How important is governance to the success of a CAP?

What are the CAP Guidelines?

Introduced in 2004, Guideline No. 3, Guidelines for Capital Accumulation Plans, or CAP Guidelines, are a framework of best practices for setting up and managing defined contribution registered plans in Canada. They make it possible to have common standards across different federal and provincial jurisdictions.

The CAP Guidelines were issued by the Joint Forum of Financial Market Regulators, which included the Canadian Association of Pension Supervisory Authorities (CAPSA).

While the CAP Guidelines are voluntary and principles-based, they reflect the expectation of regulators regarding standards for operating a CAP. Courts are usually expected to look at these guidelines as the generally accepted standard of conduct.

What the CAP Guidelines cover

The CAP Guidelines outline the rights and responsibilities of the key CAP players, including the sponsor, administrator, service provider, and members. They also cover what information and assistance members need to make investment decisions.

The key message of the guidelines is that the responsibilities of a CAP sponsor go beyond setting up the plan. The sponsor is responsible for:

Setting up the CAP—This includes defining the purpose of the plan and deciding whether to use service providers to carry out certain tasks.

Investment selection and monitoring—The investment lineup should allow members to select a suitable portfolio for their long-term investment objectives. The guidelines outline the process for fund selection, assessment of the different elements, and state the need to document the selection criteria.

Onboarding and ongoing member education—The guidelines list materials and tools to support members’ onboarding and their ongoing information needs to help ensure successful outcomes. Examples include enrolment materials, investment information, decision-making tools, and member statements.

Fee management and disclosures—The sponsor must ensure that fees paid by members in the program are reasonable and competitive and must disclose those fees to the members.

Investment advice—The sponsor must ensure that any third party they select to provide financial advisory services to members is qualified to offer advice.

Maintaining a CAP—This includes reviewing the service providers, investment options, records maintenance, and decision-making tools for members. The guidelines also cover the termination of a plan or a member’s participation in the plan.

Changes to CAP Guidelines are coming

The world of group retirement has changed in the 20 years since the original guidelines were adopted. The industry has grown, there are more investment options, and digital technologies have changed how sponsors and members can administer, join, and interact with their retirement plans.

This is why since 2022 CAPSA has been working on updated CAP Guidelines. While the process is ongoing, the proposed revisions attempt to address the changes in the group retirement landscape. The draft covers new products, future innovations, more disclosures to members, and changes to the regulatory environment.

The draft also details guidelines for governance, which would require the CAP sponsor to establish and document a governance framework.

How does a governance framework help a CAP?

An effective CAP governance system helps ensure that all decision-making is supported by clear criteria and considerations and that decisions are monitored over time and documented. Due diligence in this area may be the sponsor’s most effective tool in helping to prevent situations that could lead to a legal challenge of CAP decisions.

Maintaining a CAP governance framework

A governance model includes these key elements:

• Plan design and implementation
• Investment structure
• Plan administration
• Member education and communication
• Documentation
• Operational risk

Who can help?

The CAP Guidelines can allow the sponsor to delegate certain tasks to service providers. These can include recordkeeping, investment selection, fee negotiation, ongoing fund monitoring, member onboarding, and education.

Advisors and consultants with CAP experience can assist the sponsor with some of these tasks, as well as the selection of other service providers. When it comes to governance, they can help the sponsor develop and maintain a robust framework and help them meet their CAP Guidelines obligations.

Here are some of the ways advisors and consultants can help with each component and key element of governance.

1 Plan design and implementation

• The sponsor must identify the optimal plan type to offer employees, determine a competitive contribution formula, and establish plan rules.
• The advisor or consultant can provide guidance on competitive plan features and contribution levels.

2 Investment structure

• The sponsor establishes criteria for selecting and monitoring the investments that will be offered in the plan, selects the range of investments, and chooses the funds in the lineup. The sponsor must also monitor the funds periodically and ensure reasonable fees.

• The advisor or consultant can assist the sponsor in selecting and implementing a prudent investment structure for the plan and in monitoring the investment lineup over time to ensure it’s appropriate and effective. The advisor or consultant may establish a preferred lineup that they maintain and monitor across their plans.

3 Plan administration

Typically, all but the largest sponsors use a third party for recordkeeping tasks. These can include payroll interface, assistance with compliance and documentation, communication and education, comprehensive investment lineups, and member advice.

• The sponsor must establish criteria for selecting and monitoring the recordkeeper, evaluate its capabilities, and ensure reasonable fees.

• The advisor or consultant can assist in establishing these criteria and in the process of selecting and monitoring the recordkeepers for performance and competitive fee structure. The advisor or consultant can also review the recordkeeper’s reporting together with an annual compliance statement to assess the ongoing effectiveness of the recordkeeper.

4 Member education and communication

• The sponsor provides members with enrolment material (plan summary, risk tolerance questionnaire, retirement planning tools, description of investment options), periodically reviews plan communications, and provides annual education programs and member statements.

• The advisor or consultant can assist by reviewing the plan rollout material and periodically reviewing the education material to ensure that it remains effective and relevant. Where advisors are licensed, they could directly assist in the rollout of educational resources.

5 Documentation

• The sponsor must draft the plan text and other supporting plan documentation for certain plans, such as registered pension plans. This responsibility would include drafting the statement of investment principles and procedures and periodically reviewing plan documentation to ensure it remains current.

• The advisor or consultant can help by engaging the recordkeeper or external legal support to review CAP documentation and ensure that it’s filed with the appropriate regulatory authorities. The advisor or consultant should also encourage and assist in a periodic review of CAP documents to ensure they remain effective and in compliance with legislation.

6 Operational risk

• The sponsor’s responsibilities include ensuring proper links with payroll, legal compliance of the plan, formalizing and documenting governance processes, and making key plan decisions.

• The advisor or consultant can help by ensuring that there is a prudent governance process in place that is documented by the sponsor and that the proper processes are implemented by the sponsor and recordkeeper to maintain the plan.

Getting a head start

While the revised CAP Guidelines haven’t been finalized yet, a governance framework requirement will likely be a component of the final guidelines. This is something sponsors can start looking at now, get a head start by keeping abreast of CAP Guidelines developments, and speak with an advisor or consultant to help review their governance framework or establish one.