What employers need to know about CAPSA’s 2024 CAP guideline
An abridged version of this article was originally published in Benefits Canada on October 3, 2024.
After a two-year consultation period, the Canadian Association of Pension Supervisory Authorities (“CAPSA”) released the new 2024 Guideline for Capital Accumulation Plans (“2024 guidelines”) on September 9, 2024. They replace the Guidelines for Capital Accumulation Plans that CAPSA first published in May 2004 (“2004 guidelines”).
Who is CAPSA?
CAPSA is a national association of provincial and federal pension regulators that works to improve, coordinate and harmonize pension regulation across Canada. CAPSA publishes regulatory guidance and best practices for group pensions and savings plans that address plan governance, risk management, funding, and sponsor duties and obligations to members.
What is a Capital Accumulation Plan?
A Capital Accumulation Plan (“CAP”) is a tax-assisted group retirement or savings plan or program that allows its members to choose investments selected by the CAP sponsor, which is usually an employer. Depending on the plan type, “tax-assisted” means deferral of tax on contributions and investment returns or non-taxation of investment returns. The CAP definition includes most single-employer Defined Contribution Pension Plans (“DCPPs”), group Registered Retirement Savings Plans (“GRRSPs”), and Deferred Profit Sharing Plans (“DPSPs”). In the 2024 guidelines, the list of CAPs and CAP sponsors is increased to include Registered Education Savings Plans, First Home Savings Accounts, Pooled Registered Pension Plans, Voluntary Retirement Savings Plans and Tax-Free Savings Accounts. Almost all CAPs are DCPPs, GRRSPs or DPSPs. There are approximately 80,000 of these plans with 7.8 million members. Average plan membership is below 100, so most sponsors are small employers.
“Even where CAP sponsors have engaged service providers to carry out certain tasks or functions, the CAP sponsor retains ultimate responsibility for overseeing their CAP” – 2024 Guidelines
What’s Changed? A Comparison of the 2004 and 2024 Guidelines
The 2024 guidelines introduce several new elements to CAP supervision focused on enhancing member protection and improving CAP governance and transparency. Here are some of the key changes:
Emphasis on Member Education and Engagement
Referencing the “high degree of trust” between CAP members and sponsors, the 2024 guidelines encourage sponsors to implement strategies for ongoing member education, providing detailed information on plan features, investment options, and associated fees. Employers are now expected to proactively engage members, provide tools to boost financial literacy and “periodically review the effectiveness of the CAP’s education strategy, materials, resources, and tools”.
Governance and Oversight Requirements
The word “governance” doesn’t appear in the 2004 guidelines. In the 2024 guidelines, section 2.1.2 expects sponsors to establish a governance framework that incorporates a code of conduct, conflict-of-interest policies, and risk management, along with regular reviews of service providers, investment options, and member tools. The focus is on transparency, accountability and documentation of all oversight activities.
“The CAP sponsor should establish and document a governance framework for administration of the plan” – 2024 Guidelines
Clearer Delineation of Responsibilities
The 2024 guidelines provide a more explicit definition of the roles and responsibilities of CAP sponsors, service providers, and CAP members. This includes clarifying that CAP sponsors retain ultimate accountability for CAP administration, even when tasks are delegated.
Automatic Features
Reflecting an emerging industry consensus in favour of plan-design defaults that promote increased membership and higher contributions, new section 2.1.3 of the 2024 guidelines encourages CAP sponsors to consider deployment of features like auto-enrollment, auto-escalation of contributions, electronic communication and default investments, while ensuring such features are clearly communicated to members.
Service Provider Selection and Supervision
The 2024 guidelines contain a significantly-expanded discussion of CAP sponsor duties with respect to the selection and oversight of service providers. CAP sponsors will want to pay particular attention to new section 2.1.5, which identifies ten factors to consider when selecting providers, the most important of which are professional qualifications, service stability, protections for personal data, service quality and continuity, and value for money.
“…the CAP sponsor retains the ultimate responsibility for maintaining and overseeing the CAP, including reviewing the performance of those service providers” – 2024 Guidelines
Fees and Investment Returns
After contributions, what matters most to CAP member outcomes is investment performance, net of fees. No surprise then, that the 2024 guidelines considerably expand CAPSA’s guidance on investments and fees. Section 2.2.1 states that sponsors should evaluate the “competitiveness and reasonability” of investment fees and “whether those fees provide value”. Even though CAP members can choose and are encouraged to choose investments, the reality is that many members do not. This makes the sponsor’s selection of the default option of critical importance.
“The CAP sponsor is responsible for monitoring the ongoing performance of each investment option in the plan and reviewing the appropriateness of the investment option line-up, including the default investment options.” – 2024 Guidelines
It also underscores the practical reality that sponsors are the de facto investment managers of CAPs because they choose both default investment and restricted list of investment options from which members are permitted to choose. No CAP offers real investment choice, such as one might have with a self-directed RRSP account. Both the 2004 and 2024 guidelines make clear that when it comes to the CAP investment selection and responsibility for investment performance, the responsibility falls on the sponsors.
The Compliance Burden: What Does This Mean for Employers?
With their focus on improving plan governance and member outcomes, the 2024 guidelines significantly increase compliance responsibilities for CAP sponsors. Updated regulatory guidelines are rarely shorter than their predecessors. The 2024 guidelines are no exception to that rule with an additional 10 pages and significantly more “shoulds” with respect to sponsor and servicer provider duties.
“the more investment options that are available, the greater the governance burden will be on the CAP sponsor in their oversight of these options” – 2024 Guidelines
Compliance clearly matters, and it requires dedicated resources on the part of the sponsor. Ensuring fulsome observance of the 2024 guidelines will be particularly challenging for small and medium-sized employers, which often do not have the resources or internal expertise to perform or even supervise performance of the many tasks for which a CAP sponsor is responsible under 2024 guidelines. Some of the most daunting of these tasks are as follows:
- Section 2.1.2: Establishing a comprehensive governance framework, complete with conflict-of-interest policies, risk management protocols, and detailed oversight mechanisms.
- Sections 6.2 – 6.5: Conducting periodic reviews of member-paid fees and expenses; service providers; investment options; fund performance and risks; member behaviour; member education and decision-making tools.
- Sections 2.1.2, 2.1.5, 4.4, 4.4.1, and 6.3: Identifying and managing “perceived or actual conflicts of interest”, particularly in relation to service providers.
The 2004 guidelines don’t suggest a code of conduct or mention conflicts of interest. In the 2024 guidelines, CAPSA seems to be sending a clear message that conflicts of interest are of concern for its members. Sponsors will be prudent to take note of this and be able to demonstrate that processes for selecting service providers and negotiating service agreements put CAP members’ interests first. With respect to investments, a key point for CAP sponsors to consider is the degree to which a service provider’s compensation depends on which funds are offered by the CAP sponsor and/or selected by members.
How Employers Can Address the New Compliance Obligations
For employers without dedicated HR and legal staff, taking on CAP compliance internally may well feel overwhelming. However, there are several strategies that can ease the burden:
Build a Strong Governance Framework
Governance is about process, documentation, checklists, and proper scheduling of recurring tasks. Whether independently or with a service provider, you’ll need to develop policies for regulatory compliance, risk management, conflicts of interest, and regular performance reviews. Once an inventory of governance documentation and scheduled tasks is developed, demonstrating compliance will become easier thereafter.
Pay Attention to Fees and Investment Performance
Good governance is about focusing on what matters most which, in the case of CAPs, is typically investment returns and fees. Work closely with your service providers to ensure you have the support needed to evaluate and disclose fees and investment performance clearly and benchmark them regularly against industry standards.
“Members should be provided with information regarding the level of fees and expenses payable by the member or through the member’s account” – 2024 Guidelines
Section 6.2 of the 2024 guideline states “low costs are important” followed by “higher cost options may lead to better overall outcomes”. The latter statement seems hard to reconcile with multiple studies finding that lower costs correlate with higher returns and that higher-cost strategies often fail to deliver sufficient value to justify the expense. There are about 4,600 mutual and exchange-traded funds available in Canada. From those funds made available on providers’ platforms, CAP sponsors will have to select the investments that will be made available to members – a difficult task, given that CAP sponsors are typically not investment experts. In the absence of compelling evidence that a higher-fee product will perform better, the most prudent approach for CAP sponsors may well be to favour lower-fee investment products.
“The CAP sponsor should provide or provide access to performance reports for each investment option in the CAP to members” – 2024 Guidelines
Leverage Internal and External Expertise
Your service provider should have the requisite expertise to ensure that you as the sponsor can demonstrate compliance with relevant legislation, regulations, and CAPSA guidelines. Use any internal resources or expertise available to manage your service provider and ensure they develop and implement a compliance plan. If they can’t do it, find one that can.
What Employers Should Do Next
While the 2024 guidelines are not law, compliance should not be regarded by any employer who sponsors a CAP as optional. CAPSA guidelines are authored by all of the pension regulators as a group and regulators explicitly reference CAPSA guidelines in the guidance that they individually publish. Any practice or policy of non-compliance with CAPSA guidelines is likely to be viewed in a negative light by regulators and increase legal and financial exposure for sponsors in the event of disputes arising in relation to the performance of a CAP and the expectations of its members.
CAP sponsors should therefore consider taking the following actions in the near term:
- Review the 2024 guidelines with a view to understanding their impact on their plans.
- Engage with service providers or consultants to conduct a gap analysis and develop a compliance plan.
- Consider alternatives to sponsoring a Capital Accumulation Plan.
Exploring Alternatives: Sponsor-Managed Assets and MEPPs
With the increased complexity of the 2024 CAP guidelines, many employers may find it burdensome to manage the responsibilities of sponsoring a CAP. Two potential alternatives are sponsor-managed assets and Multi-Employer Pension Plans (MEPPs).
Sponsor-Managed Assets
Rather than offering investment choices, some DC plan sponsors manage the assets on behalf of their employees. This approach eliminates the cost and workload associated with member-selected investments and often delivers better outcomes. However, it still leaves sponsors with substantial governance and oversight responsibilities.
MEPPs
“Do what you do best and outsource the rest” management guru Peter Drucker famously advised. Sponsoring a CAP is like operating a financial institution alongside your actual business. It’s a big responsibility that redirects valuable business resources to non-core activities. Large employers can often absorb the increased compliance workload of the 2024 guidelines with limited difficulty. Smaller employers – which employ most of Canada’s workforce – may well wonder if there’s a better way.
A MEPP provides that better way. By transferring the work and fiduciary responsibility for plan management to a third party, employers joining a MEPP can entirely avoid the workload and costs of CAP compliance. It’s a particularly attractive option for small businesses which want a low-touch group-retirement solution that lets them focus on core business operations without sacrificing performance.
Conclusion
“The CAP sponsor should adopt an ongoing member education strategy … to improve member decisions and outcomes” – 2024 Guidelines
The 2024 CAP guidelines undoubtedly raise the bar for CAP compliance, governance, and transparency. As plan sponsors evaluate their options and come to terms with the increased compliance obligations the 2024 guidelines entail, balancing compliance with operational priorities is more critical than ever. For large employers, sponsor-managed assets provide one pathway to simplifying plan management. For smaller employers, joining a MEPP may well become the preferred option as a means of reducing costs and workload and provide high-quality group retirement programs that support attraction and retention of high-performing employees.
James Pierlot is the CEO of Blue Pier™. Available to employers from coast to coast to coast, the Blue Pier™ MEPP is Canada’s first ‘Pension Plan as a Service’.
