By: Christopher Cartwright
As spring reveals signs of new life, what trends and issues should we be looking for? In the group retirement industry, spring brings new reading material and, thanks to our industry’s regulators, 2004 will be no exception. The Joint Forum of Financial Market Regulators is set to release its latest word on guidelines for Capital Accumulation Plans (CAPs) sometime in the near future.1
So, our attention will turn to the implementation issues that will be at the top of many to-do lists for the coming months.
Even if you are time-starved like most of us, take a look at the guidelines: there is actually good news in the latest developments.
- Voluntary Guidelines
From the start, there has been concern about extra regulation being imposed on the industry. In the end, the guidelines are expected to be entirely voluntary. When you think about it, it is hard to imagine them being anything else, considering that the Joint Forum is an association of regulators that has no enforcement powers of its own. The authority to impose regulations across the multiple jurisdictions involved would have to derive from federal and provincial pension, securities, and insurance legislation and no one is contemplating tackling such a mammoth legislative agenda any time soon. This means that there is some elasticity in how and when sponsors apply the new guidelines to their particular situations.
- A ‘Safe Harbour?’
Additional good news is found in the response to the desire for a safe harbour. When the discussion about regulating CAPs began in 1999, sponsors were struggling with non-statutory fiduciary responsibilities and were growing weary about never really knowing if they were on solid legal ground. They asked for one thing: a safe harbour. The idea of a safe harbour is simple: ‘tell me what I need to do so I won’t have nasty surprises (like lawsuits) in the future.’ The reply from the regulators was just as succinct: ‘sorry, we don’t have the power to prevent you from being sued.’
Yet, in the end, by writing comprehensive guidelines, the regulators have answered the fundamental question. There is no guarantee that sponsors who follow the guidelines will avoid being sued by disgruntled members (as if that’s a realistic goal), but they do reduce the chance of negative outcomes to a very great degree.
Adhering to the CAP guidelines is an easy, common-sense decision. By taking the initiative now, sponsors can signal that they are proactively looking after the interests of their organizations and their membership.
It’s a win/win proposition.
- Leading the Way
The last bit of good news is that the Joint Forum has been doing what so many plan sponsors do: relying on leading service providers to do some of the heavy lifting for them. Major insurers have participated in the behind-the-scenes committee work that has contributed to the final output and are in a good position to lead the way towards better compliance. They have educated the regulators regarding prevailing practices in the industry. They have provided particular insight into how the sponsor’s CAP promise is different from anything in the retail world (and, therefore, how retail regulatory models might not be the best solution for CAPs).
And, they have toiled side-by-side with other service providers to draft guidelines that are practical and realistic. Indeed, chances are that it won’t be a big stretch for most sponsors who delegate their plan administration to the major insurers to get their plans in line with the standards the Joint Forum is calling for.
Nonetheless, it would be unwise for sponsors to assume that everything is AOK across the board without taking a close look at how their CAP stacks up against the emerging guidelines. Sponsors should budget some time to carefully review their own practices and identify areas where improvements are required. The main thrust of the guidelines is to call on sponsors to align the design and operation of their plans to the specifics of their group. Service providers should be able to help with the review process, making suggestions and offering practical guidance.
- Time to Review Investment Options
An example of an area that might require a little attention from CAP sponsors is the investment side. CAPs that offer a long, off-the-shelf list of investment options may be out-of-step with current thinking. As has become apparent through the last market cycle, diversification is a key risk management tool. Unfortunately, the concept of diversification has sometimes been interpreted as ‘more is better.’ In other words, if five funds are good, 50 must be even better. However, like any menu that presents dozens of choices, the result is more likely to be paralysis of the members’ decisionmaking process than an enlightened, balanced asset allocation strategy at the member level.
It’s not surprising that this should be so, since the longer the list of investment options, the greater the likelihood of duplicate funds and hot/cold performers that attract attention for the wrong reasons. When there are too many options from which to choose, it gets harder and harder to digest the information and to discern meaningful differences among the funds. When we reflect on the fact that a number of studies have concluded that the bulk of long-term investment results can be attributed to the asset mix (and not fund selection), 2 it is even more difficult to justify the approach of offering an unrestrained universe of choices.
The Joint Forum expects plan sponsors to make the initial selection of investment options, offering plan members a range of choices that suit their needs, taking into account such factors as the purpose of the plan, the demographics of the membership, and the cost.
They also expect that there will be an ongoing review of the selected choices. In other words, sponsors will need to have a rationale for the choices they offer their plan members – another reason to keep the list of options focused.
- CAPSA Guidelines on Governance
The Joint Forum’s guidelines are not the only source of official guidance and standard- setting. CAPSA(the Canadian Association of Pension Supervisory Authorities) has put out its draft Pension Plan Governance Guidelines. These guidelines will apply to both Defined Benefit and Defined Contribution pension plans. They also make sense for any kind of group benefits program.
Mindful of the potential impact in terms of time, effort, and cost, CAPSA launched a ‘road test’ last year to gauge the understanding and reaction of plan sponsors – especially among the smaller plans where resources are limited and concern about red tape is high.
The road test is now over and while CAPSA reviews its conclusions, it’s appropriate to look at how these guidelines might be implemented as well.
The short version of the governance guidelines is, ‘Say what you do – and do what you say.’ In other words, the guidelines say good governance has a lot to do with documenting – and monitoring – the expectations, standards, responsibilities, and accountabilities of the administrator of the plan.
While some may find the 11 guiding principles to be somewhat daunting, there is nothing in the governance guidelines that conflicts with the Joint Forum’s CAP guidelines. The two can be seen as complementary guides. The governance guidelines provide a generic outline of what a good sponsor will want to put in place and the CAP guidelines can be referred to as a more specific blueprint based on the life cycle of a CAP.
CAPSA’s guidelines should be considered a long-term map to achieving best-inclass governance practices. Improvements to governance are not usually quick fixes since they involve both corporate hierarchy and corporate culture. In fact, the governance process never really has an end since it is based on continuous review and improvement.
To get a head start on implementation, visit CAPSA’s website where you will find the latest documents relating to both CAPSA’s Governance Guidelines and the Joint Forum’s CAP guidelines.
Christopher Cartwright is manager, market strategy, group savings and retirement, at Standard Life.
1. Visit www.capsa-acor.org for the latest information
2. Refer to Brinson, Hood and Beebower, Financial Analysts Journal, July-August 1986; Brinson, Singer and Beebower, Financial Analysts Journal, May-June 1991; Ibbotson and Kaplan, Financial Analysts Journal, January- February 2000
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