Navigating CAPSA’s New Guidelines

2024 MFS DC Symposium: Deciphering today’s DC challenges for a better tomorrow

Nick DeLisi, CIM – Relationship Director – Institutional, MFS
Kathryn Bush – Retired Partner, Blake, Cassels & Graydon LLP

Nick DeLisi: My name is Nick DeLisi and I'm part of MFS' Global relationship management team, and I'm really excited to be hosting our next session. I'm pleased to be joined once again by popular demand, Kathryn Bush, a now retired partner from Blake, Cassels & Graydon. Kathy, we couldn't be happier to have you. Thank you so much for joining us again this year. Perhaps before we get started, I can ask you a question on all of our minds. How's retirement and what have you been getting up to in your first few months?

Kathryn Bush: Thanks, Nick. It's great to be back and, well, I've been doing some work post-retirement, but that's the nature of transitions, and I've joined C.D. Howe as a senior fellow, working in the retirement space, so that's interesting. But I have had a lot more time for golf and travel, and golf and travel is kind of fun. So it's nice to have that extra time both here and elsewhere. So enjoying that, but it's really nice to be back. Happy to talk about the CAPSA guideline today on CAP plans.

Nick DeLisi: Well, that's really great to hear and I'll try to reserve my jealousy a little bit, but happy to have you here once again to get your insights on CAPSA Guideline Number Three. It's interesting, as I read through the new guidelines and thought more about the process to get to where we are today, which is in the state of calling for updates for some time now. Naturally, I couldn't help but think about the similarities to the situation around the Toronto Maple Leafs. I'm a fan. Please send me your sympathies. There's been a lot of consternation and opinions around the team, particularly how the organization gives off this feeling of it constantly being Groundhog Day. They have a strong foundation of players. They fall short in the playoffs, they run it back, rinse and repeat for years now. And while we've gotten some new looks, it's not clear if we'll get that desperately need to change this summer.

When we look at CAPSA Guideline Number Three, we have a great foundation of industry standards that has guided us well but has been in need of a shakeup for some time. We see multiple new drafts of the guidelines, though it's unclear if the changes have gone far enough and if we'll actually see the final release hitting the ice this fall. Loose similarities aside, we have come a long way from the original 2004 guidelines through years of consultative drafts, working groups and industry feedback. Kathy, can you talk about the major changes that have been introduced in each of the drafts and why you think it's taking so long for us to see the new guidelines?

Kathryn Bush: Sure Nick. And I should say I'm still pulling for the Leafs to have an off season, enough changes in the off season and, maybe I'm an eternal if irrational optimist, but I'm hoping for the Leafs and I'm also hoping that the CAP guidelines . . . we've waited a long time to see these guidelines refreshed. Capital accumulation plans have grown substantially since the final version in 2005. So I think it's really important that we get a new draft, but CAPSA by its nature is all the pension regulators across the country, so that's a big, somewhat unwieldy group. It does take time. There's a lot of regulators, lot of stakeholders, and these guidelines are going to be in place as we see for a long time. So I understand why they take their time. When I most recently spoke to CAPSA, they're saying no real deadline yet about when the final guidelines will be released.

They suggested I check back in late June, so it must be getting close. So maybe it's as you say, early fall. And one thing that we saw, maybe to disappointment of some, but when we got the revised guidelines, there weren't a lot of changes. So I think we all thought if it was only minor changes, why aren't we going to final? But let me go through, there's some significant issues in the guidelines that change from the original guidelines and I want to talk about those generally, but I'm also going to note what the 2023 changes are. So we've really got a feel for the two because there's not a wording change. Read a black line in the document, you see a whole bunch of stuff, but there's a lot of it's just wordsmithing, so we're not getting much from that.

They did drop some references to self-employed and RESPs. So interesting that they restricted their jurisdiction a bit. But there are some other changes, which I think are more relevant. So let me go through that because what we saw in 2005 versus what we see now, there's some significant differences that are going to be important to CAP sponsors and service providers and even members. There are now express references to many different types of CAPs that we didn't see before: TFSAs, PRPPs, VRSPs, RIFs, LIFs.

And there's going to be some people question, well, "Why do pension regulators have any jurisdiction talking about those plans? They're not pension plans," and that's true legally. But when courts are striving to see what the rules are, what's the best practice, I think most lawyers will be nervous that these best practices are going to be informative even if not actually binding. So I think it's an important guideline. The draft guidelines have also interestingly added a bunch of new references to legal requirements. And you might say, "Well, why? That's not their job to cite what courts have said," but it is, for a plan sponsor, probably useful to at least have the regulator's view as to where the law is. The discussion of service providers and CAP have been greatly expanded. I'm going to talk about that at length a little later because that's a big and important change.

There are changes with respect to what CAP members have to do, and some of them are obvious like CAP members are supposed to keep their contact data up to date and their beneficiary information, and that's a major problem for plan sponsors, and people leave money and they don't tell them where they are and you've got missing members or lost pots. So that's an administrative headache. There's also an express statement though, interestingly, in the guidelines would say that CAP members should obtain investment advice from a qualified individual in addition to the tools and information provided by the CAP sponsor or service provider.

And of course that makes sense. I don't want to say the vast majority, but certainly many members never seek advice beyond what's on the platform. So interesting what that actually means. There's also an entirely new section dealing with a governance framework for a CAP plan, and there's a statement about that the sponsor should establish and document a governance framework.

They do say “appropriate for the size and complexity of the CAP and the CAP sponsor,” and that language about appropriate for the size and complexity, that's new. But that's an interesting statement because as you know, in big plans where there's many hundreds of members, there's often governance, but in smaller plans, I've never seen a governance framework. And so what does it really mean? Do you really expect a 25-person plan to create a governance framework, because you'd like more clarity. If I'm the 25-person plan, I want more clarity on that. There's also a section that deals with automatic features, which is probably important because we're seeing more automatic features, but they make a big point of saying that when an automatic feature will have direct impact on a member, reasonable advance notice should be provided where possible. Well, automatic features clearly have an effect on members.

So that's going to be something that's . . . what is reasonable advance notice as people are putting in these automatic features. There's also a section that deals at great length with selecting or changing service providers. And the 2023 draft says the plan sponsor should ensure it has level of information from its service provider that said it needs to make appropriate disclosure to service providers. So they want these CAP sponsors to have information from the service providers so that they can make appropriate disclosures, who normally makes those or delivers those disclosures, whether it's a service provider or the CAP sponsor. So there's more to be thought about there. There's much more prescription around what you have to do when you set up a default investment fund. And there's an entirely new section about educating members of the CAP. So I won't belabour those points, but just to flag that those are some pretty big changes that have been added.

Nick DeLisi: That's a lot of important change spread across a number of key areas. But within all that, perhaps we can drill down into one area that I know you feel really strongly about, and it's clear that one of the primary concerns across the industry has, or certainly from the first draft, has been a significant increase in plan sponsor responsibilities. And you did touch on that, and I know last year in your closing comments, you had hoped that this would be more properly addressed between drafts. And while CAPSA softened maybe a little bit, mostly by shifting some of those responsibilities towards service providers, these heavier responsibilities remain.

I know that as you and I have discussed the issue, it's been pretty clear that we seem to be dragging sponsors back towards the burden of pension regulation. An issue which many sponsors tried to address by moving from DCPPs to RRSPs. CAPSA has tried to couch some of those additional requirements, as we mentioned, really by suggesting that they be rightsized for the plan, but we don't really know what that means. But despite all these calls for softening more regulation of CAP, likely isn't going away. Can you help us unpack this a little bit?

Kathryn Bush: Yeah, and that's a good summary, Nick, of what the problem is because we're very fortunate in Canada to have sophisticated service providers. We really have a great group of service providers at different levels. And if I were king, I would say the answer is let's take the expertise of those sophisticated service providers and let's leverage that because they're the people who can do a good job, know all, and it's not on the side of their desk, it's what they do all day. And I think that's one thing that's a little disappointing when I talk about service providers, that it's not clear about exactly what the CAP sponsor has to do versus the service provider because as I say, small CAP sponsors are going to have a really difficult time justifying a huge time spend on what is a voluntary arrangement.

And I think the guideline should be clear that, where a CAP sponsor and maybe a small CAP sponsor has hired a competent service provider and the sponsor undertakes here, because there's language in the guideline about the CAP sponsor should undertake supervision of performance of its service provider and the investments that that's all the CAP sponsor should have to do. It's not as clear, and I don't even love the idea of trying to divide small versus large CAP sponsors because where's the line. And it does seem reasonable that if any CAP sponsor supervises the service provider and the investments, shouldn't that be sufficient?

Nick DeLisi: No, it's a great point, and it's certainly something that we've talked about at length that, despite all of these new regulations, those requirements are still going to stick with the plan sponsor in one form or another. So you touched on those responsibilities for service providers. Can we talk a little bit about what those actually are? What has been explicitly stated for service providers? And then again, why that doesn't completely alleviate the burden on sponsors.

Kathryn Bush: And the draft guide for instance, says, even when CAPs engage service providers to carry out certain tasks or functions, the CAP sponsor retains ultimate responsibility for overseeing the CAP plan and should be continuously engaged in fostering the achievement of the intended member outcomes. And I don't mean to smirk when I read that, but it's tough, right? Continuously engaged. Plan sponsors are doing a good thing by providing retirement assistance to their members, but you're going to tell them they have to be continually engaged in fostering the achievement of the intended member outcomes. 60% to 70% of members never take any action in their plan. The money just sits there and it falls now on the sponsor. So I think that that's just way too strong a statement. It does say, and this was added in 2023, "It's recognized that many CAP arrangements, the CAP sponsor relies heavily on the knowledge and capabilities of one or more service providers."

That's good. Agree entirely. "In those situations, the CAP sponsors primary activities with respect to the CAP are likely to involve communications with its members and supervision of the performance of the service provider and investments." If they would just double down on that and say that's what everybody's responsible for and not some of these other things, it would be a lot easier for sponsors to be able to accept these roles because the 2023 draft, it added a number of things and it said, for instance, the service provider should clearly indicate the CAP sponsor what tasks it's agreed to perform. Well, that seems reasonable, right? If you're going to delegate to the service provider, you better know exactly who's doing what. And so you'll see standard documents probably get cleaned up in that respect. The service providers that interact with CAP members should clearly inform the CAP members whether or not they're providing investment advice.

That's something that service providers have been aligned to for a long time. Service providers should confirm with the CAP sponsor and, where appropriate, member if the service providers will monetarily benefit from decisions made by the CAP sponsor or CAP members. Again, something people have been aligned to for a long time. If there are embedded fees that aren't obvious, those should be made obvious. The information to provide CAP members when they're eligible for a role has been significantly expanded. So there's a lot more disclosure required on enrollment. And this is one where . . . and this is a number of the things I'm going to list now. The service providers should be building this into their standard documents, and that's where it should end.

And the CAP sponsor should know that it's a service provider saying, we have complied with the CAP guideline, when we are doing enrollment, there's a whole bunch of the requirement to provide decision-making tools and access to investment information. Again, that's going to be on the service provider’s platform, the requirement to provide investment projections and assumptions. Again, that's going to be on the service provider’s platform. There's really nothing the CAP sponsor is going to do that. Even the requirements with respect to member statements that have been expanded broadly. Again, that's going to fall to the service providers.

The requirements for oversight of a CAP are more prescriptive, and the level and frequency of reviews are going to be something that are going to be more than most small members are currently doing. And I think the guidelines should be clearer with respect to what a plan sponsor needs to do after hiring a service provider. Because they say most times if you're a small plan, you've hired XYZ and you expect them to be taking it over. So I think service providers have been given much more guidance on their responsibilities, and I think if that movement could be clearer that that's where the responsibility lies, I think that would be functional for CAP sponsors.

Nick DeLisi: No, I couldn't agree more. And it sounds even there that there's maybe an opportunity for service providers to step up as we see the new guidelines released as well, which could certainly be an opportunity to alleviate plan sponsors out there. So hopefully we see that as well. But we've been focusing on the regulatory burden. But maybe let's shift gears a little bit towards decumulation and, certainly just within the industry over the past 12 or 18 months, there's been a lot of noise around decumulation and the need to offer better options and avenues for plan members. CAPSA certainly increased its focus on decumulation in the first draft, though it still remained a little bit light, which we had discussed last year as well, but in this draft, they seem to have walked that back quite a bit, surprisingly, even avoiding the word decumulation altogether, outside of two highlight instances in the introductions. Kathy, is this simply a matter of separating CAPSA as an accumulation vehicle from the decumulation phase, which still needs an entire infrastructure?

Kathryn Bush: Yeah, it's a funny one, Nick, and luckily I just got an answer. I've been chasing CAPSA for some weeks now to see, well, what's actually happened on decumulation. And I put a call into CAPSA and was informed that, and CAPSA has formed a decumulation committee, and they say they're conducting preliminary research to determine if a guideline is needed and if so, what it should cover. And it was suggested that I should check back in September for a further update. It's hard to see why anybody doesn't think decumulation is important. I'm not sure what preliminary research you need. As we know, once you have DC arrangements, as they mature, the amount of money that's going to decumulate grows exponentially. And so it has been a hot issue for many years, so I'm not sure why they're still thinking about it. So I expect there will be something that comes out with respect to the choices and issues, but that's their current positions. Check back in September to see if we're going to even do anything.

Nick DeLisi: So maybe we'll pencil you in next year for decumulation guidelines review, Kathy. No, thanks for that update and it'll be interesting to see how that evolves over time, certainly. But maybe sticking with decumulation a little bit, and I know it's something that you feel strongly about, and you covered last year as well, is this concept of a pension dashboard to really help members with this decumulation conundrum. Could you expand on that a little bit about really what it is and its potential benefits?

Kathryn Bush: Yeah, so a dashboard, and there are a number of countries around the world who have done it, and some of them are smaller with quite different systems than ours, so I'm not saying that we're way behind, but essentially there are websites where people can see in one location all of their retirement benefits. So that would be things like CPP, OAS, GIS, plus all their pension plans, whether DB or DC, RSPs, RIFs, LIFs, TFSAs, all in one spot, and usually also including some sort of projection or model that will allow you to convert a DC amount, a lump of cash into an income stream. And there's cybersecurity issues around them, and a lot of them now don't hold the data in one spot. They're a request system and they have a mechanism to request all this information. And it does seem that . . . the other thing they often do is they also deal with these lost accounts.

So people don't remember that they worked for XYZ company for three years when they were 25, and now they can see on the system, well, shoot, I actually have $600 bucks or $4,000 sitting there, I should move it. And we see, the Bank of Canada has a lost accounts system for deposit accounts. It's similar to that, but what it could do is actually aggregate all this information for individuals, and in real time people can see whether they think they have enough to retire on or not, because people often think it can go either way.

People think, well, geez, I've got to save a whole bunch more money. Or geez, I think I've got X thousand dollars in my RRSP, I'm good. People need to understand what that really means and how it integrates with the public systems. And so the federal government seems receptive to thinking about it, but there are costs and the UK's been working on this for almost a decade now. And it's not easy. It's easier in systems where there's more industry-wide plans like some of the Scandinavian countries, but I'm hopeful that there will be some movement in that because I think Canadians need to understand what they have and what they will have in return.

Nick DeLisi: No, thanks for that, Kathy. It's nice to hear your description, and I've certainly seen some of the visuals of what these look like and it's a lot prettier and a lot more intuitive than the multi-pronged spreadsheet that I keep for myself. So anything that could replace that, I think, would certainly be a benefit to the broader population. So thanks for going over that with us. I'd be remiss if I didn't ask you about ESG and sustainability integration within DC plans. It's a fairly lightly addressed topic in the draft guidelines, but it remains pretty top of mind for plan members and plan sponsors are generally looking for direction in this area. Why do you think it's not more directly addressed, and is it just simply allowing for more flexibility for sponsors or is CAPSA working on something else?

Kathryn Bush: I actually think, Nick, there's a couple of things going on. One is that for ESG, people are really hoping there will be consistent reporting standards at some point so that they can really get a handle on what is proper ESG reporting disclosure and how they can evaluate different investments. And so there's a little reluctance to go too deep on ESG until that's better understood. And there are people who believe when it is better understood, ESG is going to just be one investment issue like any other, and you're going to view risks and rewards, but they don't think they have it.

The other one is, and it's a little interesting, and this is in all the common law jurisdictions, the courts to date have been pretty clear — there's very few cases that go way back in time — but what they say is retirement arrangements aren't about saving the world. You're not supposed to take the money and do good things with it. You're supposed to generate income so people will have retirement savings. So there's this, well, I don't want to say I don't care about ESG. You only should be caring about ESG according to the courts to the extent that it affects the investment performance of the assets of the retirement plan. So it's not quite sometimes what members think it is.

Nick DeLisi: Yeah, I think it's a fair statement and certainly I think this is where CAPSA has an opportunity to provide some guidelines for sponsors, but certainly it's a delicate and nuanced situation. So I appreciate the insights there. And I think we could probably go on for hours here talking more and more about the guidelines, but maybe as you think about wrapping up a little bit, we'd really just like to collect from you, what would your advice be to plan sponsors from here? Any particular actions to take ahead of the expected release timeline or things to even just start considering in anticipation? I know certainly a good webinar practice to leave our listeners with some homework, so we'd love for you to be able to do that.

Kathryn Bush: Yeah, well, thanks. And one thing that's going to be important obviously is to the extent that the guidelines do put more onus on the service providers, everybody's going to want to look at their service provider documents and see if the documents that they have with the service provider properly put the service provider on notice and make the responsibilities for many of these things, whether it's statements or projections. There's a whole list of things that the service providers are going to have to do. So you're going to want to make sure your documents align. You're also going to want to be sure that the automatic features, to the extent that you're introducing, they've made it clear they want reasonable advance notice. And that's not something that's always been perfectly done when automatic features have been added, so keeping alive. There's also, as I think I mentioned, more detail about what you need to do when you're selecting or changing service providers.

So people are going to want to be alive to, when they go out to consider service providers that they are meeting, the guidelines requirements in that regard. And even the more prescriptive requirements about choosing a default fund. People should be alive to what is in the guideline. Then I don't think whatever happens on the guideline continuing oversight of the service provider and the investment performance, and everybody I think knows they have to watch the investment performance, but service providers, there's going to be more oversight of them as we delegate more to them.

And I've had clients who actually once a year, they get a certification from the service provider that the service provider has met all requirements of, and you can just list CAP guideline number three, and I think that's good practice. And the other thing that I've tried to do, and it works better with larger rather than smaller plans, but to have some sort of term of reference document so that it's established whether the board or committee or appropriate management personnel, at least once a year annually, review and confirm the necessary requirements are satisfied, including meeting with the service providers and obtaining their confirmations that they've completed the required actions.

If you just have that on some sort of agenda, it actually gets done. And if you don't, it's surprising how often it's three years later. So did we check on that? And people go, "Oh, we were going to." So it is one of the ones, I think, especially if there's any material number of members would be good to have.

Nick DeLisi: I think those are great suggestions. It's certainly things that are actionable by plan sponsors as we get ready for this new CAPSA regime. Kathy, this has been an incredibly insightful discussion and I'm so thankful that you've been so kind with your time to speak with us and all the plan sponsors listening. The updates to CAPSA Guideline Number Three, once we get out of this Groundhog Day cycle will be a significant moment for the industry. It's been 20 years since the last release, so we're on pins and needles waiting for the new one. I know I learned a lot from the session today with you, and I hope our audience has as well. So thank you.

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