Lesson 1 Flashcards
1.1.1
Explain the broad impact of legislation on retirement plans
Governments regulates retirement plans from two perspectives:
1) By limiting the tax deferral available through the federal ITA
2) For DB and DC plans by controlling the terms and operations of the plan through pension standards legislation in order to provide security of pension benefits
1.1.2.a Describe the purpose of retirement plan governance
Retirement plan governance refers to the structure and processes for overseeing managing and administering a plan to ensure that the fiduciary and other obligations of the plan are met
1.1.2.b What key areas does effective governance establish roles and responsibilities for? (3)
- Administration and communication. This includes establishing plans and addressing regulatory compliance establishing the range of processes, systems and technologies required to administer the plan contributions; and determining benefits.
- Financial management. Depending on the plan type, this includes determining whether to secure the benefit obligations, how and what amounts to accumulate funds, and how to measure and recognize tension costs in the plan sponsor’s financial statements
- Investment management of funds assets
1.1.3.a Outline the purpose of a defined benefit pension plan funding policy
Funding requirements promote benefit security
The goal of funding a defined benefit pension plan is to ensure sufficient assets will be accumulated to deliver the promised benefits on an ongoing basis and to protect pension benefits in situations that involve employer insolvency or bankruptcy.
The purpose of the funding policy is to establish a framework for funding the plan. The policy should support the decision making process and be consistent with the purpose and goals of the pension plan and the plan sponsor.
1.1.3.b What are factors that can be relevant in the development of a funding policy for a defined benefit pension plan? (9)
- Benefit security
- Stability and/or affordability of contributions
- The sponsors financial position and competing organizational demands for cash
- The demographic characteristics of those persons with entitlements under the plan
- The minimum funding requirements under pension standards legislation
- The financial position of the pension plan
- The terms of the plan documents and any related documents such as collective agreements
- Maximum contribution limits applicable to the plan under the income tax act
- Legislative requirements and plan provisions relating to the utilization of funding excess
1.1.4 Outline advantages of developing a funding policy identified in CAPSA guideline number seven (4)
- The exercise of developing a funding policy improves the identification, understanding and management of the risk factors that affect the variability of funding requirements and the security of benefits
- The adoption of a funding policy could increase the plan sponsors discipline around funding decisions. This could increase predictability
- Having a written summary of the funding policy that is accessible to pension plan beneficiaries should help improve transparency and understanding of pension funding issues
- Having a funding policy may also provide guidance to the pension plans actuary when selecting actuarial methods and assumptions in accordance with actuarial standards of practice
1.1.5 Outline the key elements of a DB pension plan funding policy identified in CAPSA guideline number seven (11)
- An overview of the plan
- Funding objectives and how they integrate with investment policy
- Key risks and their effects on the security of plan benefits
- Factors affecting funding volatility and management of risk
- Funding target ranges and relation to specific objectives
- Cost sharing mechanisms between EE and ER
- Utilization of funding access
- Guidance to the actuary for assumptions and margins based on risk management
- Standards for valuation frequency
- Documentation of roles responsibilities and oversight for the funding policy
- A plan for communication of the funding policy to plan beneficiaries
1.1.6 Describe the special considerations that apply to establishing a funding policy for MEPPs identified in CAPSA Guideline No 7 (4)
- Include the approach followed to set benefit levels and address issues relating to the use of fixed contributions
- Document to the respective decision-making rules of trustees, employers and collective bargaining agents [as applicable]
- Discuss how to apply and evenhanded treatment of beneficiaries both current and future generations
- Discussed the policy on benefit reductions and restructuring
1.1.7 Describe the responsibilities of a fund holder as identified in CAPS a guideline No. 5 (7)
- Holding funds in a manner that meets the requirements of pension standards legislation and ITA
2 acting under the terms of a fund holder agreement that meets the requirements of legislation
- Reporting omissions or delays in contribution remittances were required
- Meeting the responsibilities for reporting and recordkeeping set out in the fund holder agreement
- Acting on direction from the admin, or delicate, in accordance with legislation and the SIP&P
- Ensuring the pension funds assets are kept separate and apart from the employers and fund holders
- Ensuring the pension funds assets are held exclusively for the pension plan and with the front holder has clear accurate and up-to-date records
1.1.8a Identify the requirements under pension legislation and the ITA regarding who may be the fund holder of a pension plan [4]
- An insurance company licensed to do business in Canada under an insurance contract
- A trust, that is governed by a written trust agreement, with a trust corporation in Canada
- A group of individual trustees
- Any other party permitted by pension legislation
1.1.8.b What are the requirements for a group of individual trustees to act as a fund holder of a pension plan [3]
- There are three or more individuals
- At least three of these trustees reside in Canada
- At least one trustee is not a connect in person, a partner of the employer or a proprietor of the employers business
1.1.9.a In the context of pension plan assets to find the term custodian
A financial institution that hold some or all of the pension funds assets pursuant to an agreement with the plans fund holder is a custodian. Although the custodian is not a fund holder, the fund holder may also be a custodian
1.1.9.b Describe the responsibilities of custodians and outline the relationships that can exist between custodians and fund holders
Because sodium his responsibilities are generally solely related to the safekeeping and servicing of the pension funds assets.
The custodian is responsible for holding these assets in accordance with the terms of a custodial agreement and must be capable of segregating the pension plans assets as well as meeting the reporting and recordkeeping requirements of the custodial agreement.
A custodian does not have legal title to the assets and does not have tax reporting obligations. The custodian is retains to a contract and all his duties only to the party that retained it’s services
1.1.10 Outlined some of the reasons a pension plan may utilize more than one fund holder [3]
- The plan may provide benefits under both DB and DC provisions and engage a different fund holder for each provision
- There may have been a merger of pension plans, each with its own fund holder
3 the plan maybe large and complex, needing more than a single fund holder in order to meet it’s investment needs
1.1.11 Outline the five key steps in the defined benefit pension plan investment cycle
- Set investment objectives and constraints
- Determine long-term investment strategy
- Determine investment manager structure and rules
- Select investment managers
- Monitor investment results against objectives
1.1.12 Outlined the five key steps in the capital accumulation plan investment cycle
- Set investment objectives and constraints
- Determine service provider structure and select providers
- Select specific investment alternatives
- Provide investment information to members
- Monitor investment results against objectives
1.1.13 Describe the key differences between the DB pension plan investment cycle and the CAP investment cycle (3)
- In a DB pension plan
The plan sponsor is aiming for full funding of the plan. While in a CAP the plan sponsor is aiming to meet its responsibilities by providing members with appropriate options - In a DB pension plan the governance committee makes decisions regarding the ass that mix and specific investment options. While in a CAP the governance committee makes decisions regarding investment options for the plan as a whole and each member besides their own personal mix
- In a DB pension plan, education requirements relate to the benefit provisions under the plan. In a CAP education requirements relate to the investment decision process.
1.1.14 Outline information regarding rights and responsibilities of CA P plan members that the guidelines for capital accumulation plans recommend be provided by plan sponsors (5)
- Members right to access information about the nature in features of the plan
- Right to request paper copies of their members statements if the statement is normally provided in another format
3 members responsibilities for making investments decisions and that Those decisions will affect the amount of money accumulated by the plan
- Responsibility for informing them selves about the plan using the documents information and tools available to them
- Recommendation the members on to obtain investment advice from an appropriately qualified individual in addition to using information provided by the sponsor
1.2.3 Outline the key policy areas that influence the overall financial performance of a DB pension plan, the assets available for benefits and accrued pension benefits, and whether the plan is in a funding access or funding deficiency position at any given fiscal year
3
The overall financial performance is determined by the following key policy areas
- Benefits policy. Level and type of benefit entitlements of active members and retirees
- Funding policy. Nature and timing of contributions
- Investment policy. Mix of investment vehicles and risk exposure of the plan.
1.2.2 Explain why it is critical to coordinate the benefits, funding and investment policies of a defined benefit pension plan.
Also list three things sponsor objectives typically include.
The benefit, funding, and investment policies must be coordinated so the financial performance of the plan can be managed toward the specific objective set by management and, once set, monitored to ensure policies are consistent with objectives.
While objectives vary by plan sponsor, they typically include:
- target funding levels,
- level and volatility of pension expenses, and
- level and volatility of cash contributions.
Changing economic conditions and business needs may trigger the need to refine objectives or modify policies
1.2.3
Explain the importance of investment returns to a defined benefit pension pension plan
Investment returns contribute to the asset level.
An excess may allow plan sponsor to increase benefits or reduce contributions
A deficit may necessitate greater contributions or implants that allow for it result in decreased benefits.
In most single employer plans responsibility for ensuring the plan is fully funded rests with the plan sponsor
Since plan membership and benefit levels are normally fixed the actuaries are required to follow their professional and regulatory standards in the determination of plan liabilities the investment management becomes key
1.3.1 Describe the various ways that pension funds participate a security holders within Canadian financial markets (4)
- Shareholders. Pension funds hold corporate shares directly and through financial intermediary such as mutual funds
- Bondholders. Pension funds typically hold significant amounts of debt securities.
- Unit holders. Pension funds often invest in investment corporations and mutual funds and as such our unit holders.
- Limited partners. Some limited partnerships involve pension funds as one of a number of limited partners
1.3.2 Outline how pension funds can exercise shareholder rights if the pension fund owns shares acquired by investing in a pooled fund such as a mutual fund
When usual funds invest in shares of a corporation, the fund itself is the legal owner of the shares. The pension fund is the beneficial owner, and dividends and capital gains from shares accrue to it as the beneficial owner.
It is possible for the beneficial owner to exercise shareholder rights such as voting at meetings of shareholders if an arrangement is established between the intermediary, the mutual fund, and the beneficial owners
1.4.1 Briefly describe the reasons behind the establishment of capital markets and the two primary types of securities and financial instruments used to raise capital
Companies need capital in order to expand and purchase physical assets and may not have sufficient funds to make all the investments required for their growth. As a result they raise capital.
To obtain capital companies that have more funds that are required for their immediate needs can invest insecurities and build capital for later consumption, those with a deficit is issue securities that are bought by those with excess funds.
Two primary types of securities are stocks and bonds
