FSRA Releases Guidance on Leading Practices for Defined Benefit Multi-Employer Pension Plans

The Guidance begins by acknowledging the three characteristics that typically distinguish DB MEPPs from Single Employer Pension Plans: they are administered by Boards of Trustees; contribution rates are fixed under collective or other agreements; and benefits for future and/or past service are permitted to be adjusted, upward or downward.

In light of these characteristics, FSRA reviewed the administrative practices among the sample group, concentrating on three elements: governance; risk management; and communications. Eight “leading practices” were identified, which FSRA encourages Boards of Trustees to consider in comparison to their own practices in these areas.

Governance

In terms of administration structures and processes, the Guidance identifies five leading practices:

Comprehensive orientation policies: FSRA identified leading orientation policies for newly appointed trustees included the following elements:

a. Review of organizational and board structure.
b. Review of plan design and trust agreement.
c. Pre-meeting with consultants to review plan documents.
d. Skill assessment that connects to educational support; and
e. Completion of educational programs within a reasonable period of a trustee’s appointment.

Trustee education policies: Boards of Trustees are encouraged to consider education programs for trustees explaining their fiduciary duties and providing support in fulfilling them. FSRA observed leading practices among education policies, which included:

a. A regular assessment of skills needed for the administration of the plan and whether these are by trustees or advisors.
b. In-house, plan specific education.
c. A list of relevant pension courses with qualified institutions or entities.
d. A process for trustees to report back on education taken to share knowledge with the Board of Trustees; and
e. The frequency of education requirements, i.e., annual, every two years etc.

Succession planning: Boards of Trustees are encouraged to develop guidelines for requirements and “desirable characteristics” for potential trustees. Leading succession planning practices noted by FSRA included:

a. Articulating a process to efficiently identify and recruit a new trustee.
b. Understanding of any term limits or retirements that might result in a change in the board composition.
c. Ensuring continuity between trustees and the sharing of institutional knowledge.
d. Describing the situations where a Board of Trustees may consider a non-affiliated trustee to complement a particular skill, expertise, or knowledge.

Enrolment policies and procedures: The Guidance promotes member enrollment processes that include comprehensive document collection, and facilitate connection between members and their pensions, and identified the following leading practices in that regard:

a. Managing records consistent with good governance and record keeping processes.
b. Communicating regularly with members, before and after employment terminates; and
c. Following an appropriate process when the administrator becomes aware that member contact information may no longer be current.

Sound investment policies: FSRA encourages investment policies that include ongoing education, awareness and responsiveness to leading investment practices, and a plan to resolve conflicts of interest that adheres to relevant disclosure and management standards.

Risk Management Practices

The Guidance notes that in the context of DB MEPPs, funding and benefit polices are inherently connected to the extent that a plan’s benefits stem from contributions that are generally fixed. This informs the one leading practice FSRA identified among the plans reviewed in the area of risk management.

Risk management policies are encouraged, which focus on the relationship between a plan’s financial position and the benefit levels it can support, outlines the risks facing the plan, and provides a “plan to either mitigate or respond to these risks.”

Such a policy provides Boards of Trustees support to make difficult decisions regarding when and how to adjust benefit levels. FSRA’s review identified a number of leading risk management practices, including the clear articulation of how the financial health of the plan will be assessed, and “describing how to apply an even-handed treatment of various classes of plan beneficiaries, as it relates to benefit adjustments, restructuring or allocation of surplus.”

Communications

The guidance identifies two leading practices concerning communication with plan beneficiaries and other stakeholders:

Explanation of the nature of the plan and the potential and likelihood of benefit adjustment: The potential for benefits to be adjusted is unique to DB MEPPs among Defined Benefit pension plans in Ontario. FSRA recommends “plain language” explanations of both the possibility and probability that benefits could be adjusted, and encourages use of regular review of member communications and facilitation of member feedback to ensure communication is clear and transparent.

Regular, on-going dialog between trustees, advisors, and stakeholders: With respect to communication between trustees, advisors, and other stakeholders, FSRA observed the following leading practices:

• Maintaining regular communication with stakeholders.
• When necessary, informing stakeholders of significant plan related events; and
• Facilitating a shared understanding of the interdependence between the trustees and stakeholders, so stakeholders are aware of their roles and responsibilities.

Future Review

This Guidance, effective March 18, 2021, will be reviewed no later than Spring 2026. FSRA plans a follow-up benchmarking pilot comparing leading practices for Ontario-registered DB MEPPs with the leading practices identified in the Guidance, and will release a report by Spring 2024 aggregating its benchmark findings.