TORONTO—A new set of regulatory guidelines codify the responsibilities of Canadian employers with defined contribution pension plans that allow participants to make investment decisions.

While the guidelines created by the Joint Forum of Financial Market Regulators are technically voluntary, plan sponsors are being urged to comply with them because of the likelihood that they will be adopted by Canadian courts as the minimum standard of best practices for the governance of defined contribution plans.

The guidelines apply to capital accumulation plans-tax-assisted investment or savings plans that permit participants to make investment decisions among two or more options offered within the plan (see sidebar). They outline the responsibilities of CAP sponsors in the area of administration and governance of their CAPs.

The Joint Forum was created in 1999 by the Canadian Council of Insurance Regulators, Canadian Securities Administrators and Canadian Association of Pension Supervisory Authorities as a mechanism through which pension, securities and insurance regulators could co-ordinate, harmonize and streamline the regulation of financial products and services in Canada.

There are a number of key guidelines to which employers must pay attention. For example, the guidelines state that CAP sponsors should clearly define and document why the CAP is being established and ensure that the terms of the plan are consistent with its purpose. Employers should state whether the CAP is being used for retirement savings vs. savings for other financial goals such as education or home purchase, and ensure that the funding vehicle is appropriate given the stated purpose of the plan.

"It's just part of good governance, defining what you're trying to do with the CAP," said Becky J. West, chair of the advocacy and government relations committee for the Toronto-based Assn. of Canadian Pension Management, which represents plan sponsors in Canada.

Any ambiguity or lack of connection between the statement of purpose and the funding vehicle could create problems for plan sponsors, said Greg Hurst, a Vancouver-based pensions consultant with Heath Benefits Consulting Inc. "It's very much a potential trap," he said. Employers "need to be clear on statement of purpose and this purpose must be consistent with the funding vehicle."

Another key issue for employers relates to investment selection and monitoring. The guidelines place responsibility on employers to provide appropriate investment options, which makes certain that employers analyze the range of available choices and pare the list down to a reasonable number, likely between eight to 10 funds, Mr. Hurst said. "Doing nothing around investment selection is not an option," he said.

Some of the guidelines are not new for Canadian companies, particularly those that have pension committees. For these companies, the guidelines are merely a logical extension of the practices they have already been following with more detail and better documentation, observers say.

"I don't think the concepts are new," said Martin Rochette, co-chair of the pension and benefits practice of Ogilvy Renault L.L.P. in Montreal. "I think what is new is that they are more or less codified."

For example, the guidelines require that employers establish an appropriate process to review the investment options. Most plan sponsors already regularly review the options, but the guidelines require a set of criteria be established for the review, said Anthony Devir, a partner in the pensions and benefits department of Osler, Hoskin & Harcourt L.L.P. in Toronto. "It's that area where employers currently may not have the level of rigor or documentation in place," he said.

Fee disclosure requirements

A substantial portion of the guidelines involves disclosure of information to members, but much of that type of information is currently provided to members so it will not lead to specific changes, Mr. Devir said. What will lead to changes is the guideline that mandates the disclosure of all fees, expenses and penalties related to the plan because members currently do not receive a lot of information in that area, he said.

"That is an area where I think employers need to focus on to ensure there is adequate disclosure," Mr. Devir said.

The deadline for voluntary compliance with the guidelines is Dec. 31. While compliance with the guidelines is not mandatory, pension lawyers and consultants all agree that it is in the best interest of employers to follow them. If a dispute arises related to the administration and governance of the pension plan, the Canadian courts will most likely embrace the principles as the industry standard of best practices and measure an employer's actions against the guidelines.

"If someone brings an action against the employer based upon a complaint on how the CAP has been operated, the case will be significantly bolstered if they can point to the guidelines and say the employer didn't follow them," Mr. Devir said.

Staffing considerations

Large employers with sophisticated benefits programs are said to be well into their compliance efforts because they have larger human resource departments and the ability to hire service providers and consultants to help ensure compliance.

Small and medium-sized companies face compliance challenges due to limited personnel and time, observers note. "The small to midsize plans may have had more work to do to get up to where they're supposed to be," ACPM's Ms. West said. "I think you can say it's due to resources."

But even the larger companies still have work to do to ensure that they are in full compliance due to the extensiveness of the guidelines, observers say. "I would say that few would tell you they're 100% in compliance," said John Chute of Toronto-based benefit consulting firm John Chute & Associates.

In 2006, employers will examine what the big plan sponsors have done and try to follow their format for compliance, making their own efforts easier, he suggested. "There will be concrete formats that they can follow, what works and what doesn't work," Mr. Chute said. "My guess would be that by the middle of 2007, most employers will be in compliance."

Because of the high level of consultation with the industry over the last five years discussing and drafting the guidelines, regulators do not believe that the guidelines are onerous. "Generally, the sense we're getting is that it's doable," said Nurez Jiwani, director, regulatory coordination, for Toronto-based Financial Services Commission of Ontario, which regulates pensions in that province.

However, Mr. Chute said some of his clients have discussed the possibility of eliminating certain kinds of CAPs known as group registered retirement savings plans-voluntary individual retirement plans funded with an individual's own earnings that are similar to individual retirement accounts in the United States. These employers say they facilitate these CAPs as a favor to employees, but are considering terminating them because of the new responsibilities placed on them by the guidelines, Mr. Chute said. "I have some clients saying this looks so onerous, I might just wind up our capital accumulation plan," he said.

Ms. West said she is not aware of any plan sponsors who are considering this option, but added that it would not be surprising if employers who merely facilitate these types of plans by performing functions such as allowing payroll deductions decide to eliminate them. But employers whose CAPs are part of their retirement strategy are unlikely to consider this option, she said. "I don't see any of those being shut down at this time," Ms. West said.

Regulators are confident that employers will not shy away from CAPs because of the level of consultation conducted prior to adoption of the guidelines. "We have not heard at all that this would discourage employers from setting up plans," Mr. Jiwani said. "My sense is that the majority of employers are busy reviewing their plans and want to follow the guidelines."