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Prudence in pension investment

Why flexible guidance is needed.

Looking at charts

The Pension and Benefits Law Section of the Canadian Bar Association, in a letter to the Office of the Superintendent of Financial Institutions, comments on pension investment risk management. Below is a summary of the Section’s contribution to the OSIF consultation paper.

Broadly speaking the CBA Section supports efforts to establish best practices on investment risk management for pension plans. “We believe that greater guidance from regulators on their expectations for prudent risk management practices will promote better governance and risk management practices,” the letter reads. But that guidance needs to be flexible.

Proportionality and flexibility

As the Section explains, there is “no one-size-fits-all model of risk management” that could apply to every pension plan. Therefore, best practices should be guided by the principles of proportionality and flexibility.

The letter points out that most of what has been proposed is directed at larger, well-resourced plans. “Not all pension plans have these resources available. For a defined contribution (DC) pension plan, where members pay expenses, or for smaller defined benefit (DB) plans, these best practices may not be necessary, and the cost of implementing specific risk management practices must not outweigh their benefits. All guidance should recognize this reality,” it reads.

Best vs. prudent practices

Prudence in the context of pension investments varies greatly depending on the circumstances of each case. As the Section explains, guidance should acknowledge the need for flexibility. “What is prudent for one pension plan may not be for another type of plan. The Consultation Paper should not seek to substitute a ‘tick the box’ exercise for sound judgment and flexible practices for investment risk management.”

The CBA letter proceeds to address a number of specific questions, including how small or less complex plans could achieve the benefits of an independent assessment without going through the exercise, risk reporting obligations, key limits for pension plans, CAPSA Guideline No. 7 concerning funding policy guidelines, how pension plans can anticipate implementing risk limits and how best to manage data limitations relating to investment funds among others.