Using the CAPSA guidelines as a risk-management tool
It is said that a person who looks at himself in the mirror and, after he goes away, immediately forgets what he looks like, is a fool. Or, at least, he’s very forgetful.
The pension plan governance self-assessment questionnaire developed by the Canadian Association of Pension Supervisory Authorities (CAPSA) can be regarded as a pension governance mirror, providing a clear reflection of the state of an employer’s plan governance. Once having looked into the plan governance mirror, a plan sponsor would be ill-advised to look the other way.
The questionnaire is a “reality check” for those responsible for overseeing pension plans, providing valuable insight into how governance, oversight or management of a pension plan is functioning and what risks are present. It also prompts the plan administrator to mitigate risks proactively.
CAPSA is a quasi-regulatory body composed of all the pension regulators across Canada. Part of its mandate is to develop policies it expects to be adopted in each of the jurisdictions. After a lengthy and productive consultation process, CAPSA introduced pension governance guidelines in 2004. The guidelines comprise 11 principles, with commentary underlying each of the principles. (They are available on CAPSA’s website at www.capsa-acor.org.) Topics include responsibilities, roles and responsibilities, performance measures, risk management, oversight and compliance and codes of conduct. The guidelines are intended to represent prudent governance practices that should be achievable by all pension plan administrators. They apply equally to defined benefit and defined contribution registered pension plans.
A self-assessment tool
Apart from providing direction concerning specific aspects of plan governance, the guidelines also provide a mechanism for self-assessment. Principle 11 deals with governance reviews and simply states: “The plan administrator should conduct a regular review of its plan governance.” Attached to the guidelines is a self-assessment questionnaire. Use of this questionnaire is critically important in order for a plan administrator to assess what gaps in governance exist and then to map out a strategy to close the gaps.
The questionnaire consists of two “simple” yes or no questions for each principle (with the exception of one principle, for which there is only one question) for a total of 21 questions. The questions also leave room for comments or action steps. The word “simple” is in quotes because, while the questions may appear simple at first glance, they are by no means straightforward.
Take, for example, question one: “Have you identified your fiduciary and other responsibilities to plan members and beneficiaries?” To answer that question, one must have a grasp of what fiduciary duties and “other” responsibilities are. Given that the courts have been grappling with the concept of fiduciary duties in the pension context for several years and that the concept continues to evolve, how could a plan administrator possibly identify all of its fiduciary duties with absolute clarity? How could it identify all its “other” responsibilities? Could any plan administrator truthfully answer “yes” to this question?
Of what possible use, then, is a questionnaire that is composed of questions that no one can answer with absolute precision? The answer lies in the nature of corporate governance in general and pension plan governance in particular. Governance is a process to identify, monitor and manage risk. It is fluid rather than static. Governance must be capable of adapting to changes initiated by a plan sponsor (such as changes in staffing, corporate structure reporting relationships, and plan characteristics), changes in the regulatory environment and changes in demographic and economic factors. The questions are primarily intended to stimulate thought and foster discussion among the members of a plan administrator’s board, committee or staff and to initiate action to continuously improve pension plan governance.
The glib approach
Due to the challenging nature of many of the questions, some advisors may advocate for the “Enron-inspired approach” to disclosure by blindly marking “yes” after each of the 21 questions. Apparently, the justification is if there is a lawsuit in future, it is better to avoid answering “no” because doing so would constitute an admission of practices that do not meet the standard in the guidelines. This approach is tragically misguided and misses the point of the guidelines altogether, which is to mitigate risk by identifying governance gaps and mapping strategies to narrow those gaps.
The Enron-inspired approach to completing the questionnaire is akin to the person who looks in the mirror and forgets what he looks like. It could invite the court’s criticism and condemnation. A glib or superficial completion of the questionnaire deprives the persons who are ultimately responsible for a pension plan (who may very well be different from the persons who complete the questionnaire) of the opportunity to be apprised of any potential problems. Clearly, those who may be held to account for governance gaps have a key interest in being made aware of such issues.
The two questions under principle seven deal specifically with risk management: “Have you identified the pension plan’s risks?” and “Do you have a process to manage these risks?” These questions require a plan administrator to examine every function of a pension plan in detail. To properly identify a pension plan’s risks, the plan administrator must address the following types of questions. Who assumes the risks: the employer or the employees? Where do the major risks lie: with plan investment, funding, asset custody, administration or communication?
What the risks are and who bears them will be different depending on whether the pension plan is a defined benefit or defined contribution design. The risks may also change over time as the pension plan is redesigned, as there are changes in member demographics or if the employer merges with another. Once the risks are identified at a particular point in time, the plan administrator must assess what processes are in place to deal with those risks.
There are times in an organization when all the checks and balances are in place and everything is running efficiently and effectively. There are other times when things are not running so smoothly. Similarly, with the governance questionnaire, at one point in time most of the answers may be “yes” and at another point in time some of them may be “no” or “maybe”.
Regardless of the outcome of completing the questionnaire, the plan sponsor’s board of directors, board of trustees or other governing body need to be kept informed on a regular and systematic basis in order to know what risks the pension plan, the organization and they individually are potentially exposed to, so they can take appropriate actions to address the risks. The CAPSA questionnaire is a useful tool for this purpose. An annual reality check, using the CAPSA questionnaire in a rigorous and meaningful way, should be the minimum for any plan administrator.
Mark Newton is a Toronto-based lawyer at Heenan Blaikie specializing in pension and benefits issues. He is the founding chair of the national pensions and benefits law section of the Canadian Bar Association and a representative of the Ontario Bar Association on both the Canadian Association of Pension Supervisory Authorities’ Pension Governance Industry Task Force and the Joint Forum of Financial Market Regulators’ Task Force on Capital Accumulation Plans. He may be reached at (416) 643-6855 or at [email protected].
The pension plan governance self-assessment questionnaire developed by the Canadian Association of Pension Supervisory Authorities (CAPSA) can be regarded as a pension governance mirror, providing a clear reflection of the state of an employer’s plan governance. Once having looked into the plan governance mirror, a plan sponsor would be ill-advised to look the other way.
The questionnaire is a “reality check” for those responsible for overseeing pension plans, providing valuable insight into how governance, oversight or management of a pension plan is functioning and what risks are present. It also prompts the plan administrator to mitigate risks proactively.
CAPSA is a quasi-regulatory body composed of all the pension regulators across Canada. Part of its mandate is to develop policies it expects to be adopted in each of the jurisdictions. After a lengthy and productive consultation process, CAPSA introduced pension governance guidelines in 2004. The guidelines comprise 11 principles, with commentary underlying each of the principles. (They are available on CAPSA’s website at www.capsa-acor.org.) Topics include responsibilities, roles and responsibilities, performance measures, risk management, oversight and compliance and codes of conduct. The guidelines are intended to represent prudent governance practices that should be achievable by all pension plan administrators. They apply equally to defined benefit and defined contribution registered pension plans.
A self-assessment tool
Apart from providing direction concerning specific aspects of plan governance, the guidelines also provide a mechanism for self-assessment. Principle 11 deals with governance reviews and simply states: “The plan administrator should conduct a regular review of its plan governance.” Attached to the guidelines is a self-assessment questionnaire. Use of this questionnaire is critically important in order for a plan administrator to assess what gaps in governance exist and then to map out a strategy to close the gaps.
The questionnaire consists of two “simple” yes or no questions for each principle (with the exception of one principle, for which there is only one question) for a total of 21 questions. The questions also leave room for comments or action steps. The word “simple” is in quotes because, while the questions may appear simple at first glance, they are by no means straightforward.
Take, for example, question one: “Have you identified your fiduciary and other responsibilities to plan members and beneficiaries?” To answer that question, one must have a grasp of what fiduciary duties and “other” responsibilities are. Given that the courts have been grappling with the concept of fiduciary duties in the pension context for several years and that the concept continues to evolve, how could a plan administrator possibly identify all of its fiduciary duties with absolute clarity? How could it identify all its “other” responsibilities? Could any plan administrator truthfully answer “yes” to this question?
Of what possible use, then, is a questionnaire that is composed of questions that no one can answer with absolute precision? The answer lies in the nature of corporate governance in general and pension plan governance in particular. Governance is a process to identify, monitor and manage risk. It is fluid rather than static. Governance must be capable of adapting to changes initiated by a plan sponsor (such as changes in staffing, corporate structure reporting relationships, and plan characteristics), changes in the regulatory environment and changes in demographic and economic factors. The questions are primarily intended to stimulate thought and foster discussion among the members of a plan administrator’s board, committee or staff and to initiate action to continuously improve pension plan governance.
The glib approach
Due to the challenging nature of many of the questions, some advisors may advocate for the “Enron-inspired approach” to disclosure by blindly marking “yes” after each of the 21 questions. Apparently, the justification is if there is a lawsuit in future, it is better to avoid answering “no” because doing so would constitute an admission of practices that do not meet the standard in the guidelines. This approach is tragically misguided and misses the point of the guidelines altogether, which is to mitigate risk by identifying governance gaps and mapping strategies to narrow those gaps.
The Enron-inspired approach to completing the questionnaire is akin to the person who looks in the mirror and forgets what he looks like. It could invite the court’s criticism and condemnation. A glib or superficial completion of the questionnaire deprives the persons who are ultimately responsible for a pension plan (who may very well be different from the persons who complete the questionnaire) of the opportunity to be apprised of any potential problems. Clearly, those who may be held to account for governance gaps have a key interest in being made aware of such issues.
The two questions under principle seven deal specifically with risk management: “Have you identified the pension plan’s risks?” and “Do you have a process to manage these risks?” These questions require a plan administrator to examine every function of a pension plan in detail. To properly identify a pension plan’s risks, the plan administrator must address the following types of questions. Who assumes the risks: the employer or the employees? Where do the major risks lie: with plan investment, funding, asset custody, administration or communication?
What the risks are and who bears them will be different depending on whether the pension plan is a defined benefit or defined contribution design. The risks may also change over time as the pension plan is redesigned, as there are changes in member demographics or if the employer merges with another. Once the risks are identified at a particular point in time, the plan administrator must assess what processes are in place to deal with those risks.
There are times in an organization when all the checks and balances are in place and everything is running efficiently and effectively. There are other times when things are not running so smoothly. Similarly, with the governance questionnaire, at one point in time most of the answers may be “yes” and at another point in time some of them may be “no” or “maybe”.
Regardless of the outcome of completing the questionnaire, the plan sponsor’s board of directors, board of trustees or other governing body need to be kept informed on a regular and systematic basis in order to know what risks the pension plan, the organization and they individually are potentially exposed to, so they can take appropriate actions to address the risks. The CAPSA questionnaire is a useful tool for this purpose. An annual reality check, using the CAPSA questionnaire in a rigorous and meaningful way, should be the minimum for any plan administrator.
Mark Newton is a Toronto-based lawyer at Heenan Blaikie specializing in pension and benefits issues. He is the founding chair of the national pensions and benefits law section of the Canadian Bar Association and a representative of the Ontario Bar Association on both the Canadian Association of Pension Supervisory Authorities’ Pension Governance Industry Task Force and the Joint Forum of Financial Market Regulators’ Task Force on Capital Accumulation Plans. He may be reached at (416) 643-6855 or at [email protected].
