The CAP Guidelines – Where We Are And Where We Are Going
By: Greg Hurst
In years to come, the CAP Guidelines may be regarded as the most signifi - cant regulatory development in the pension sector after the pension standards and pension tax reform of the late ʼ80s. The irony is that the guidelines are not actually regulation, but simply a set of ʻbest practicesʼ published by financial services and pension regulators. The CAP Guidelines were published in mid-2004 by the Joint Forum of Financial Regulators and ʻtook effectʼ as of January 1, 2006. The Joint Forum is a body that consists of several financial services regulatorsʼ associations, including the Canadian Securities Administrators, the Canadian Association of Pension Supervisory Authorities, and the Canadian Insurance Regulators.
The guidelines are not law, nor are they regulations or the product of any legislative body. They are, perhaps, best regarded as a tool designed by financial services regulators for the purpose of addressing several irregularities (pun intended) in the regulation of Capital Accumulation Plans (CAPs). These irregularities include the differences between insurance and securities regulation as they apply to investment options offered by CAPs, and the utilization of group registered retirement savings plans (Group RRSPs) as substitutes for registered pension plans for purposes of avoiding the application of pension standards regimes.
Duties And Obligations
Pension and group RRSP services providers were influential in assisting the Joint Forum in developing the guidelines. It is notable that the guidelines are squarely aimed at imposing duties and obligations upon plan sponsors, rather than upon service providers. Generally though, providers have been responsive in tailoring their service offerings to assist sponsors in meeting the obligations imposed upon them by the CAP Guidelines.
Fee disclosure by insurers, one of the major concerns of regulators, is one area that is beginning to improve in the wake of the CAP Guidelines. Some insurers have started to publish previously undisclosed fees, particularly operating expenses within fund offerings. Changes are also being seen within the mutual fund industry as they move away from group RRSP offerings. At least two institutions have quietly begun transitioning such business to an insurance company. This process is likely consequent to the recognition by those mutual fund companies that the lack of formal contractual arrangements with group RRSP plan sponsors presents a significant CAP Guidelines compliance problem for plan sponsors, as may the role played by such sponsors in the distribution of mutual fund products to plan members.
Another trend resulting from the CAP Guidelines is the transitioning of group RRSPs to Defined Contribution registered pension plans. This results from the process of aligning the CAP funding structure in accordance with the statement of purpose for the CAP which is a requirement of the guidelines. Another area of improvement being seen is in the trend towards adopting more formal governance structures by sponsors for the operation of their CAP programs.
The CAP Guidelines story is just beginning, however. As a tool to measure the manner in which plan sponsors manage and operate their CAPs, the guidelines will inevitably be wielded by pension regulators and in the courts. CAP structures that are not aligned with the sponsorsʼ apparent purposes will be the most at risk. At least two pension regulators in the late 1990s have ruled in specific cases that group RRSP arrangements were, in fact, non-compliant pension plans.
Currently, the CAP Guidelines appear fairly simple, clear, and harmonious (a quality that has been wholly eluded in pension regulation). Such appearances are deceptive though. In the end, we can expect that the guidelines will be further molded by various courts across Canada to ultimately become a set of principles and best practices to be applied by plan sponsors under common law. It is doubtful that clarity and simplicity will be preserved in such a process.
Greg Hurst is a principal in Vancouver and national coleader of Morneau Sobecoʼs DC consulting practice.
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