Our publication: Administering a pension plan well

Pension committees administer pension plans. They play an important role that requires their members to have thorough knowledge of the committee's obligations and responsibilities.

To properly administer a pension plan, the members of the committee must be prepared, and they must have the right tools. They must show common sense in the exercise of their duties and adopt a set of rules of procedure. The committee must also adopt operating and governance rules based on sound management principles.

Using common sense that is not based on rules can be risky but so can following rules without using common sense. The rules cannot cover every situation with which the pension committee will be faced. That is why it is important for the members of the committee to have a thorough understanding of their role and to be actively involved in the administration of the pension plan. This will allow them to act appropriately in any given situation.

This part of the collection outlines the fundamental principles of the role, obligations and responsibilities of a pension committee and its members. It also discusses the committee's obligations when it entrusts duties to service providers, the liability of its members and ways to reduce the risk of lawsuits.

A list of the relevant sections of the Supplemental Pension Plans Act is provided in the References section.

Role of the pension committee

In a pension plan, the contributions of the employer and those of plan members (if they pay contributions) are paid into a pension fund. Although the fund is used to pay out the benefits provided for in the plan, it does not belong to the employer or the members (active or inactive) or beneficiaries: it is a trust fund. The pension committee that administers the pension fund is the trustee. It assumes the obligations of an administrator of the property of others. The sections in the Civil Code of Québec that apply to persons who are charged with the administration of property that is not their own are listed in the references.

The role of a pension committee is to ensure the management of the pension fund and the day-to-day administration of the pension plan by implementing adequate means to protect the benefits of the plan's members and beneficiaries and to maintain and increase pension fund assets. Its role is similar to that of a corporate board of directors, and is distinct from the role of the body empowered to establish, amend or terminate the pension plan.

To fulfill its mission, the pension committee must make sure that a number of duties are carried out. For more information about this, see the Duties of the pension committee section.

The pension committee's internal bylaws must stipulate the mechanisms and rules needed to ensure the proper operation of the pension committee and the sound administration of the pension plan.

As the plan's administrator, the pension committee must apply the plan text and ensure compliance with legal requirements. If some provisions of the plan text are unclear, the committee must interpret them, ask for the necessary opinions to validate their application and, where necessary, recommend that the empowered body (usually the employer) make changes to the plan.

Moreover, as administrator of the pension fund, the pension committee is responsible for the full administration of the fund's investments. It must develop an investment policy that takes into account the type of pension plan, as well as its characteristics, financial commitments and funding policy. It must review and revise the investment policy on a regular basis and make sure that it is respected.

Investments must comply with the applicable provisions of the Supplemental Pension Plans Act, which may limit or prohibit certain types of investments. The pension committee's investments must also comply with the investment policy and any investment rules contained in the plan text, including rules regarding term contracts and other financial instruments.

The pension committee must make an effort to put together a diversified investment portfolio so as to minimize the risk of large losses, unless it is reasonable to act otherwise under the circumstances.

In some pension plans, the members decide how to invest the contributions credited to their account. In that case, the pension committee must make sure that the members have at least 3 diversified investment options and that the investments have different degrees of risk and expected rates of return, which will allow them to put together a portfolio adapted to their needs. Therefore, the pension commmittee is not responsible for establishing an investment policy. However, it should apply Canadian Association of Pension Supervisory Authorities (CAPSA) Guideline no. 3 on capital accumulation plans , which recommends that the committee:

• select the financial institution that will offer the investments and evaluate it periodically
• make sure that the investments offered are appropriate and revise them if applicable
• provide members with the information and tools they need to choose their investments.

Obligations of the pension committee

Like any person who administers the property of others, the pension committee has the legal obligation to exercise the prudence, diligence and skill that a reasonable individual would exercise in similar circumstances. It must act with honesty and loyalty, in the best interest of members and beneficiaries.

Furthermore, pension committee members who have particular knowledge because of their professional or business experience must use such knowledge in administering the pension plan. Lastly, all pension committee members must avoid conflicts of interest.

The obligation to act with prudence means that a pension committee that does not have sufficient knowledge in a specific area should consult experts or entrust tasks to people with the necessary competencies. The more the knowledge of committee members is limited, the more important it is for the committee to call upon such persons.

Entrusting duties

Since the tasks are numerous and sometimes complex, the committee can entrust duties to service providers, but must make sure that they are correctly carried out. The people whose expertise is required (accountant, auditor, actuary, securities depositary, portfolio manager, employer who is party to the plan) are called key administrative players.

Important!

The pension committee has the power to entrust duties to a service provider. One or more of the committee's members or another person may also entrust duties, provided they are authorized to do so by the committee.

If it entrusts duties to a service provider, the committee must make sure that the person has the necessary skills, provide clear instructions and adequately monitor his or her work. To that end, the rules for choosing, compensating, monitoring and evaluating service providers must be provided for in the internal bylaws. For example, the bylaws could require that the committee issue a call for tenders to invite individuals of its choosing to submit a bid.

Choosing the type of contract

When a pension committee entrusts some or all of its duties to a service provider, the legal responsibility of the pension committee with respect to those duties depends on the nature of the contract between the committee and the service provider, unless a discretionary power of the committee is involved (see Entrusting duties that involve the exercise of a discretionary power). The contract may be a mandate, a service contract or a delegation. For protection purposes, it is strongly recommended that the contract be in writing.

A pension committee does not have the power to perform certain tasks. It must call on professionals who have exclusive competence to carry out such tasks. For example, the committee must retain the services of an independent auditor to audit the plan's financial report or financial statements. To do so, the committee must enter into a service contract with a qualified professional. Execution of these tasks cannot be entrusted by means of a mandate or delegation.

Mandates and service contracts

A mandate is a contract by which the pension committee grants authority to a person to represent it in fulfilling one or more of its duties. In the Supplemental Pension Plans Act, such a person is called a representative of the pension committee (i.e. the mandatary under the Civil Code of Québec). The representative carries out duties on behalf of the committee and represents the pension committee before third parties (members, other persons, government agencies). The committee is responsible to these parties for the acts or omissions of representatives who act within the limits of their mandates.

A mandate can be given for the purpose of performing a specific task or generally overseeing all of the pension committee's business. It is therefore possible to mandate the employer or another person to carry out the committee's duties. For example, it is common to mandate the employer to answer members' questions, sign up workers who are eligible for the plan, issue statements of benefits, etc.

The mandate should be written in clear terms to ensure that all of the parties clearly understand its scope. It must clearly indicate that the representative is authorized to take actions that only the pension committee, as the administrator of the property of others, has the power to take.

The committee and the representative are required to cooperate with each other. The committee must provide the representative with the information required to fulfill its mandate. The mandate should clearly indicate the respective obligations of each party.

A service contract is usually a contract by which the committee hires a person to perform a specific task. Unlike a representative, a person who provides a service under a service contract (i.e. a service provider), does not act on behalf of the pension committee or represent the committee before third parties. A service provider does not usually interact with the plan's members or any other person or government agency.

As previously indicated, acts that are reserved for certain professionals are entrusted by means of a professional service contract. This is the case for audits of the plan's financial report or financial statements, which must be performed by an independent auditor, actuarial valuations for defined benefit pension plans, which must be performed by an actuary, and legal opinions, which can only be given by a legal expert.

Service contracts can also be signed for the purpose of carrying out certain duties for the committee. For example, it is not uncommon to enter into administrative service contracts with consulting firms for the purpose of preparing statements, making calculations and drafting plan amendments.

The service contract should clearly define the obligations of each party.

The committee is responsible for the actions or omissions of representatives and service providers that occur in the course of their duties. The committee can, however, seek recourse against these individuals if they fail to fulfill their obligations. That is why written contracts are important.

When the committee entrusts duties, it should:

• Choose the representative or service provider carefully. The committee must take reasonable measures to assess the person's ability to execute the contract. For example, it can check the person's professional credentials and require references.
• Provide the representative or service provider with clear and specific instructions, preferably in writing.
• Supervise the individual's work, to the extent required by the circumstances. The committee must require reports and read them in order to make sure that the appropriate services have been provided and that they meet the committee's expectations.
• Check periodically that the pension fund is paying a reasonable price for the services received.
• Keep written documents that reflect the steps taken to implement each instruction listed above.

Delegations

A delegation is when the pension committee entrusts duties to a person who agrees to assume the same obligations and liability as the pension committee. A delegation should be drafted in clear terms, and the committee should have the right to revoke it at any time.

Persons to whom duties have been delegated, known as delegates, therefore act on their own behalf. Delegation involves a transfer of liability from the committee to the delegate.

As administrator of the pension plan, the committee must supervise the work of delegates to make sure that they adequately perform their delegated duties. To this end, it can require that they provide an account of their work by submitting periodic reports.

Delegates can delegate some or all of their duties if the delegation agreement so authorizes. Their obligations are then delegated to a subdelegate. As a result, if the committee chooses delegates for their particular qualities, such as their expertise, it must make sure that the delegation agreement does not authorize subdelegation.

The pension committee should regularly review the delegations in effect. During a review, all committee members have a say in evaluating delegates' competence and verifying if the delegations that are in effect still comply with the committee's policy. This exercise enables the committee to decide whether a delegation should be maintained or revoked and to make any other changes or adjustments necessary.

It should be noted that, under the Supplemental Pension Plans Act, the pension committee must review all delegations within 30 days after a member having the right to vote takes office. New members should also be informed about the mandates and service contracts in effect.

Important!

When a pension committee chooses to delegate duties, it should do so in writing and indicate on the contract that a delegation is being made. It should also specify that the delegate will assume the pension committee's obligations and liability when performing the delegated duties.

Even if the contract does not specify that a delegation is being made, if the duties entrusted to the service provider involve the exercise of a discretionary power, the rules with respect to delegation will apply. For example, if a person can make decisions without having to obtain the pension committee's authorization, that person has the same obligations and liability as the committee would have had had it acted on its own. For the other functions, the terms of the contract will serve to determine the intention of the parties. That is why it is important to have a clearly worded contract.

When the committee delegates duties, it should:

• Make sure that the plan text does not prohibit delegation. If it does, any delegation will be null and void, and committee members could be held liable for any errors or omissions by the delegate, as if they themselves had made these errors or omissions.
• Take reasonable measures to assess the delegate's ability to successfully execute the contract. For example, it can check the person's professional credentials and require references.
• Provide the delegate with clear and specific instructions in writing.
• Supervise the person's work, to the extent required by the circumstances. The committee must require reports and read them in order to make sure that the appropriate services have been provided and that they meet the committee's expectations.
• Check periodically that the pension fund is paying a reasonable price for the services received.
• Keep written documents that reflect the steps taken to implement each instruction listed above.

If these precautions are taken, in the event of an error or omission on the part of the delegate, it is the delegate who will be held liable and not the committee. The pension committee is, however, obliged to intervene as soon as it becomes aware of the delegate's error or omission. Should the committee fail to intervene, it may be held liable for losses incurred. The pension committee must also intervene immediately if it learns that the delegate is carrying out a duty that has not been delegated to him or her.

Entrusting duties that involve the exercise of a discretionary power

When a pension committee entrusts duties that involve the exercise of a discretionary power to a service provider, that service provider is deemed to be a delegate of the pension committee. Regardless of the type of contract by which the service provider is bound to the pension committee (mandate or service contract), the service provider has the same obligations and liability as a delegate. In particular, the service provider must act in the best interest of the plan's members and beneficiaries.

In this case, as in delegation, there is a transfer of the pension committee's liability to the service provider. To the extent that the committee has been careful in choosing a competent person, has given clear instructions and adequately monitors the work, the committee is not responsible for the actions taken by the service provider. (See Delegations for details.)

The duties entrusted to a service provider do not all involve the exercise of a discretionary power. For example, a service provider who prepares statements for members and beneficiaries or who calculates benefits and refunds generally does not exercise a discretionary power.

Discretionary power is characterized by the holder's freedom to evaluate, act and make decisions. For example, a portfolio manager who chooses which securities to buy and sell exercises a discretionary power of the pension committee.

Service providers generally exercise a discretionary power when they can make decisions without first obtaining authorization from the pension committee. For example, a service provider who makes recommendations to the pension committee does not exercise a discretionary power because the final decision is made by the committee.

If the pension committee transfers a discretionary power to a service provider because it does not have the competence needed to act for itself, it should specify in the contract between it and the service provider that the committee will not authorize or ratify the decisions made by the service provider. In fact, if the committee authorizes or ratifies the service provider's decisions, it assumes the same liability as if it had acted alone.

Acting in the best interest of the plan's members and beneficiaries

Pension committee members must not exercise their powers for their own self-interest or for the interest of a third party. They must therefore not take into account the interests of the entity that appointed them, such as the employer, the union, active or non-active members or beneficiaries. Pension committee members do not represent the people who appointed them. Committee members must act in the best interest of the plan's members and beneficiaries as a whole, putting their own interest on the same level as the interests of all the others.

Maintaining a register of interests

Pension committee members should not be in a position in which there could be a conflict between their own personal interests and those of the pension plan. A conflict of interest situation is a situation where legitimate interests could conflict with those of the pension fund, either now or in the future.

It is the duty of the committee members in question to notify the pension committee in writing as soon as possible of any interests in a business that may cause their personal interests to conflict with the duties of their office, whether or not it involves a financial benefit. In addition, when a member can claim rights from the pension fund or against it, other than rights under the plan, such as the payment of benefits, that person must declare his or her rights, their nature and their value in writing.

The committee must keep a register of interests and rights reported to it. The committee must allow the employer, members and beneficiaries to consult the register during the annual meeting.

It should also establish the procedure to follow when a member is in a potential conflict of interest situation. A member who is in such a situation could continue to perform duties on the committee while not participating in deliberations or the making of certain decisions. The goals is to avoid an actual conflict of interest.

Important!

When the committee entrusts duties to a person (e.g. a delegate), the contract should indicate that this person is obligated to declare the interest he or she has in a business that may cause his or her personal interests to conflict with the duties of his or her office. The person must also declare the value and the nature of the rights he or she could claim from the pension fund or against it.

Not receiving advantages or benefiting from pension fund assets

Pension committee members may not receive fees, commissions or other advantages with respect to any transaction concerning pension fund investments. The same rule applies to delegates, employers and certain other persons mentioned in the Supplemental Pension Plans Act who may be in a conflict of interest situation.

However, this prohibition does not apply if such advantages are usually granted to persons in the exercise of their duties and if they correspond to what is normally granted for such transactions. For example, portfolio managers may receive their usual fees for transactions.

It is important to note that receiving a secret commission to the detriment of the pension fund constitutes a criminal act.

Moreover, pension committee members may not use the assets of the pension fund or the information to which they are privy in the exercise of their duties for personal profit. For example, a committee member cannot rescue his or her own business by receiving a loan from the pension fund.

Complying with legal requirements

The pension plan must be administered in compliance with the requirements set forth in legislation, in particular the Supplemental Pension Plans Act and the Taxation Act.

Pension legislation contains a number of legal requirements that govern funding of the plan, administration of the pension fund, benefits that can be paid, plan members' rights and information that must be submitted to Retraite Québec and the Canada Revenue Agency. The committee is obligated to make sure ensure that all legal requirements are met.

If certain provisions of the plan text do not comply with the minimum requirements of the Supplemental Pension Plans Act, the Supplemental Pension Plans Act shall have precedence.

Penalties or fines can be levied if certain legal requirements are not met. For example, if the annual information returnis not submitted before the deadline, the pension fund will be required to pay additional fees (penalties) to Retraite Québec.

Liability of the pension committee

The pension committee acts through its members, who are personally responsible for ensuring that the committee meets its obligations. Committee members can be brought before civil courts and forced to pay damages and interest.

The committee has an obligation of means, not results. Committee members therefore cannot be held liable in all situations that involve financial losses. The Supplemental Pension Plans Act does not require that the committee obtain predetermined results to fulfill its duties adequately. The committee does, however, have the obligation to act with prudence, diligence and skill, that is, to take the necessary steps that a reasonable person would take in similar circumstances, in particular, it must:

• Establish operating and governance rules (internal bylaws).
• Obtain all the information and documents required to properly administer the pension plan (e.g. the plan text, internal bylaws, correspondence with Retraite Québec, a copy of the annual information return and, if applicable, the actuarial valuation report) (see the part of this collection entitled Documents Regarding the Pension Plan and its Administration).
• Obtain the necessary information before making decisions and understanding the scope of its decisions.
• Verify the credentials of persons to whom it has entrusted duties, provide them with clear instructions and exercise adequate supervision over their work.
• Act in the best interest of the plan's members and beneficiaries at all times.
• Meet regularly and draft minutes of the meetings.

The pension committee should not hesitate to consult an expert if it considers that it lacks the necessary competence to make a decision. If the committee acts in good faith, on the basis of an expert's opinion, it will be deemed to have acted with prudence.

It is up to the individual taking legal action to demonstrate that the pension committee or a person to whom it entrusted duties is in breach of his or her obligations and that damages have resulted.

Nevertheless, pension committee members who approve an investment that is not compliant with the Supplemental Pension Plans Act are, for that reason alone, jointly and solidarily liable for any resulting losses, no other proof of wrongdoing being required. They would therefore be liable even if they could show that they acted like a reasonable person. They can, however, avoid such liability if they can show that they acted in good faith and on the advice of an expert. It is therefore very important to make sure that the person who is entrusted with choosing investments acts with competence and in compliance with the law.

Members of the pension committee are jointly and solidarily liable

The Supplemental Pension Plans Act stipulates that each committee member who has a voting right is deemed to have approved every decision made by the pension committee. Members are jointly and solidarily liable unless they voice their opposition immediately.

Joint and solidary liability means that one or more members can be sued or found liable for damages caused by an error or omission on the part of the pension committee or any committee member who acted on behalf of the committee. The members who are sued have the right to recover the other members' share of the damages.

Joint and solidary liability also means that each committee member may be held personally responsible for the consequences of a decision made by the committee. Committee members who do not want to be held liable for decisions with which they disagree must immediately voice their dissent. Dissent cannot be expressed by abstention or by simply voting against the decision. It must be explicit. Members who are in disagreement must therefore make sure that their dissent is noted in writing in the minutes of the meeting. Should a member fail to voice dissent during the meeting, and if the decision has not yet taken effect, that member may voice dissent in a letter addressed to the committee, or put the matter on the agenda for the following meeting.

Members who are absent for a committee meeting are deemed to have approved any decisions made in their absence, unless they send notice of their dissent in writing to the other members within a reasonable delay after receiving news of the decision. It is therefore important to draft detailed minutes of each meeting and for all committee members to be aware of the decisions made in their absence.

Resignation of a pension committee member

Pension committee members are allowed to resign. Their resignation, however, does not discharge them of their liability as committee members for decisions made during their term. Moreover, if a committee member resigns without a serious reason at a time when the committee or the pension plan is experiencing serious problems, the resigning member may be held liable for any damages thus incurred. It would therefore be prudent to give the reasons for resigning in the notice of resignation.

A member who resigns must give notice in writing to the individuals designated by the plan to appoint a replacement. If the plan makes no specific provisions in this regard, the member must inform all the other committee members of his or her resignation. The member must also notify Retraite Québec, and indicate on the notice the date of resignation and the date it takes effect. This date is either the date the notice is received or a later date indicated on the notice (a member cannot resign retroactively).

Lawsuits and liability insurance

The best way to prevent a lawsuit is to use common sense and to include operating and governance rules in the pension committee's internal bylaws, thereby ensuring the effectiveness and thoroughness of the decision-making and monitoring procedures used in the administration of the pension plan. Furthermore, the actions of the pension committee members must be motivated by the best interests of plan members at all times.

Although lawsuits against pension committee members are rare, the risk cannot be dismissed entirely. Even when a lawsuit is groundless, defence costs alone can be high.

When committee members are not covered by liability insurance but are not found guilty of any wrongdoing, the pension fund must reimburse them for the cost of their legal defence. However, if the lawsuit against the member is successful, the costs of legal defence and any damages that the member must pay cannot be paid by the pension fund. In some plans, an agreement is made with the employer to indemnify pension committee members. However, it may be difficult or even impossible to enforce such an agreement if the employer is in financial difficulty.

For this reason, it is strongly recommended that civil liability insurance coverage be provided for pension fund trustees. This type of insurance coverage protects pension committee members against acts, errors or omissions committed when carrying out their duties.

In some plans, committee members are protected by the employer's liability insurance, which is commonly called "directors and officers civil liability insurance." Generally speaking, such insurance provides protection against administrative errors and omissions. It does not cover fiduciary risk. Furthermore, the protection may be withdrawn if the employer is in financial difficulty or goes bankrupt. For those reasons, it is far preferable that the committee take out liability insurance specifically for its members.

Insurance premiums are an administrative expense. They must be paid by the pension fund, unless the plan specifies that administration expenses are to be assumed by another person.

If committee members have liability insurance, the insurer pays for the cost of legal defence, whether or not the lawsuit against them is successful, to the extent that the wrongdoing alleged in the lawsuit is covered by the insurance. If the lawsuit is successful but the wrongdoing is neither a deliberate or gross fault, the insurance policy's deductible may be paid by the pension fund. However, before making a decision to pay the deductible, the committee must take into account the financial impact of such payment on the pension plan's assets and any other circumstances. For example, it might not be appropriate for the pension fund to pay the deductible if it is very high compared with the pension fund's assets or if the employer has agreed to pay it. Furthermore, an agreement may be reached with the employer for the employer to pay the portion of damages that exceeds the coverage limits of the insurance policy.

Before choosing insurance coverage, it is important to compare the costs of the different components and actions covered, which vary from one insurer to another. The following elements should be considered.

• The amount of the premium:

  The amount that the underwriter of an insurance contract must pay the insurer periodically or at the beginning of the contract in exchange for taking on a risk: the premium is the cost of insurance

• The amount of the deductible:

  The portion of the damages (fixed amount or percentage) that the insured must pay in the settlement of a claim

• The terms of payment of defence expenses:

  For example, these expenses are paid before a judgment is rendered.

• Out-of-court settlements
• The persons insured:

  Current, past or future members, representatives, delegates, service providers

• Coverage at the end of a committee member's term:

  In particular if the member resigns

• The acts covered:

  For example, find out whether events that occurred before the policy comes into force are covered.

• Exclusions

  Insurance policies that cover fiduciary risk are often complex. Pension committee members should not hesitate to meet with an insurance representative to obtain clarifications. Furthermore, it would be prudent to consult an independent insurance expert.

Important!

Rules for the sound administration of a plan (also called governance rules) are important. Insurers take these rules into account when deciding whether to cover pension committee members against the risks to which they are exposed and to determine the cost of the policy.

Duties of the pension committee

Pension committees administer pension plans. Their role is to ensure the management of the pension fund and the day-to-day administration of the pension plan. To do so, they must:

• implement adequate means to protect the benefits of the plan's members and beneficiaries
• maintain and enhance pension fund assets
• ensure that a numbe of duties are carried out, such as signing up workers who are eligible for the plan, paying contributions into the pension fund, paying pensions and benefits, etc.

References2

Legal references

Sections and chapters of the Supplemental Pension Plans Act 

Topics	Supplemental Pension Plans Act
Role of the pension committee's trustee	150
Obligations of the pension committee	151, 151.1, 158, 159
Delegation	152 to 155
Service providers	154.1 to 154.4
Discretionary power	153, 154
Register of interests	159, 166
Fees and other benefits	162, 182
Responsibilities of the pension committee	156, 180
Dissent	156
Membership	Chapter IV
Contributions	Chapter V
Refunds and pension benefits	Chapter VI
Transfers of benefits and assets	Chapter VII

Other references

• Guidelines for Capital Accumulation Plans  of the Joint Forum of Financial Market Regulators
• CAPSA Guidelines : Guideline No. 3 – Capital Accumulation Plans

• Newsletter number 28: Rules regarding the payment of contributions into the pension fund