The right funding policy

The Canadian Bar Association Pensions and Benefits Law Section supports updating pension plan funding guidelines to reflect new plan designs and legislative funding requirements across the country.

In its comment on draft revisions of the Canadian Association of Pension Supervisory Authorities (CAPSA) Guideline No. 7, the Section remarks that not all Section members believe funding policies are needed for all plans. But the Section, whose members are involved in all aspects of pensions and benefits law, generally agrees “that the establishment of a funding policy by a plan sponsor (or where applicable, by a plan administrator) will help make more informed funding decisions which in turn promotes benefit security.”

Not every jurisdiction requires funding policies to be established, but they are considered best practices even in the absence of legal requirements. However, as the Section points out, some plan sponsors, particularly small and medium sized private sector employer plans, may see the guideline as too prescriptive and opt to not have a funding policy.

The Section suggests CAPSA use softer language in its guideline, especially when discussing funding objectives, risk appetite, mitigation of risks, target benefit management, stress testing and projections. Specifically, the Guidelines ought to use “could” instead of “should” to signify that certain policy elements are encouraged but not required. Likewise, it would be better to use words like “ideals” or “models” instead of “recommendations” and make it clear that not all plans are in a position to meet them.

In addition to softening the language, the CBA Section suggests substantive changes in how the Guideline ranks funding objectives to avoid reducing the flexibility to respond to particular funding circumstances faced by a plan or its sponsors. As drafted, some of the guidance in the guideline “could predetermine the outcome of funding decisions rather than inform the process by which those decisions are made,” it notes.

The Section is in agreement with the guideline’s distinction between the roles of a plan sponsor and plan administrator. “We agree with CAPSA’s characterization of plan sponsor functions as non-fiduciary in nature, with plan administration functions fiduciary in nature and believe this distinction is of paramount importance.” Accordingly, the Section recommends the guideline ensure there are no instances where the two roles maybe conflated.

Noting that the guideline refers to contributions in excess of the legislative minimum that may be used to build a “reserve,” the Section points out that this particular word “may be misconstrued and suggest that contributions in excess of minimum standard requirements can be treated differently than any other contributions to the plan fund.” It would be better to use different terminology, such as the word “buffer” to avoid undue confusion.

Funding requirements help promote benefit security by ensuring sufficient assets are accumulated to deliver on promised benefits over the long term. They also help protect benefits in situations where the employer becomes insolvent or bankrupt. While the CBA Pensions and Benefits Law Section is of the view that not all plans need to have funding policies, it agrees with the guideline’s statements that “the funding policy will depend on the nature (characteristics and complexity) and documents of a pension plan” and that “the funding policy should fit the particular circumstances of the plan.”