they possess. Because of an actuary’s specialized knowledge, the bar is set a little higher for actuaries than administrators.
The PBA also clarifies that if an administrator employs an agent, it must personally select the agent. It must be satisfied of the agent’s suitability to perform the services for which it is hired and must also supervise the agent as is reasonable and prudent. It’s a common and prudent practice to evaluate all third party service providers (agents and advisors) annually.
It’s very important both the administrator and the agent(s) avoid conflicts of interest. Under the PBA, they “shall not knowingly permit” their interests to conflict with their duties and powers in respect of the pension fund. For example, if a plan sponsor’s business is failing, the administrator (which may be the Board of the plan sponsor) either alone or in concert with the actuary, should not change actuarial assumptions and methods to accommodate its business, to the detriment of the pension plan members. Pension plan administrators depend upon the specialized expertise of actuaries, investment consultants, investment managers, custodians, recordkeepers and legal counsel. While not all of these third parties are agents (legal counsel, for example, are clearly not agents), it is essential that the pension plan administrator closely and effectively monitors the quality, timeliness, cost and effectiveness of the services being provided. This is particularly the case in which the fees of the third parties are being paid from the pension fund.
The pension plan governance guidelines established by the Canadian Association of Pension Supervisory Authorities (CAPSA), provide a useful framework for the management and oversight of a pension plan. Those guidelines promote a regular review of governance. The decision to use third parties and then the selection and on-going monitoring of those persons is only one part of governance, albeit a very important one.
For more information see:
• Ontario (Superintendent of Financial Services) v. Norton, 2007 CarswellOnt 1425 (Ont. C.J.).
Mark Newton is a lawyer with Heenan Blaikie in Toronto and chair of the Ontario Bar Association’s Pension and Benefit Section. He can be reached at (416) 643-6855 or [email protected].
