This presentation offers an overview of the current issues in governance of single-employer pension plans, governance issues unique to MEPPs (private sector + public sector), jointly governed target benefit plans, governance of PRPPs, "funding policies" and CAPSA Guideline No. 7, as well well as some practical perspectives on DC governance.

1. The Osgoode Certificate in PENSION LAW
Pension Governance and Risk Management:
Governance models: single employer & MEPPs + jointly‐governed target benefit plans
(and observations regarding the governance of PRPPs and the utility of funding policies)
February 28, 2012
Presented by:
Mary Picard (Fraser Milner Casgrain LLP)
Phone: +1 416 863 4469
Email: mary.picard@fmc-law.com
‐and –
John Poos (Vice President, Pensions and Benefits, George Weston Limited)
1

2. we plan to cover…
current issues in governance of single‐employer pension plans
governance issues unique to MEPPs (private sector + public sector)
jointly governed target benefit plans
some practical perspectives on DC governance
governance of PRPPs (new pooled registered pension plans)
“funding policies” and CAPSA Guideline No. 7
2

3. overview of types of MEPPs
think of three types:
•related private‐sector
•unrelated private‐sector employers
•public sector employers
‐ versus ‐
typical “pension plan” sponsored by a single employer
3

4. strange cousins in the MEPP family:
SMEPs: specified multi‐employer plan (ITA)
SMEPPs: specified multi‐employer pension plan (Alberta)
MUPPs: multi‐unit pension plan (Alberta)
SOMEPPs: specified Ontario multi‐employer pension plan (Ontario)
NCPs: negotiated cost plan (B.C.)
4

5. governance of MEPPs totally different:
• board of trustees is the administrator (read: personal
liability)
• who should be on the board?
• benefits may be reduced … who decides?
• Quebec the spoiler re benefit reduction
• challenge for the governors of MEPPs: perhaps
reduce accrued benefits for everyone except Quebec
members, and reduce future accruals for current
Quebec members
5

6. public sector MEPPs
OMERS:
– established in 1962 as the pension plan for employees of local gov’ts
– OMERS Act, 2006 continued the plan and created 2 separate
corporate bodies to govern the plan:
• OMERS Sponsors Corporation; and
• OMERS Administration Corporation
– Section 3.2 of Pension Benefits Act Regulations specifically prescribes
OMERS pension plans as “jointly‐sponsored” pension plans for the
purposes of the PBA
– The OMERS plan has more than 900 employers, more than 400,000
members, and more than $50B in assets
6

7. OMERS…a jointly‐sponsored plan
• Governance of Jointly Sponsored Plans
– Section 3.1 of the PBA regulations requires that “the documents that
create and support the plan” must satisfy certain criteria, including:
• 3.1 (3): “The employers…..and the members of the pension plan….are
jointly responsible for making all decisions about the terms and conditions
of the pension plan….”
• OMERS Sponsors Corporation:
• 14 Board members‐ 7 plan member reps & 7 employer reps
• Board rep initially determined by OMERS Act, 2006, and now SC By‐Law 4
• OMERS Administration Corporation:
• 14 Board members‐ 7 plan member reps & 7 employer reps
• Board rep initially determined by OMERS Act, 2006 but now SC By‐Law 13
7

8. OMERS Sponsors Corporation
• Replaced the Ontario Government as Plan Sponsor in 2006
• Certain corporate laws were made applicable to SC but most are not:
– OMERS Act, 2006: section 22(3) Section 132 (conflict of interest), subsection 134 (1) (standard of
care) and section 136 (indemnification) of the Business Corporations Act apply, with necessary
modifications, to the Sponsors Corporation and its members. 2006, c. 2, s. 22 (3).
– Section 22(4) The Corporations Act and the Corporations Information Act do not apply to the
Sponsors Corporation. 2006, c. 2, s. 22 (4).
• Responsible for:
– Determining Plan Design;
– Setting contribution rates;
– Establishing or changing a Reserve;
– Filing the actuarial valuation; and
– Setting contribution levels and appointment protocol for SC and AC Board members
• Decisions that impact design, contributions or the reserve require a 2/3
vote of the Board
• Long range strategic funding plan, and 3 year plan approved in 2010
8

9. OMERS Administration Corporation
• The AC is the Administrator and Trustee of the OMERS Plans;
• The AC responsibility includes:
– Investment management of OMERS assets;
– Funding policies;
– Pension services and administration;
– Plan valuations;
– Advise and assist the SC
• The board of the AC has fiduciary responsibility to the Plan
members
Since 2006 the 2 OMERS corporations have worked to smooth
out governance roles and responsibilities resulting in
completion of a Framework Agreement
9

10. OMERS unique solution:
Unprecedented comfort obtained in 2008 regarding governance:
Ontario Superior Court of Justice upheld a Joint Protocol reached between
the OMERS Administration Corporation (AC) and the OMERS Sponsors
Corporation (SC). The protocol provides for:
• the reimbursement of certain SC costs from the OMERS pension plans;
and
• technical and administrative support for the SC, provided by the AC.
• The SC and AC worked together to seek a court decision on which SC costs
may be lawfully reimbursed by the OMERS pension plans – for the
purposes of allowing the SC to carry out its mandate ‐‐ and the types of
support that can be provided by the AC to the SC.
• For example, it was recommended that SC costs related to administrative
support and the use of facilities be paid out of the OMERS pension plans.
Details of expenses and support were set out in a Joint Protocol document.
10

11. Personal liability in pension governance
• individuals on the board of trustees of a MEPP, and on a
pension committee of a Quebec‐registered pension plan can
be personally sued, and prosecuted
• DO NOT accidentally impose that personal liability on
individuals involved in the governance of a pension plan that is
not a MEPP, and not registered in Quebec
• pension committee mandates, and SIPPs often do so …
11

12. R. v Christophe et al. (“CCWIPP”)
Canadian Commercial Workers Industry Pension Plan:
• charges under Ontario pension legislation in relation to investments made
by the Plan over the period from February 15, 2002 to December 31, 2003
• alleged breach of “10% rule” and prudent person rule in legislation
• convicted for breach of quantitative limits & failing to supervise individuals
on Investment Committee
12

13. Ontario court harshly criticized governance:
• didn’t retain consultants to attain required expertise
• didn’t maintain minutes that evidenced prudent
consideration OR delegation to consultants/experts
“woefully inadequate”
13

14. OECD and U.K. Guidance on Governance
Organization for Economic Co‐operation and Development:
• OECD Guidelines for Pension Fund Governance
• June 2009
• http://www.oecd.org/dataoecd/18/52/34799965.pdf
U.K.: "The Pensions Regulator“:
• Conflicts of Interest Regulatory Guidance
• October 2008
• http://www.thepensionsregulator.gov.uk/guidance/guidance‐conflicts‐of‐
interest.aspx
14

15. new frontiers in governance of DC plans
• No helpful legislative governance requirements for DC Plans
• DC plans are relatively new and their governance is evolving but
governance generally lacks the same care and oversight as DB plans
• CAP Guidelines issued by Canadian Association of Pension Supervisory
Authorities in May 2004 to provide governance guidance to the evolving
industry
• CAP Guidelines provide best practices but do not have force of law and do
not provide “safe harbours” (but PBSA does, now)
• US 401k industry started earlier and followed a similar evolutionary path,
but is now enjoying class action lawsuits, even though legislation includes
safe harbours – mostly about fee disclosure
15

16. Pooled Registered Pension Plans
how will they be governed?
• OSFI
• "administrator" (certified financial institution)
• employer
questions …
‐ what does the licence say?
‐ how are "low cost" fees monitored?
‐ what are the obligations of employer in selecting the
administrator?
‐ is it certain that the employer has no fiduciary obligations?
16

17. new frontiers in governance of DC plans
• Important areas in DC Governance and CAP Guidelines
– Selecting and supervising service providers
– Selecting and overseeing investment options
– Fees associated with investment options
– Liquidity and level of risk associated with the investment options
– Default options and auto‐enrollment
– Investment education and/or advice
– Communication to members and tools available to assist
• Given the increased governance expectations of DC sponsors,
why not simply follow the roles and responsibilities well
established for DB Plans? Better yet, why not simply combine
the assets from both plans into a single structure for
governance purposes?
17

18. Proposed Canadian Pooled Structure
ACTIVE POOLS
Canadian Equity
DC Participant “A” Target Date Pool
Funds DB
(i) 2010
(ii) 2020 Plan no 1
(iii) 2030
Global Equity
Pool
DC Participant “B” Fixed Income DB
Pool Plan No 2
Passive Index
Funds
(i) Global Equities
(ii) Canadian Equities
(iii) Fixed Income Alternative Inv.
Pool
Cash & Short
Term Inv.
18

19. new frontiers in governance of DC plans
Pros of Proposed Integration of DB and DC assets:
– allows for complete fund manger oversight;
– governance would use DB roles & responsibilities which have
regulatory and common law standards
– reduces fees for the smaller asset pool (usually DC Pool);
– significantly reduces fiduciary risk;
– least costly option to maintain
Cons:
– disruption to participants;
– mapping of current choices to new options;
– restricts employee choice;
– potential significant tax impact to participants in Canada;
– design not easily implemented in Canada
19

20. delegations & pension committees
typical delegations by Quebec pension committee
accidental delegations (well‐intentioned) create
unnecessary personal liability
* * * * monitor and make recommendations * * * *
20

21. jointly governed target benefit plans
• OECP Report recommended it & the Ontario government
responded with Bill 120
• governance shared by employers & plan members (via a board
which is the administrator)
• single or multiple employers
• DB, with benefit reduction permitted
• employer’s liability fixed at the contribution described in
collective agreement
• no PBGF
21

22. Jointly governed target benefit plans
• Sounds like a MEPP? It is! Sort of.
• Bill 120 fixes the concern (valid) that participating
employers could be on the hook for deficits …but only
in Ontario
• Quebec remains the problem, and N.B. may be too
22

23. governance anxieties from “Slater Steel”
the not‐yet‐completed story of potential personal liability of
individual directors and officers of the traditional single‐
employer pension plan:
•Mel Norton (Aon actuary) employed “asset smoothing”
technique that FSCO didn’t like, which resulted in lower
contribution obligations
•Slater Steel became insolvent and Morneau was appointed
wind‐up administrator
•Morneau sued Mel Norton and Aon for $20 million, claiming
that Mr. Norton overstated the plans’ assets which in turn
improperly permitted Slater Steel to avoid making additional
contributions before becoming insolvent
23

24. … Slater Steel …
In response, Mr. Norton and Aon commenced “third party”
claims in the lawsuit, against the directors, officers and
employees who sat on the audit committee of Slater Steel,
saying that those individuals caused or contributed to the
deficit:
“…the Slater personnel, in their capacity as agents or employees of the
administrator, acted negligently and in breach of statutory and fiduciary
duties…placed themselves in a position of conflict of interest … followed a
deliberate strategy to minimize the contributions Slater would have een
required to make to the plans…”
24

25. … Slater Steel …
• The directors and officers went to the insolvency court to get
confirmation they were insulated from claims, as part of the
standard “CCAA”/insolvency protection.
• Ontario Court of Appeal:
– nope. “…although the Slater personnel were appointed to the Audit
committee by virtue of their positions as directors and officers, when
making decisions in respect of the plans’ administration they did so as
agents and employees of Slater qua administrator – not as directors
and officers.”
• So the directors and officers owed a fiduciary duty to plans’
members and weren’t able to shelter under the D&O
protection.
25

26. FSCO & the Queen wade into Slater Steel
•Prosecution under PBA against Mel Norton was dismissed.
•FSCO has been “fourth partied” in the ongoing lawsuit that
Morneau commenced against Aon and Mr. Norton:
On March 17, 2010, the Slater officers and directors served notice under the
Proceedings Against the Crown Act that they intend to commence a fourth
party claim against Her Majesty the Queen in Right of Ontario as represented
by the Superintendent of Financial Services
26

27. some final words about funding policies…
CAPSA Guideline No. 7: November 15, 2011
• what should a funding policy say?
• exactly how is it different from a SIP&P?
• consider addressing the sponsor's position on requesting solvency
relief
• should it be disclosed to plan members?
• beware of unions putting it on the table for collective bargaining
purposes
27

28. The preceding presentation contains examples of the kinds
of issues companies dealing with pension governance and
risk management could face. If you are faced with one of
these issues, please retain professional assistance as each
situation is unique.

29. Thank you
Mary Picard
mary.picard@fmc‐law.com
+1 416 863 4469