'The whole purpose of the CAPSA guideline is to create this harmonized approach to consistency,' says Mercer.
Do plan sponsors have their risk management framework updated?
This was one of the themes posed by Mercer at an investment symposium held on Tuesday in Toronto for plan sponsors, pension funds and asset managers.
Tania Pironcelli, senior DC consultant at Mercer, explained the critical areas that often lack proper documentation in governance framework, how to address these gaps and why plan sponsors need to prioritize risk management guidelines.
“Now is the time to act,” she asserted. “The whole purpose of the CAPSA guideline is to create this harmonized approach to consistency. As plan sponsors, you need guidance on what to include for a successful plan. This is a great tool for your employees to have; you need to ensure executives understand that they're part of the plan as well.”
The Canadian Association of Pension Supervisory Authorities (CAPSA) recently updated its guidelines for pension plan governance and risk management, marking the first significant overhaul in nearly two decades. For plan sponsors, these changes are a call to action.
As Pironcelli explained, the updated CAPSA standards include a new focus on risk management practices, while emphasizing the importance of modernizing governance frameworks to address the growing complexity of retirement programs.
CAPSA first introduced guidelines in 2004, a time when “the word ‘governance’ wasn’t even mentioned,” Pironcelli noted. Now, governance is referenced more than 15 times in the new guidelines, highlighting its crucial role in plan oversight and member outcomes.
"This isn’t something you put in your archive or on a shelf, it needs to be constantly refreshed,” said Geoffrey Melbourne, Toronto wealth practice leader at Mercer, who also moderated the session.
One of the most significant additions is CAPSA Guideline No. 10, which outlines principles for risk management practices. It essentially calls for sponsors to establish a formal risk management framework capable of identifying, monitoring, and mitigating material risks affecting both defined benefit (DB) and defined contribution (DC) plans.
That’s why Pironcelli emphasized tailoring risk management to each plan’s unique circumstances:
“It depends on your plan, size, your complexity, your circumstances, your investment beliefs, as well as the associated risk that you already have documented. All of that together will develop into your risk management framework,” she said.
“With the amount of threats and risks in the pension plan landscape, ensuring that you have a solid risk management framework in place will add a layer of defence,” Pironcelli said.
To that end, plan sponsors need to focus on building a comprehensive risk register, like utilizing a heat map. This includes ranking risks, evaluating their probability and potential impact, and implementing tools to manage them effectively.
CAPSA guidelines also outline best practices for plan governance, which places a stronger emphasis on creating a structured governance framework. This includes defining committee roles, implementing a clear code of conduct, and ensuring robust communication strategies, Pironcelli explained.
For sponsors, this means increased responsibilities to ensure plans meet the needs of a diverse demographic and changing regulatory expectations as the guidelines highlight specific risk categories for sponsors to consider, like cybersecurity, environmental, social, and governance (ESG) factors, as well as the use of leverage in investments.
Another critical aspect of the new CAPSA guidelines is the focus on member outcomes. With aging populations and increasing longevity, decumulation strategies are also highlighted.
Consequently, because the word ‘retirement’ doesn’t resonate with current demographics, Pironcelli noted, the guidelines encourage sponsors to adopt personalized communication and education strategies that resonate with different age groups annually.
Improving plan design is also a key consideration. Sponsors are urged to evaluate whether their plans are still meeting member needs, considering features like automatic enrolment, auto-escalation, and rebalancing.
However, while these features might not make sense for every sponsor, Pironcelli said, they should be considered based on the type of plan, member demographics, and the ability to leverage them effectively.
“If I was a sponsor, these are the two questions I would ask myself: ‘Is my plan still meeting the needs of my members?’ And looking at my plan design, ‘Do I have a flexible plan design to meet the needs of the wider demographics? Have I reviewed my service provider lately? Have I reviewed my fees?’,” said Pironcelli.
Ultimately, while CAPSA guidelines are not legally binding, they represent “best practices” that regulators and courts consider when evaluating fiduciary responsibilities.
“Guidelines are not laws. They're best practices. They provide a sense of defense or mitigate risk. In the event a member would challenge anything in court, the regulators, as well as the board will look towards CAPSA guidelines to identify if you adhere to them, and that will just provide a form of defence for you as a sponsor,” said Pironcelli.
“You want to have documented processes to show that decisions were made thoughtfully. That’s your best defence against challenges from members or regulators,” Melbourne added.
CAPSA requires any IT system or process changes needed to comply with the updated CAP Guideline be implemented by January 1, 2026. The updated guidelines became effective on September 9, 2024.
