Communication to Members Significant Activity - Pension Supervisory Guidance Note RAF5
Information
Table of contents
1. Introduction
The purpose of this guidance note is to provide the Relationship Manager (RM) with information to assist in the risk assessment process. An overview of this process can be found in the Risk Assessment Framework for Federally Regulated Private Pension Plans document.
In assessing the risk within a pension plan, it is important to begin with a sound knowledge of the plan.Footnote 1 This involves understanding key elements of the significant activities the plan is involved in.
This guide sets out the key concepts for assessing the Inherent Risks, Quality of Risk Management, and finally the process for determining the Net Risk of the Communication to Members Significant Activity.
2. Specific Actions under the Communication to Members Significant Activity
The Communications to MembersFootnote 2 Significant Activity ensures that everyone who has a right to benefits is provided with the tools to understand the nature of the plan, its promised benefits, and who bears what risks. It involves ensuring that members receive the prescribed information and are aware of all relevant plan amendments and the impact they might have on their rights and benefits.
A strong communication process will help the plan administrator through member feedback and involvement. Good communication will work to reduce the risks of litigation especially in the context of:
- plans with capital accumulation accountsFootnote 3
- negotiated contribution plans (NC Plans)
- plans operating under a distressed pension plan workout scheme (DPPWS)
- plans being funded under special funding rules
- plans undergoing significant plan amendments, such as benefit reductions.
Failure of the plan administrator to communicate timely and accurate information may have a negative impact on the plan or members’ benefits. For example, it may result in a cost to the plan through legal action if a member does not receive expected benefits, or through regulatory intervention.
Examples of actions that fall under the Communication to Members Significant Activity include:
Individual information: The administrator is required to provide prescribed information to members, former members, and the spouses and common-law partners of members and former members. The legislation requires that certain information be provided annually or on cessation of membership, death, or retirement of members.
Plan Updates: Significant plan events, such as amendments and plan termination, must be communicated to members in a timely and accessible manner by the administrator.
Member Education: The administrator is expected to provide members with information in order to permit a reasonable level of awareness and understanding of the plan and the related risks. Member education should cover the various options available to members about decisions they need to make as members of the plan, more specifically on important events, including, but not limited to retirement, termination and death. Items covered in this activity include educational/employee booklets and newsletters, collective agreements, and presentations. In regards to a plan with capital accumulation accounts, member education and awareness regarding investment options is extremely important as members bear the investment risk.
Member Rights: The administrator is expected to provide full disclosure to plan beneficiaries regarding their rights and privileges provided for under the pension legislation. This includes:
- The right to receive a written explanation of the plan provisions;
- The right to examine a copy of the plan documents and a copy of every document filed with OSFI that creates or supports the plan or the pension fund;
- The right to examine a copy of the plan’s financial statements and actuarial reports ; and
- The right to examine the plan’s Statement of Investment Policies and Procedures (SIP&P).
Member Enquiries/Complaints: The administrator is expected to have a mechanism in place to answer enquiries from members about their plan and benefits, as well as to deal with complaints.
Additional Communications: The presence of websites and other communication tools which the plan administrator deems necessary to increase the transparency of the plan would be considered within this significant activity.
3. Inherent Risks
Inherent risks are intrinsic to a pension plan and arise from exposure to and uncertainty of potential future events. Inherent risk is evaluated by considering the potential risk to the pension promises and/or the plan meeting minimum funding requirements. The inherent risks for each significant activity are rated Low, Moderate, Above Average or High.
The inherent risks for the Communication to Members Significant Activity are: Operational Risk, Legal and Regulatory risk, and Strategic Risk.
3.1 Operational Risk
This is the risk of deficiencies in internal controls or processes, technological failures, human errors, fraud and natural catastrophes. The primary risk for the Communication to Members Significant Activity is that deficiencies in internal controls and processes will lead to a breakdown in communication.
Assessing the level of Operational Risk:
The following should be considered in assessing the level of Operational Risk:
Pension plan complexity: As fiduciaries, plan administrators must effectively communicate pension information to plan members. The complexity of the plan is a key factor in determining the operational risk of the communication activity. Members may not have a deep understanding of their pension plan, so the complexity of the plan could increase the risk that information conveyed to the members is not understood. Plans with complicated benefits, such as a final average earnings plan with early retirement, bridging, and other ancillary benefits, as well as multiple pensionable ages, may be significantly more complex to describe to members. Disclosure to members should always be clear and easily understood by the members.
Multi-Employer Pension Plans (MEPPs): Member communications may present a significant operational risk for MEPPs. Where participating employers, in lieu of a third party administrator, address pension issues with members, they should have a knowledgeable human resources representative that can address pension issues. For MEPPs, this means each participating employer would have their own representative for the pension plan. Given that these representatives are not likely dealing solely with pension issues, there is a risk that the required level of expertise is not present and the representatives may be providing inconsistent or incorrect information. Where the terms of a plan text, trust agreement(s), or any other documentation supporting the plan permits the board of trustees to make amendments that reduce accrued pension benefits or pension benefit credits, this authority should be communicated to plan members, former members and participating employers so that the members understand the nature of their benefit and the risk involved in this type of plan.
Plans operating under a distressed pension plan workout scheme (DPPWS): Member communications may also present significant operational risk for plans where the sponsor enters into a DPPWS. In accordance with the PBSA and the PBSR, the plan administrator must provide information to members and beneficiaries within a specific timeframe after the beginning of the negotiation period. The plan administrator must also provide information to representatives within a prescribed timeframe after the representative’s appointment. Once the employer and the representatives have entered into a proposed workout agreement, information must be disclosed to members and beneficiaries within a prescribed timeframe. A plan administrator that does not understand the complexities of a DPPWS runs the risk of not disclosing or disclosing incorrect information to members and beneficiaries.
Other special situations: Additional disclosure may also be required when plans are subject to specific funding rules, or undergoing a transaction that requires OSFI’s authorization.
Size of the plan: The size of the plan may create operational risk in communications. The administrator must ensure that member contact information is up to date. Large plans have to deal with large volume of information which increases the risk of error in maintaining the information current. As a result, members may not receive key communications.
People Risk: There is an operational risk that a knowledgeable replacement for an administrator is not readily available. In this situation, there may be a period of time where there is no resource with sufficient knowledge to effectively communicate with members. This situation could be made worse by circumstances that require increased communication with membership, such as when the employer is in financial difficulty. In addition, where there are various offices across the country handling the local member disclosure, such as for large, multi-location companies or MEPPs, there is an operational risk that the communication to members may not be consistent.
3.2 Legal and Regulatory Risk
This is the risk that a plan may not be in compliance with the rules, regulations, prescribed practices, or fiduciary standards imposed on the plan in any jurisdiction in which the plan operates. Additionally, it includes the risk of misrepresentation on the part of the plan administrator or employer. Application of the disclosure items outlined in OSFI’s Guideline Disclosure of information to pension plan members and former members and CAPSA’s Guideline No. 3 for Capital Accumulation Plans (CAP Guideline) will assist plan administrators in reducing legal and regulatory risk.
Assessing the level of Legal and Regulatory Risk:
The following should be considered in assessing the level of Legal and Regulatory Risk:
Technological considerations: The pension legislation requires that information must be sent to both the member and the members’ spouse or common-law partner in writing. For example, the PBSA requires that each member of the plan and the member’s spouse or common-law partner must be provided with a written statement containing the prescribed information within six months after the plan year end. The administrator must ensure that the information reaches them. For example, if access to email is not available at work, it may be necessary for the plan administrator to make use of regular mail or another form of communication delivery method.
Disclosure requirements: Some plan administrators may face increased disclosure requirements. These may include significant plan events (i.e. plan amendments, regulatory approvals) or plan events for which member disclosure is recommended (e.g. a significant decrease in the Estimated Solvency Ratio (ESR), delays in regulatory filings).
Annual statements: The plan may also be exposed to legal risk depending on the quality of their annual member statements and other required disclosures. If the information the statements contain is not clear and consistent, plan members may not understand their rights and benefits under the plan, leading to increased member enquiries, complaints and possibly lawsuits.
Disclosure errors: A major legal risk that plan administrators face with defined benefit provisions is the risk of incorrect disclosure. As seen in court cases, the impact to the plan of communicating incorrect benefit entitlements to members for the basis of decision making can be significant. Errors could also occur if spouses or common-law partners are not provided with appropriate forms and information to make independent decisions. The explanation of items must be complete and transparent in order for the parties to fully understand the concepts to make an informed decision. As such, the complexity of the plan is a key factor in determining the inherent legal risk.
Investment choices: Plans with capital accumulation accounts inherently have the potential for legal risk relating to the communication and education surrounding investment choices. Where such a plan provides investment options, the administrator is expected to provide the member the information required to make informed decisions about their investments. Adoption of the disclosure items outlined in the CAP Guideline will assist plan administrators in providing these members with the appropriate information. Additionally, plan administrators must be effective in communicating the unique risks faced by members of plans with capital accumulation accounts. Members should be made aware of their responsibility for making investment decisions and how those decisions will affect the money they accumulate in the plan, their responsibility for informing themselves about the plan, and that they may seek investment advice from a qualified individual.
3.3 Strategic Risk
This is the risk that arises from a plan administrator’s difficulty or inability to implement appropriate policies or strategies required to address problems or challenges that may arise in the pension plan due to its design or structure. For example, the makeup of the plan’s membership may present a challenge as it may require specific communication strategies depending on the membership’s different levels of education, cultures and languages.
Assessing the level of Strategic Risk:
The following should be considered in assessing the level of Strategic Risk:
Amendments:Amendments affecting the design and structure of a pension plan could raise a number of issues that may be difficult or complicated to explain to members, spouses or common-law partners. The number and complexity of the decisions regarding the timing and manner of communications to these members increases the Strategic Risk.
Benefit Reductions:The administrator must provide clear and transparent communication regarding benefit reductions to affected members and their spouses or common-law partners, former members, retirees or other beneficiaries. The notice to members should include the impact of a reducing amendment and their right to make representations to the Superintendent.
Complaints / Enquiries: A history of member enquiries and complaints may give an indication of the quality of communication to members and signal the need to further analyze the controls of the administrator. A formal process for making decisions related to enquiries should be documented. This may include recording of conversations, signed attestations by the member that they understand the information provided, and copies of all communications sent to or received from members.
4. QRM
Quality of Risk Management (QRM) assessment considers the performance and risk mitigation efforts of plan administrators in two key areas: Controls and Oversight. QRM is rated as Weak, Needs Improvement, Acceptable or Strong.
The Controls Function involves ensuring the appropriate processes are in place to:
- Support a plan administrator to effectively carry out its activities/responsibilities
- Mitigate the plan’s inherent risks;
- Plan, direct and control the day-to-day operations of a plan;
- Properly inform management of their responsibility for planning and directing activities of the plan;
- Support general operations; and
- Help to achieve the strategic direction defined by the Board of Trustees/Directors (the Board) or Pension Committee.
The Oversight Function provides stewardship and independent oversight for the plan. This is generally performed by the Board or a Pension Committee.
4.1 Assessing “Controls” for the Communication to Members Significant Activity
There are many controls that an RM would expect to be in place for the Communication to Members Significant Activity. The RM should focus on the controls in place that are more likely to mitigate the inherent risks identified.
Communication Policy: An appropriate process outlining the steps, signoffs and input required should be documented and should outline the plan administrators’ method of communicating key required disclosures, such as:
- Up-to-date member booklets which reflect the most recent plan text;
- Annual member statements;
- Member statements on cessation of membership, retirement and death;
- Plan Amendments;
- Providing plan membership with a right to examine documents;
- Providing disclosure and background to plan membership regarding a significant plan event like a benefit reduction, refund of surplus, asset transfer, regulatory filing delinquency and how that event impacts the members’ benefit; and,
- Providing required disclosure at key milestones for a plan under a distressed pension plan workout scheme (DPPWS).
Proactive communication: Non-mandatory communications, such as quarterly newsletters, articles distributed via website or other methods, and information sessions, may be used to increase the knowledge base of the plan membership. Such communications indicate that the administrator is being proactive and contributing to mitigating communication risks.
Alternative communication methods: The controls for communication also cover the policies surrounding alternative forms of information delivery such as websites. Policies on what types of information should be posted, website security, and frequency of review and update should be formalized and documented. Different methods of communication may be required for different levels of complexity. Additionally, there may be privacy issues surrounding such forms of communication. These measures aim to reduce both operational, and legal and regulatory risk.
Member Education: The administrator should take an active role in educating the members of the risks and benefits that the pension plan presents. Monitoring attendance at information sessions would be beneficial.
4.2 Assessing “Oversight” of the Communication to Members Significant Activity
The role of oversight in the Communication to Members Significant Activity relates to the approval of communications and ensuring that any duties carried out by service providers are performed within expectations. Oversight includes reporting to the Board or pension committee on the process of how member complaints and enquiries are handled and the type of enquiries and complaints being received.
The RM should ensure that the delegation of communication responsibilities is clearly documented and authorized. For example, ensuring that:
- Communication responsibilities are clearly outlined and documented for all related parties;
- Documentation retention issues are addressed;
- All processes are implemented and followed;
- Compliance requirements are met; and
- There is a process in place for the review and approval of procedural controls in regards to communications to members.
Those responsible for oversight should be aware of current efforts in the communications function. In order to determine this, the RM may request minutes of Board meetings to ensure it is being discussed on all sides, including from operational, legal and regulatory, and strategic viewpoints. Additionally, the RM could assess the oversight via the plan administrator’s response to a management letter, following an on-site examination or desk review.
5. Net Risk
The Net Risk for each significant activity is a function of the aggregate level of inherent risk offset by the aggregate QRM. The aggregate levels are based on judgments that consider all of the inherent risk ratings and the QRM for the activity. Net Risk is rated as Low, Moderate, Above Average or High.
Assessing Net Risk for the Communication to Members Significant Activity involves considering the level of each of the inherent risks and how well those risks are mitigated by the QRM activities (both Controls and Oversight functions) conducted by the plan administrator.
In determining the Net Risk, some inherent risks will influence this rating more than others. RMs will need to exercise judgment when determining which risks have the greatest impact on Net Risks. In addition to the inherent risks, the Controls and Oversight ratings must then be considered to produce a Net Risk rating for the Communication to Members Significant Activity.
Example: For a plan with a large, established membership base with retirees and members spread about the country, Operational Risk may be determined as driving the Net Risk rating.
Example: For a plan with past issues surrounding the communication function, on the QRM side, consideration of the Control and Oversight functions will be of particular importance.
Footnotes
- Footnote 1
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See Knowledge of Plan Guidance Note for more information.
- Footnote 2
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For purposes of this Guidance Note, Members include everyone who has rights or benefits under the plan, pre and post retirement, including spouses or common-law partners.
- Footnote 3
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Plans with capital accumulation accounts include plans with defined contribution provisions and Pooled Registered Pension Plans (PRPPs).