On September 9, 2024, the Canadian Association of Pension Supervisory Authorities (CAPSA) released Guideline No. 3: Guideline for Capital Accumulation Plans.1 The guideline, which replaces an earlier version released in 2004, reflects industry developments in the intervening decades and represents CAPSA's view of leading practices for the management of capital accumulation plans (CAPs).
The guideline is intended to outline the views of Canadian pension regulatory authorities on:
- The responsibilities of CAP sponsors, administrators, service providers and members
- Industry best practices for CAP maintenance and administration
- Information to be provided to CAP members
This article provides an overview of the guideline and its implications for CAP sponsors, members and service providers.
Application of the CAP guideline
The guideline defines CAPs as tax-assisted investment or savings plan/program for which members make investment decisions for their individual accounts from two or more options the CAP sponsor selects.
The examples of CAPs provided in the guideline expand on those provided in the 2004 guideline and are split between plans with and without a retirement savings/income focus. In addition to defined contribution (DC) pension plans and registered retirement savings plans (RRSPs), CAPs with a retirement or savings focus now include:
- Tax-free savings accounts (TFSAs)
- Locked-in retirement accounts (LIRAs)
- Life-income funds (LIFs)
- Registered retirement income funds (RRIFs)
A DC plan is a CAP whether or not it provides post-employment variable benefit payment options, such as LIF-like payments. Registered education savings plans (RESPs) and first home savings accounts (FHSAs) are considered CAPs without a retirement or savings focus.
Depending on plan type, a CAP can be established by an employer (or former employer), trade union or association, financial institution, board of trustees or pension committee, or licensed administrator. The last example is only applicable to pooled registered pension plans (PRPPs) and voluntary retirement savings plans (VRSPs).
CAP stakeholder responsibilities
The guideline sets out the specific responsibilities of CAP sponsors, service providers and members.
Sponsors. All sponsors have responsibilities to plan members, which may include fiduciary responsibilities. In the case of DC plans, sponsors are subject to the duty of care set out in the applicable pension standards legislation. The responsibilities of CAP sponsors include setting up the CAP, determining its key features, selecting service providers, maintaining records and providing information to members. Where third-party service providers are engaged to perform specific tasks, the sponsor retains ultimate responsibility for CAP oversight. Where a sponsor relies heavily on third-party service providers, their primary activities are typically limited to communicating with members and supervising the plan's service providers and investments.
Service providers. Service providers that the CAP sponsor engages must have the appropriate knowledge and skill to perform their assigned tasks, which should be clearly documented. When interacting with members, service providers should clearly indicate whether they're providing investment advice. They should also inform the sponsor and members, where appropriate, if they will benefit monetarily (beyond disclosed fees) from decisions sponsor and/or members make.
Members. CAP members are expected to use the information and materials they receive to understand all aspects of their participation in the plan. The guideline notes that members should obtain investment advice from a qualified individual in addition to what they may receive from the sponsor and/or service providers. Member responsibilities include making decisions about contributions and investment options, using education materials provided, and deciding which decumulation options best suit their situation.
Setting up a CAP
Purpose
The sponsor should clearly document the plan's purpose in terms of its intended outcome for members. The terms of the plan should be consistent with its purpose and with what's communicated to members.
Governance framework
Each CAP's governance framework should be appropriate for its size, complexity and other characteristics of both the plan and its sponsor. The guideline lists the recommended components of a governance framework, including a description of the roles, responsibilities and accountabilities of the parties involved in plan governance.
Automatic features
The sponsor should consider whether to establish one or more automatic features for the CAP, such as automatic enrollment and/or contribution escalation. Where used, these features should be disclosed to members at enrollment or when the CAP is amended, particularly where opting out is an option. If an automatic feature has a direct impact on a CAP member, reasonable advance notice should be provided.
Service providers
Where a sponsor determines that it doesn't have the necessary knowledge and/or skills to carry out some of its responsibilities, it should engage one or more service providers. The sponsor should establish criteria for selecting service providers, including those listed in Section 2.1.5. Sponsors should document any tasks and/or functions delegated to service providers.
Investment options
The plan sponsor should select the CAP's investment options, subject to any limitations applicable legislation imposes. The guideline lists the factors sponsors should consider when choosing investment options, including any default options discussed below.
The governance burden increases with the number of investment options offered. Each CAP's sponsor is responsible for monitoring ongoing investment performance and reviewing the options offered. Members should be given "reasonable opportunities" to transfer among available investment options. Where the administrative costs of such transfers are passed along to members, they should be communicated in advance.
Default options
Sponsors should establish a policy outlining what happens if a member doesn't make an investment choice within a specific period and describe the default investment option that will apply to that member's assets. The guideline lists the factors that should inform the selection of the default options, including the purpose of the CAP and its intended outcomes and the degree of diversification the default option provides. The policy should be disclosed to members before any action is required.
Record maintenance and retention
The sponsor or a service provider should retain the records related to CAP member accounts and plan administration and governance processes. The sponsor should also consider the controls necessary to protect members' personal information. Sponsors should also establish a records retention policy for the plan, which should include a description of the types of records to be retained, how they will be retained and secured and retention schedules.
CAP member education
The guideline outlines the responsibilities of CAP sponsors in educating members about their plan. Sponsors should adopt an ongoing member education strategy geared to the plan's purposes and designed to help improve members' decisions and outcomes. The strategy should address both initial (i.e., at enrollment) and ongoing communication and should include information on:
- The plan's nature and features (e.g., enrollment information, automatic features)
- Key plan member responsibilities (e.g., making contribution and investment decisions)
- Investment options (e.g., availability, features, investment restrictions), including:
- How to transfer between investment options, including any restrictions associated with the suspension of trading in the investment options
- The level of fees and expenses payable by members through their accounts, including asset-based fees and operating expenses
- How members can access additional information related to the plan and a description of the type of information available
When communicating with members, sponsors and service providers should communicate in plain language. Once established, the education strategy should be subject to periodic review.
CAP member decision-making tools and investment advice
The guideline states that CAP sponsors should provide, or provide access to, investment information and decision-making tools to help members decide on and achieve their desired outcomes. When deciding what information and tools to give or make available, sponsors should consider a range of factors, including the plan's purpose and features, the cost of the information and tools, and the location, financial literacy and demographics of the CAP's members.
While the information and tools don't need to address all potential needs and circumstances of members, sponsors may consider tools that provide members with a holistic picture of their potential income at retirement sources beyond the CAP, including government benefits and personal savings.
Examples of investment information provided in the guideline include information regarding the relative level of expected risk and return associated with different options and funds (including any guarantees) and performance reports for investment funds and other options. Examples of decision-making tools include projection tools, and investor profile questionnaires and calculators. As the calculations within many decision-making tools require assumptions for future projections, the guideline notes that CAP sponsors and service providers should ensure that these assumptions are prudent and subject to periodic review. Disclosures should also describe how outcomes are affected by using different assumptions.
The guideline notes that CAP sponsors may choose to either enter into an arrangement with or refer members to one or more service providers who are qualified to provide investment or financial planning advice. If using such an arrangement, the sponsor should clearly advise members about the nature of the service provider's advice and how those providers are paid — and by whom. The guideline lists a range of factors sponsors should consider when selecting investment advisors or financial planners. CAP sponsors who don't use such an arrangement may still consider providing members with information on how to find a financial advisor.
CAP member communication
The guideline provides detailed information communicating with CAP participants, on an ongoing basis, and upon termination of active participation and/or the plan itself.
- On an ongoing basis, participants should receive statements at least annually, or as required by legislation. These statements should contain prescribed information, supplemented by the information listed in the guideline. Participants should also receive details on investment options, transfer options and other items listed in the guideline, which aren't already captured in member statements. Material changes in the CAP's purpose, features and/or investment options should be reported to participants. Finally, participants should receive performance reports for investment options containing specific information.
- When a member terminates active participation, whether due to termination of employment, retirement or death, the termination should be handled in accordance with the terms of the plan and applicable legislation. The guideline notes that the CAP sponsor "maintains responsibilities" for a former CAP member as long as the member still has assets in their individual CAP account. On termination, the CAP sponsor should provide information based on the nature of the CAP, such as the ability to remain in the plan if permitted by applicable legislation or the terms of the plan, and information on how to transfer funds to products outside the CAP. For CAPs that give former members the option to receive retirement income directly from the plan, the sponsor should provide additional information to terminating members relating to this option.
- When a CAP is terminated, communication should be in accordance with the terms of the plan and applicable legislation.
CAP oversight
The guideline notes that CAP sponsors should periodically review all aspects of their plans. While the sponsor sets criteria and frequency of the review, reviews should also consider any feedback or complaints received from members.
Plan and governance framework
The sponsor should periodically review CAP's features to determine whether the features continue to meet the plan's purpose and objectives. Periodic review of the governance process should consider the guideline when determining whether the sponsor is fulfilling its roles and responsibilities in providing the CAP.
Fees and expenses
The sponsor should periodically review all fees and expenses members pay, for both competitiveness and reasonability. When reviewing fees and expenses, the guideline lists items the sponsor should consider, including requesting a description and breakdown of the various categories of member-borne fees.
Service providers
The sponsor should periodically review the performance of service providers, including those providing financial planning or investment advice. The guideline lists considerations for sponsors in establishing the criteria for reviewing providers, including assessing sponsor and member satisfaction with the providers' services.
Investment options and funds
The sponsor should review the performance of each investment option/fund — including the defaults — at least annually. The review should consider the appropriateness of the aggregate investment lineup considering membership characteristics and the levels of member engagement and financial literacy. The guideline sets out considerations for the establishment of criteria for this periodic review.
Member education and decision-making tools
The effectiveness and appropriateness of the education materials and strategy, and the investment information and decision-making tools provided by the CAP should be reviewed periodically, based on criteria set out in the guideline.
Record maintenance
Sponsors should periodically review their record retention policies and practices. This review should ensure that all applicable legislative requirements are met, including those relating to the protection of personal information. The guideline notes that sponsors should help maintain the accuracy of member records by using a process to locate any "missing" CAP members. For applicable CAPs, CAPSA's Guideline No. 9: Searching for Un-locatable Members of a Pension Plan may be helpful.2
In closing
The guideline provides CAP sponsors with additional information and guidance for all facets of their plans, including design, governance and communication. It expands on its 2004 predecessor in numerous respects, particularly member communication and education, with an emphasis on decision-making and outcomes.
As noted in the letter to stakeholders that accompanied the guideline,3 CAPSA expects that plans of all sizes should be able to determine how best to implement the guideline, effective September 9, 2024. Implementation particulars will be determined based on consideration of the size and sophistication of each pension plan, and the applicable pension standards legislation. Where IT system or process changes are needed to support the 2024 guideline, the letter states that these should be implemented by January 1, 2026.
While the guideline's recommendations don't have the force of law, they're evidence of best practice for CAPs, and sponsors and regulators should rely on them as such.
For more information on this topic, and its impact on your plan, members and organization, talk to your Gallagher consultant or contact us at GBS.Canada.Marketing@ajg.com
