Key Administrative Resources
The art of choosing a solid team and keeping a watchful eye
In order to fulfill their obligations with prudence, pension committees usually call upon service providers to help them administer the pension plan in compliance with the plan text and the applicable legislation. These service providers are key resources that must be selected and hired by the pension committee.
The part of this collection entitled Role and Responsibilities of the Pension Committee discusses the fundamental principles of the role, obligations and responsibilities of a pension committee. One of these principles has to do with key resources. When the committee entrusts duties to these resources, such as preparing the actuarial valuation or choosing investment options, it must make sure that they have the necessary skills, provide them with clear instructions and oversee their work. These conditions limit the pension committee's liability.
The committee also limits its liability when it hires a service provider as an advisor and bases its decisions on the advice of this expert. It is therefore important that the committee know how to select an advisor with the expert skills required.
This part of the collection contains practical information that will help pension committee members select key resources wisely and develop harmonious relations with them.
It presents the key administrative resources whose expertise is usually required. It also addresses the process involved in selecting key resources, including rules for screening candidates and putting out calls for tenders, as well as the various subjects that should be covered in the contract between the committee and the service provider. Lastly, it discusses oversight and the replacement of key resources.
The committee's internal bylaws (the document that sets out the committee's operating and governance rules) must include rules for selecting, compensating, overseeing and evaluating its experts.
A list of the relevant sections of the Supplemental Pension Plans Act and the ensuing regulations is provided in the References section at the end of the document.
Key administrative resources4
Administering a pension plan involves many duties with varying levels of complexity. The Supplemental Pension Plans Act stipulates that some of these duties must be carried out by an accountant or an actuary selected by the pension committee. Other duties can be carried out by the pension committee or by various service providers to whom the committee has decided to entrust these duties.
Accountant and auditor
Administering a pension plan requires a number of accounting operations. The most common are those relating to the preparation and auditing of the financial report or financial statements.
Within 6 months following the end of each fiscal year of the plan (financial year), the pension committee must have a financial report or financial statements prepared by an accountant with expertise in Canadian accounting standards relating to pension plans. With some exceptions, the financial report or financial statements must be audited by an accountant who is a member of the Ordre des comptables professionnels agréés du Québec and who holds the title of auditor. The accountant must perform the audit in conformity with the standards governing the profession and the rules set out in the Supplemental Pension Plans Act.
The accountant must submit an independent auditor's report to the pension committee, stating that, in his or her opinion, in all material respects, the financial report or financial statements fairly present the plan's financial position at the end of the fiscal year, as well as the change in net assets for the fiscal year.
Also, within this same time frame, the pension committee must file an annual information return (AIR) with Retraite Québec. The accountant must complete part of the return when he or she is required to audit the financial report or the financial statements.
The accountant must also provide the committee with the Report on Supplementary Matters Arising from an Audit Engagement with regard to the questions in the AIR.
The accountant may also be asked to establish the method for calculating rates of return or the method for applying the monthly interest rate on late contribution payments if these methods are not stipulated in the plan.
The accountant or a person with expertise in accounting standards can perform other verifications and offer other services, such as giving advice on internal controls.
Not all financial reports and financial statements need to be audited. In plans with fewer than 50 members and beneficiaries, whose net assets have a market value of less than $1 000 000, the committee is not required to have the pension fund's financial report or financial statements audited in either of the following cases:
- If it is the plan's first fiscal year
- If it is not the plan's first fiscal year and, at the annual meeting, the committee informed the members and beneficiaries of its intention not to have the financial report or financial statements audited, and less than one third of the members and beneficiaries opposed this intention
A pension committee that administers a defined benefit plan must hire an actuary to prepare the required actuarial valuations. The actuary must be a member of the Canadian Institute of Actuaries and hold the title of Fellow.
The actuary's role is to determine the cost of the plan and its financial position. This involves determining the value of the plan's commitments and the value of the plan's assets and establishing whether the plan has a surplus or a deficit. This information is used to determine the level of contributions that must be paid into the pension plan to make sure that its funding respects the minimum rules provided for under the Supplemental Pension Plans Act.
In the performance of their duties, actuaries must respect tax rules, the funding rules provided for under the Supplemental Pension Plans Act and the standards governing their profession.
The actuarial valuation report that the actuary files with the pension committee contains the information prescribed by the applicable regulations. It also includes a declaration by the actuary attesting that the report complies with the Supplemental Pension Plans Act and professional standards.
A notice of the plan's financial position at the end of the fiscal year must be produced, unless an actuarial valuation is required on the same date. The actuary must produce a document accompanying this notice. The content of both these documents is provided for under the Regulation respecting supplemental pension plans.
Actuarial firms usually offer consulting services and administrative services (see Administrative service providers). Among other things, they can:
- inform the committee of the risks related to plan funding and liquidity requirements
- assess the extent to which the plan's assets match its liabilities
- take part in the annual meeting.
Actuaries who work in financial institutions, such as insurance companies, can also offer the same services.
The Supplemental Pension Plans Act requires that pension plans have a pension fund into which contributions are paid and in which investment income is kept. This fund constitutes a trust patrimony that is separate from the patrimonies of the employer and the members and beneficiaries.
Pension committees usually hire a securities depositary (also called a "securities custodian") to hold the pension plan's assets, that is, its securities and cash on hand.
Banks, trust companies and insurance companies can act as securities depositaries.
The depositary's duties are as follows:
- receiving contributions and investment income
- paying benefits and expenses or, depending on the contract, transferring the necessary funds to the person with payment authority
- disbursing the funds needed to make investments according to the instructions of the person who manages them (e.g. the portfolio manager)
- keeping track of proxies, voting rights and maturity dates of investments
- producing the agreed reports.
In addition to serving as a securities depositary, most depositaries provide pension committees with complementary services. For example, the depositary can analyze the return on investments, verify the pension fund's degree of risk exposure and make sure that investments comply with the investment policy, the Supplemental Pension Plans Act and the Income Tax Act.
Some pension plans, in particular small and medium-sized plans and defined contribution plans in which members make their own investment choices, entrust the function of securities depositary to the financial institution that manages the plan's assets. The pension committees that administer these plans should make sure that securities depositary tasks and portfolio manager tasks are entrusted to separate people in order to avoid conflicts of interest.
In the case of small and medium-sized plans, once a written investment policy has been adopted, the pension committee usually hires a portfolio manager. In the case of larger plans, the pension committee will often entrust fund management to an internal manager or select several external portfolio managers.
The portfolio manager manages the pension fund's investments according to the plan's investment policy, the Supplemental Pension Plans Act and the Income Tax Act. The portfolio manager's duties include the following:
- making investment choices (more specifically, identifying the market sectors and securities in which to invest) and allocating assets among various investment categories
- maintaining relations with the securities depositary and, if applicable, with the actuary
- reporting to the pension committee as agreed.
The pension committee usually delegates the exercise of voting rights attached to the pension fund's securities to the portfolio manager. Moreover, the plan text or the investment policy must set out the rules applicable to the exercise of voting rights. The manager exercises voting rights according to these rules.
Insurance companies, trust companies and companies that specialize in asset management offer portfolio management services.
The role of the securities depositary differs from that of the portfolio manager.
- Securities depositaries hold the pension fund's assets. They do not manage investments, but rather carry out the operations requested.
- Portfolio managers manage investments. They give instructions to the securities depositary. Portfolio managers do not have access to the pension fund's assets
Administrative services provider
Most pension committees transfer their administrative tasks to service providers. These tasks may include the following:
- registering employees eligible for membership in the plan
- answering questions from members and beneficiaries
- processing applications for benefits from members: eligibility, calculations, options
- providing access to plan documents
- making sure member and beneficiary files and plan records are up to date
- preparing statements of benefits for members and beneficiaries
- preparing applications for the registration of amendments to the plan, as well as reports that must be filed with government authorities
- keeping the books and preparing financial reports or financial statements
- ensuring the appropriate retention of pension committee and pension plan files and documents.
The pension committee can transfer these administrative tasks to the employer, the labour union that sponsors the pension plan or service providers, such as financial institutions, actuarial firms or companies that specialize in the administration of pension plans.
The pension committee takes the following considerations into account when deciding whether to entrust these tasks to a service provider, the employer or the union:
- the complexity of the pension plan and the number of files to be processed
- the experience and training of the staff members to whom the tasks will be entrusted
- the possibility of replacement in the event that those staff members are absent or have left
- the tools available to these staff members in carrying out the tasks: administrative manuals, databases, software, etc.
- the cost.
In the case of defined contribution plans, insurance companies and trust companies usually provide all administrative services.
When drafting or revising an investment policy, the pension committee should be advised by a financial expert independent of the portfolio manager.
The pension committee can also call upon a financial expert to carry out other duties, including the following:
- monitoring the investment policy
- training pension committee members
- selecting and evaluating the portfolio manager
- analyzing the reports of the securities depositary and the portfolio manager.
Financial experts usually work for insurance companies, trust companies or actuarial firms.
The pension committee may hire a legal advisor for the following duties:
- making sure that the provisions of the pension plan comply with all applicable legislation
- resolving contentious issues
- negotiating and drafting contracts with service providers.
Legal advisors can be lawyers or notaries. They must be very knowledgeable about pension plans, the Supplemental Pension Plans Act and tax rules.
The pension committee may hire a communications consultant, for example, to draft the pension plan's information booklet, amendment notices and statements of benefits, and to help prepare the annual meeting.
Adequate and clear documents are essential if members and beneficiaries are to take an interest in their pension plan and make informed decisions.
Selecting key administrative resources
When the pension committee hires service providers for advice or asks them to perform certain duties, it must adopt formal rules in order to select competent people. These rules must be stipulated in the committee's internal bylaws.
Failure to establish adequate rules can entail risks, including the following:
- errors in the administration of the plan because the people performing tasks or providing advice do not have the necessary skills
- additional administrative costs for the pension fund, processing errors or a lack of continuity or an interruption in day-to-day operations due to high service provider turnover.
The pension committee must establish a selection process that is adapted to the characteristics of the pension plan. The major steps in this process are described below.
Determining the pension committee's needs
In order to take full advantage of the required services, the pension committee must first determine its needs. These needs may vary depending on the size and complexity of the plan, the administrative approach and pension committee members' knowledge.
For example, pension committee members may need the following:
- a financial expert who can help them draft an investment policy because they do not have sufficient knowledge to draft it on their own
- an external resource who can perform administrative tasks because having them carried out internally would be too costly
- a specialized external resource because pension committee members do not have the expertise needed to advise members who choose their own investments.
If the pension committee does not have the knowledge required to properly identify its needs and select key administrative resources, it must seek the assistance of an expert. The Supplemental Pension Plans Act stipulates that the pension committee will be assumed to have exercised prudence if it bases its decisions on the expert's advice.
Calls for tenders
Once it has determined its needs, the pension committee must seek out potential candidates. The mechanism used to select candidates must allow the committee to demonstrate that it has taken reasonable measures to select more than one potential candidate capable of providing the services required. Practically speaking, this means that the pension committee's decision must not be based solely on subjective criteria, for example, if the sole candidate is a friend of a pension committee member. The committee must be conscientious and objective in its search.
The committee may solicit bids from service providers through a public call for tenders or a call for tenders by invitation.
Public call for tenders
This procedure involves publishing a public tender notice in the newspapers or on the Internet in order to reach all those who might be interested and have the required skills, thereby stimulating as much competition as possible. This procedure, which is generally used for large contracts, reduces the potential for favouritism and conflicts of interest.
In a public call for tenders, the contract is awarded to a service provider whose service offer (or "bid") meets all of the requirements set out in the call for tenders.
Call for tenders by invitation
Calls for tenders by invitation lie somewhere between public calls for tenders and private agreements. They guarantee impartiality and transparency, while providing the pension committee with more leeway in selecting a candidate.
In calls for tenders by invitation, the pension committee draws up a list of potential candidates.
The list of potential candidates is usually drawn up based on general criteria, such as:
- the sector of activity (e.g. financial institutions that offer pension fund management services)
- the region of practice (e.g. actuaries who have an office in the region where committee members live).
Specific criteria can also be useful in drawing up the list, in particular the sector of activity in which certain consultants specialize. For example, the pension committee could search for actuarial firms that have substantial experience in the municipal sector or in administering multi-employer pensionplans.
Book of specifications
It is important to clearly lay out what is expected of the service provider from the outset. In public calls for tenders, these instructions are included in a document called "book of specifications."
The following is an example of what might be included in a book of specifications:
A description of the pension plan and its environment – This description allows service providers to assess the scope of the tasks involved and find out what skills are needed to carry them out. For example, the description might include the following:
- the type of plan
- the number of active and inactive members and beneficiaries by province and the turnover rate
- the plan's financial position
- a description of the software or other tools the service provider may be required to use, for example in order to transfer data.
The scope of the contract – It is important to clearly indicate the nature of the services required and to include a description of the tasks to be carried out as well as, where practicable, any other points that the committee wishes to settle in the contract. For more information on this topic, see Contract.
The information and documents that the candidate must supply – The information and documents requested may include the following:
- a description of the company
- an example of a standard report
- the names of the people who will be in charge of the file, their training and a summary of their experience in general and the experience they have in carrying out similar contracts
- a description of the procedures and controls implemented to ensure the quality of the work
- proof of insurance (amount, coverage and exclusions)
- where applicable, the permits and licences held, for example permits issued by the Autorité des marchés financiers
- in the case of a portfolio manager, that person's policy with regard to "soft-dollar commissions"
- the price charged for the required services and a detailed description of costs and fees (services that are included and those that are not, type of compensation, etc.). Depending on the type of compensation, this will be either a fixed price or a fixed rate with an estimated total cost.
- the period for which the costs and fees are guaranteed.
Lastly, the book of specifications provides the contact information of the person in charge of the selection process and the person to be contacted should service providers have any questions. It also indicates the deadline and location for submitting bids.
The purpose of bid analysis is to determine whether bidders meet the minimum requirements set out in the call for tenders. It also serves to determine which bidders will be invited for an interview.
In order to carry out the analysis, the committee should develop a scale indicating the various selection criteria and the weight assigned to each one. Criteria might include the following:
- the candidate's training and experience
- the quality of the communications (Are the reports complete and easy tounderstand?)
- the price (Is it competitive?)
- the quality of the organization and its growth.
At this stage, the committee should also verify whether any proceedings have been instituted against the candidates or the companies they represent.
The interview is an essential step in the selection process. It provides an opportunity to assess certain subjective elements, such as a candidate's affinities with pension committee members.
The committee must prepare carefully for the interview. In order to assess candidates during an interview, the committee must establish criteria and weight them according to their level of importance. To help them select a candidate from among those interviewed, the pension committee can consider several criteria, including the following:
- the candidates' ability to tailor their reports to the pension committee's specific requirements
- the additional services they are willing to provide
- their ability to clearly answer the pension committee's questions
- their ability to explain technical concepts in laypersons' terms
- their behaviour: eye contact, confidence, politeness, tone, etc.
During the interview, the pension committee can ask candidates to provide additional details about certain aspects of their bid.
It is important to properly document each step in the selection process and to retain the pertinent documentation, for example:
- a text describing the nature of the services to be provided and the selection criteria
- a text describing the tendering procedure (e.g. the committee might note that it used a call for tenders by invitation and include the names of the candidates who were invited to submit a bid)
- an analysis grid for the bids received, along with the weight assigned to each selection criterion
- the list of candidates short-listed for an interview
- a description of the interview (including the questions asked and the answers given), and the analysis grid used, along with the weight assigned to each evaluation criterion
- the reports and other documents provided by the candidates.
By following this procedure, the pension committee can demonstrate that it applied sound governance principles when selecting a service provider.
Pension committee members are personally liable for the plan's administration. Of the various types of contracts (mandates, service contracts, delegation), only delegation allows the pension committee to transfer its liability to the service provider. To the extent that it provided adequate oversight, the committee is accountable only for the care it demonstrated in selecting its service providers and providing them with instructions.
The Supplemental Pension Plans Act stipulates that a service provider who exercises a discretionary power of the pension committee is considered a delegate of the committee.
A service provider who, as part of a service contract or mandate, makes decisions without having to obtain the authorization of the pension committee has the same obligations and incurs the same liability that the committee would have had it been the one to act. As is the case with delegation, pension committee members are not liable for the decisions made by the service provider, provided the committee chose the provider carefully, gave clear instructions and adequately oversaw the work.
It is therefore important to provide clear instructions when entrusting tasks to a service provider. A contract including those instructions should be signed by an authorized representative of the pension committee.
In addition, when the pension committee hires a service provider as an advisor, a clear and complete contract helps avoid unpleasant surprises and misunderstandings.
The contract should reflect the elements the parties have agreed upon. Where applicable, the book of specifications is the background document for the agreement. However, any subsequent changes made to the book of specifications, in particular in the service provider's bid or during the interview, must be taken into account. If necessary, it may be preferable to have a legal advisor draft or validate the contract.
The contract is usually drafted by the service provider and is generally a standard contract, the content of which can be adjusted to take the pension committee's specific requirements into account. It is important that the committee carefully read each of the contract's provisions in order to make sure that they are properly understood and that they clearly reflect all the terms and conditions the committee and the service provider have agreed upon. The service provider should provide explanations as needed. The pension committee should also make sure that all the contract's provisions comply with the applicable legislation, the pension plan text and the investment policy, if applicable.
The contract should address the following main elements.
Scope of the contract
All tasks must be clearly described, along with their associated costs and the related deadlines. The more detailed the contract, the easier it is to monitor and the easier it is to evaluate the service provider's performance.
General and specific obligations of the parties
The contract should indicate the various obligations of the pension committee and the service provider, for example:
- the information the pension committee must make available to the service provider so that he or she can perform the assigned tasks
- the confidentiality rules that apply to the service provider
- the rules that the service provider must abide by with respect to conflicts of interest
- reporting rules, in particular the frequency of meetings with the pension committee and the types of reports the service provider must provide
- rules dealing with breaches of contract (e.g. the contract can provide for penalties in the event of failure to meet deadlines)
- the pension committee members the service provider can contact.
Clauses that seek to exclude or limit a service provider's liability are null.
Prices and invoicing
The procedure for setting the price should be provided for in the contract. Depending on the duty to be carried out, a single contract may provide for various types of compensation:
- fee-for-service (e.g. fixed amount for each calculation)
- hourly rate (fixed amount for each hour worked)
- lump sum (fixed amount for the entire contract). It is important to specify the work covered by this amount.
- percentage of the plan's assets.
In general, when there is not much work to be done and the work is relatively simple, the price is set on a fee-for-service basis or according to an hourly rate. A lump-sum amount is usually prescribed when the nature and the scope of the work is known ahead of time, as might be the case, for example, with the preparation of annual statements.
When the price is set according to an hourly rate or on a fee-for-service basis, the contract should stipulate that the service provider is required to report on the work completed and the expenses incurred upon request by the pension committee. In addition, the contract should provide for a maximum amount above which the service provider must obtain the committee's authorization before continuing the work.
Where the duty to be carried out extend over a long period, the contract should stipulate the number of invoices and supporting documents to be presented to the pension committee, along with the prescribed time frame for their submission.
Assignment of contract and subcontracting
The committee usually hires a service provider because of that person's skills, aptitudes and reputation. It therefore expects that the services will be delivered by this person. To that end, it is customary to stipulate that the service provider cannot assign the contract or subcontract it out.
Amendments to the contract
The contract should stipulate the circumstances under which it can be revised, for example, further to legislative amendments, amendments to the pension plan text that make the plan's administration more complex, a significant increase or decrease in the number of members or the departure of the person placed in charge of the file by the service provider.
Expiry of contract
The contract should indicate the date on which it expires. It should also set out the terms and conditions for extending it or terminating it before its expiry.
To facilitate the transfer of the file, the contract should also specify certain obligations of the service provider, such as the obligation to transfer the file in its entirety to the new service provider within the agreed time frame and the obligation to draw up a list of the work currently under way and the work that needs to be done in the short term.
In the event of termination of the contract, the pension committee is required to pay the service provider for the services delivered in proportion to the price agreed upon. If the service provider has received overpayment, the amount overpaid must be returned to the pension committee.
Each party to the contract is usually held liable for the damages it has caused the other party. The contract should include provisions to that effect.
Oversight and replacement of key resources
In order to meet its commitments and limit its liability, the pension committee must oversee the work of its service providers.
Accountability mechanisms (such as reports and statements to be submitted to the committee) are usually provided for in the contract. Obviously, adequate oversight involves more than simply verifying whether the service provider has produced the appropriate documents. The committee must also examine the documents to make sure that they do not show signs of a problem. If necessary, the committee should not hesitate to ask the service provider for explanations, whether in order to properly understand the content of the documents submitted, or to obtain an explanation for any discrepancy noted.
Even if there are no problems, the committee must evaluate its service providers from time to time. Are their prices still competitive? Have they managed to adapt to new developments in the market? Does the portfolio manager's performance continue to meet expectations? If necessary, the pension committee can call upon specialists to help it evaluate its service providers.
Changing service providers can have a considerable financial impact on the pension plan and can involve certain risks. As a result, the reasons for replacing a service provider must be serious. However, the pension committee must not hesitate to make this decision where the situation requires it.
The pension plan's documents (e.g. minutes of meetings) should indicate the reasons why the committee decided to stay with or replace a service provider. If the pension committee replaces a service provider, the people with whom the service provider was authorized to have dealings should be informed.
The Supplemental Pension Plans Act provides for oversight measures.
- When, in the normal course of his or her duties, a service provider notes a situation that could adversely affect the financial interests of the pension fund and that requires a correction, he or she must file a written report on the situation with the pension committee. If the committee does not correct the situation immediately, the service provider must then send a copy of the report to Retraite Québec.
- The service provider must send the pension committee any information and documents received from government authorities (including Retraite Québec) that raise questions regarding the extent to which the plan or the plan's administration complies with the applicable legislation.
Sections of the Supplemental Pension Plans Act (SPPA), the Regulation respecting supplemental pension plans (RRSPP) and the Regulation respecting the exemption of certain categories of pension plans from the application of provisions of the Supplemental Pension Plans Act (Regulation – Categories).
Sources of information about key resources
To obtain the names and contact information of most service providers (actuaries, managers, communications consultants, etc.), you can consult the directory of service providers published annually in certain journals that specialize in employee benefits, including:
Other sources of information are also available:
Visit the website of the Ordre des comptables professionnels agréés du Québec .
You can consult the Canadian Institute of Actuaries' website for actuaries who specialize in pension plans. The site allows you to search for an actuary based on various criteria (province, city, name, etc.).
Banks, trust companies and insurance companies act as securities depositaries for pension plans.
Insurance companies, trust companies and companies that specialize in asset management offer portfolio management services.
The profession most in demand for portfolio managers is chartered financial analyst (CFA).
Administrative Services Providers
dministrative services providers usually work for insurance companies, trust companies or companies specializing in pension plans and employee benefits.
Financial experts usually work for insurance companies, trust companies or actuarial firms.
The profession most in demand for financial experts is chartered financial analyst (CFA).
Visit the websites of the Barreau du Québec and the Chambre des notaires du Québec .