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UK and Canadian Pension Fund – Implications

Comparative Study of U.K. and Canadian Pension Fund Transparency Practices 

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7. Implications of Introducing a SEE Disclosure Requirement in Canada 28

Introduction

The past decade has seen an increasing level of interest in RI within Canada. The Social Investment Organization (SIO) estimates that the sum of all assets in Canada managed according to SRI guidelines as of June 30, 2002 totalled $51.4 billion. This represents about 3.3 percent of the Canadian retail mutual fund and institutional investment market (SIO, 2003). Concurrently, we can observe increased levels of CR initiatives, evidenced by corporate sustainability reporting growing from 57 companies in 2000–01 to 100 in 2001–02 (Stratos, 2003). Building on the information gathered in the previous sections of this report, we believe Canada can observe lessons learned from the U.K. experience and relate them to a Canadian context. This section explores possibilities for designing a requirement to disclose consideration of SEE issues in Canadian pension fund investments, as well as implications for implementation. Consideration is given to Canadian pension regulatory and legal frameworks, as well as other issues of local relevance including current developments. Canadian Pension Fund Overview There are more than 13,800 29registered pension plans in Canada (Statistics Canada, 2002). And the amount of money in institutional investments 30has seen remarkable growth over the past 20 years. The OECD has tracked this growth worldwide, Figure 2 shows Canadian pension funds as a subset of institutional investments increasing more than 800 percent between 1980 and 2000 (OECD, 2004a).31 More recent estimates assess total assets held by employer-sponsored pensions at about C594 billion (Statistics Canada, 2004), plus approximately $17.5 billion (CPPIB, 2003) and $16 billion (MacDonald, 2003) held by the Canada Pension Plan Investment Board (CPPIB) and the Quebec Pension Plan (QPP) respectively. This represents the second largest pool of investment capital in Canada 32(Statistics Canada, 2002), owning about 20 percent of the stock of big-name publicly traded companies in Canada. Figure 2: Financial assets of Canadian institutional investors (US$million) [Source: OECD (2004a)].

Key Stakeholder Organizations

Pension Investment Association of Canada33 The Pension Investment Association of Canada (PIAC) includes membership of more than 135 pension funds that represent aggregate assets of more than $500 billion (PIAC website). Association of Canadian Pension Management 34 The Association of Canadian Pension Management (ACPM) is the national voice of Canada’s pension industry. The ACPM's current membership totals 700 in the individual category (open to plan sponsors, administrators, plan trustees, consultants, investment managers, custodians, providers of professional services, government representatives, academics and citizens), plus over 20 institutional members (APCM website). Canadian Pension and Benefits Institute 35 The Canadian Pension and Benefits Institute (CPBI) is a forum for education, discussion and networking for Canadian plan sponsors, service providers, consultants and regulators involved in pensions, benefits and investments. Canadian Association of Pension Supervisory Authorities 36 The Canadian Association of Pension Supervisory Authorities (CAPSA) is a national inter-jurisdictional association of pension supervisory authorities whose mission is to facilitate an efficient and effective pension regulatory system in Canada. It discusses pension regulatory issues of common interest and develops policies to further the simplification and harmonization of pension law across Canada (CAPSA website).

Best Practice

At present, some pension funds disclose whether they consider SEE issues in a policy statement or similar document (e.g., CPPIB, 2004), as well as disclosing their proxy voting guidelines and/or proxy voting records (e.g., BCIMC website; OMERS website; OTPP website; CPPIB website). In response to client requests, some investment managers report on proxy voting to clients, and this is becoming common practice (Anonymous, see App. E).

Canadian Pension Regulation

Canadian pensions are regulated both provincially and federally. 37There are approximately 12,500 provincially regulated pension funds with total assets of about $503 billion and 1,205 federally regulated pension funds with total assets of about $91 billion (Statistics Canada, 2002; OSFI, 2003). The Reciprocal Agreement (1968) 38between the provinces allows for the regulation of plans by the jurisdiction in which the plurality of members live and/or work; however, the members’ benefit entitlements remain subject to the legislation of their “home” province (Hall, see App. E). (The Agreement does not apply to federal plans—where the application of the law is based on the industry involved—or to plan members who live in the Territories.) Multi-jurisdictional regulation presents challenges for stakeholders complying with different rules in different jurisdictions, and the need for uniformity in standards has been raised (CAPSA, 2004; Yaron, 2001; Bardswick, see App. E). A complete list of Canadian regulatory bodies is included in Appendix F.

Potential Regulatory Reform 39

Canada’s split regulatory jurisdiction is perhaps the greatest challenge in potential regulatory reform (Ellmen, see App. E; Jantzi, see App. E; Kainer, see App. E). On the positive side, it creates numerous ways for adopting SEE disclosure in Canada. However, against this it is difficult to envisage consistent reform occurring nationally.

Because of the federal nature of the country and different pension regimes and exemptions from the legislation for some statutory plans, including major ones like OMERS in Ontario, there will be a need for a variety of types of legislative change. One fix isn’t going to do it all. I think it only makes sense to assume it will be necessary to pass the required legislation, or make the regulation in the context of each specific pension statute. (Kainer, see App. E)

Prospects for Federal Reform

Federal regulations are cited in this report as exemplars of current pension regulation. A complete review of Canadian pension disclosure requirements is beyond the scope of this report; however, we have undertaken preliminary research in this area, and we understand that the investment rules for pension funds (including disclosure requirements) are based on the federal statute in most jurisdictions (Hall, see App. E). 40Therefore, consideration of federal regulations provides a starting point for the potential reform required to incorporate SEE issues more broadly into pension fund investment considerations. In the past, federal pension law has been adopted by provincial jurisdictions seeking to harmonize. Hence the amendment of federal regulations relating to pension fund transparency could provide the impetus for increased disclosure by other jurisdictions (Jantzi, see App. E; Yaron, see App. E; Ellmen, see App. E; Anonymous, see App. E).   Defined Benefit Plans Defined benefit (DB) federal pension assets are regulated by three different legal frameworks: 1. The Public Sector Pension Investment Board Act (PSPIBA) addresses investment policy issues with respect to federal public sector pension plans (including those of the Royal Canadian Mounted Police and the Canadian Forces), whose combined assets exceed $2.5 billion (PSPIBA, 1999). The disclosure requirements for these plans require the board to annually “establish written investment policies, standards and procedures for each fund that the Board manages” (PSPIBA, 1999, Section 7(2)(a)), and those should be adhered to as a prudent person would (PSPIBA, 1999, Section 32). 2. The Canada Pension Plan Investment Board Act (CPPIBA) sets out the investment policies for the Canada Pension Plan, which as stated earlier has net assets of about $17.5 billion (CPPIB, 2003). Changes to this act would require the approval not only of Parliament but also of two-thirds of the nine participating provinces representing two-thirds of the population (Curry, 2004 quoting CPPIB spokesman John Cappelletti). Much like the PSPIBA, the CPPIBA requires a SIPP in the annual report (CPPIBA, 1997, Section 51(3)(f)) and that the investments be managed prudently (CPPIBA, 1997, Section 35). 3. The Pension Benefits Standards Act (1985) governs investment policy for all federally regulated pension plans except those identified below. As stated previously, 1,205 private pension plans valued at $91 billion are federally regulated under the PBSA (OSFI, 2003). The Pension Benefits Standards Act covers the largest sum of assets and provides the legal framework upon which the Pension Benefits Standards Regulation expands. An amendment to the Act is possible; however, amending the Regulation would be less onerous, requiring only an order in council by the Cabinet. Section 7 (Investments) of the Pension Benefits Standards Regulation (PBSR) (included in Appendix G) outlines the information to be included in the SIPP and could be amended to require additional disclosure on SEE issues. On November 10, 2001, the federal government adopted amendments to the Pension Benefits Standards Act (1985) (see Appendix H), requiring disclosure of a plan’s SIPP to plan members upon request. However, most plan members do not request or read their pension’s SIPP. Therefore, in addition to Section 7 of the PBSR, complementary legislation could integrate a disclosure statement on SEE considerations in the annual reports to members attached to Sections 22–23 (Information to be Provided) in the Pension Benefits Standards Regulation (see Appendix G).   Capital Accumulation Plans A capital accumulation plan (CAP) is “a tax assisted investment or savings plan that permits the members of the CAP to make investment decisions among two or more options offered within the plan. A CAP may be established by an employer, trade union, association or any combination of these entities for the benefit of its employees or members” (Joint Forum of Financial Market Regulators, 2004). These are regulated separately from DB plans and include defined contribution (DC) registered pension plans, group registered retirement savings plans or registered education savings plans, and deferred profit-sharing plans. More than three million Canadians belong to over 60,000 CAPs totalling over $60 billion in assets (Merrick, 2003), and about 70 percent of these plans allow members to make investment choices (Joint Forum of Financial Market Regulators, 2003). CAPs must comply with the investment rules

• under applicable pension benefits standards legislation if the investment funds are offered in a registered pension plan;
• under National Instrument 81-102 Mutual Funds (OSC 1999) if the investment fund is a mutual fund under securities law; or
• applicable to individual variable insurance contracts, or conventional public mutual funds, or applicable pension benefits standards legislation if the investment fund is an insurance product (Joint Forum of Financial Market Regulators, 2004). 41

  The regulations surrounding CAPs are scattered. To provide some coherence, the Joint Forum of Financial Regulators (JFFR) was created and consulted on Proposed Guidelines for Capital Accumulation Plans (Joint Forum for Financial Regulators, 2003). These guidelines are being released in their final version at the time of writing of this report (Joint Forum of Financial Regulators, 2004). Three options for incorporating consideration of SEE issues into CAPs would be to 1. require mutual funds to disclose the extent to which they consider SEE issues in National Instrument 81-106 42on Investment Fund Continuous Disclosure (OSC, 2002); 2. require CAP sponsors to offer members an RI option for their plan. This could be added to the JFFR Guidelines for CAPs, or possibly added to the PBSR under DC plans; 43and/or 3. require investment advisers providing personal financial advice to plan members to ask whether environmental, social or ethical considerations are important to their clients (Australian Securities and Investments Commission, 2003). CAPSA Model Pension Law As noted earlier, the overlap and split of regulatory jurisdictions in Canada creates challenges, not only for legislative reform but also for those operating within the system (Bardswick, see App. E; Hall, see App. E; CAPSA, 2004). CAPSA is currently consulting on a Model Pension Law (CAPSA, 2004) with the aim of harmonizing pension legislation. The Model Pension Law does not currently include any disclosure requirements for consideration of SEE issues in investments; however, it is in the early stages of consultation and could include this addition to Canadian SIPPs (and other mediums of disclosure such as the annual reports to members). If the Model Pension Law were to include such a provision, it would facilitate the adoption of SEE disclosure in the jurisdictions where pension law is under review (Yaron, see App. E; Jantzi, see App. E; Ellmen, see App. E; Hebb, see App. E; Bardswick, see App. E). Pension Law Currently Under Reform Meanwhile, any jurisdiction could establish new best practice. Manitoba is currently reviewing its provincial pension law with a view to amending it, likely by fall 2004. The proposed framework did not include a requirement for disclosure of consideration of SEE issues; however, it is not out of the question for regulations to include this, and submissions have been made in this regard (Yaron, 2004b). At this time it is unclear whether Manitoba is considering its inclusion based on documentation available. Alberta is also reviewing its pension law and recently completed consultations on its discussion paper Strengthening Risk Management, Disclosure and Accountability (Alberta Finance, 2003). Based on its consultation process, Alberta found (among other things) general support for increased disclosure and transparency of pension funds (Alberta Finance, 2004). Recommendations on SEE disclosures (among other things) have been made (Yaron, 2004a). International Guidelines The OECD has guidelines that have been adopted by some pension funds as best practice. 44OECD guidelines for disclosure and transparency in pension funds could include a statement on consideration of SEE issues in investments (Hebb, see App. E). The OECD’s recently revised Principles of Corporate Governance also promote consideration of broader stakeholder interests, and this may be taken to be consistent with investors’ interests in SEE issues (OECD 2004b).

Fiduciary Responsibility

Pension fund trustees have a legal responsibility to act according to the “principle of prudence” and the “principle of loyalty,” which include achieving a reasonable rate of return and maintaining an adequate diversity of investments. An extensive review of fiduciary law and SRI in Canada found no legal authority on this point in Canada. The review also found no consensus among U.K. and U.S. authorities regarding the ability of institutional investors to apply non-financial screens to the investment selection process (Yaron, 2001). Yaron (2001) concluded that “from the extensive analysis of Canadian legislation, common law and academic authorities on the subject…Canadian law does not prohibit trustees from investing plan assets in a socially responsible manner. Rather, there is significant legal and empirical support for viewing SRI practices as a requisite element of prudent and loyal trusteeship.” Recently, institutional investors have publicly expressed concerns about “non-financial” issues such as climate change (e.g., the Institutional Investors Group on Climate Change, Carbon Disclosure Project), corporate governance (e.g., the Canadian Coalition for Good Governance), and HIV/AIDS (Baue, 2004b) due to their associated risks. Yaron (2001) argues that Canadian law has not yet caught up with today’s operating environment. Similar sentiment has been expressed by legal experts in the U.S. (Baue, 2004a). However, it is still an area with little clarity, and investors’ ability to consider this information is limited by corporate disclosure and reporting on social and environmental issues.

…often the consultants that advise trustees thinking about using SEE criteria tell them using such criteria is in violation of their fiduciary duty (this still happens in Canada on a pretty regular basis). (Hebb, see App. E) Further clarification around the rights of trustees in pursuing these questions would be a good idea. That would mean an interpretation by the government of the restrictions set out in legislation as it pertains to social investment…. In the United States, the federal regulator has clarified rules around social investment which creates the space for trustees to explore that agenda. (Berger, see App. E). There is still a fair bit of misunderstanding here about trustee entitlement to take these [SEE] considerations into account. I don’t want to tar all money managers with the same brush, but there are a number who, I think, don’t really relish the idea of having any restrictions placed on them…. Part of the concern of the trustees is that it may be in breach of their fiduciary duties…so if it [the disclosure requirement] were accompanied with some statement that this was acceptable, and does not constitute a breach, that would certainly help. (Kainer, see App. E) I would take the inclusion of this [SEE disclosure requirement] in the legislation or the regulation (myself as a lawyer), as a tacit or implicit assumption by the people who passed the legislation that these are legitimate considerations. (Kainer, see App. E)

Discussion

Many Canadian interviewees noted the general move toward increased transparency in the context of ongoing corporate governance scandals (Enron, Worldcom, Tyco, etc.), citing Sarbanes-Oxley, U.S. Securities and Exchange Commission requirements of Canadian CEOs and CFOs (Bardswick, see App. E; Yaron, see App. E), new proxy voting disclosure requirements for U.S. mutual funds (Ellmen, see App. E; Hebb, see App. E; Yaron, see App. E), the Canadian Institute of Chartered Accountants guidelines for “management discussion and analysis” (Yaron, see App. E), the Myners Report in the U.K. (Hebb, see App. E), and general investor expectations (Baue, 2003; Bardswick, see App. E; Ambachtsheer, see App. E).

Institutional investors in Canada are on a path to being required to have more transparency generally anyway because you can’t become such an important driver of the financial system and be such a black box. (Hebb, see App. E) I wonder whether this is an inevitability given the increasing expectation and requirement of organizations, particularly larger organizations, to provide full disclosure and broad comprehensive disclosure on a number of fronts…we are heading down that road anyway. (Bardswick, see App. E)

A broad range of interviewees associated with the SRI industry favoured Canada’s adoption of SIPP/SEE disclosure that is similar to the U.K. requirement:

Who’s against transparency? (Anonymous, see App. E) I think the idea that pension funds would be able to articulate their investment beliefs is a very sound idea—why not? (Ambachtsheer, see App. E) Legislation is important because it sends a signal from a regulatory sense that these issues are important as a component of fiduciary responsibility. The legislation is not prescriptive—it’s not saying you have to do it [SRI]. But when you have legislation and disclosure on whether you are doing something on this front or not, then I think that it does send a message; I think that has value in and of itself. (Jantzi, see App. E) I don’t know what the arguments are against it. (Walker, see App. E)

However, these commentators expressed some concern about a regulatory focus directed solely on pension funds and a desire to see disclosure and transparency on SEE issues implemented more broadly (Bardswick, see App. E; Hebb, see App. E; Ambachtsheer, see App. E; Walker, see App. E):

…so much more effective to have social and environmental [issues], because of the risk that they pose to the portfolio, integrated into broad transparency requirements of institutional investment than just a single transparency demand. (Hebb, see App. E) I think that what is good for pension funds, what’s appropriate and ethical for pension fund disclosure, should be more broadly applied. (Bardswick, see App. E)

These commentators tended to see the U.K. requirement as a first step toward a more desirable state:

If you pose the question “to what degree do you consider social, environmental, etc.”—wrong question. The question is, how do you generate investment beliefs inside your organization, and what kind of factors do you think make the elements of those investment beliefs—for them to be functional and effective. See now you’ve left the question open-ended; you haven’t given them the answer. Then fill in the blanks, because if it is done well those kinds of things will come up. (Ambachtsheer, see App. E) Right now, the Statement of Investment Policies and Goals (SIP&G) are, 99 percent of them are, basically just boilerplate. They all look the same, and they really don’t have any measurable feet. Again, if you want to improve the effectiveness of an organization, including an investment organization, you have to go way beyond some broad, general statement. You need to say “and for us, what that means is the following.” (Ambachtsheer, see App. E) I think the other thing that is lacking is that there has been no follow-up monitoring and verification, so even those funds that say “we are doing something…we are doing this…we are doing that”—well, what does it really mean? Are they really doing what they are saying they are doing? And there is obviously a big discrepancy in what funds are doing. This isn’t necessarily a bad thing. I mean, the range isn’t a bad thing, but it’s the funds that are not doing what they are saying they are doing—that is the problem. (Jantzi, see App. E) I would like to see a disclosure rule include a discussion about how they [pension funds] view social and environmental issues as part of the broader value proposition and details on how they actually implemented the policy. On the flip side, I would like to see why they don’t look at these issues. (Jantzi, see App. E) …[look] to Australia where they’ve extended the disclosure rule to mutual funds. (Walker, see App. E)

In our interviews, we detected little indication of political activity or even interest in the area of pension fund transparency, CR or RI generally. However, this issue has been raised before. Stéphan Tremblay (MP, Bloc Quebecois) tabled Private Member’s Bill C-394 in the House of Commons on September 20, 2001 to amend the PBSA, 1985. The amendment included a requirement to prepare an annual report on SEE factors considered during the previous fiscal year relative to investment decisions and/or voting rights, which would be available to any member upon request (Tremblay, 2001). This bill was not passed. During Question Period in December 2001, Tremblay pressed the issue of pension funds and SRI with the then Finance Minister, Paul Martin (Liberal); Martin replied somewhat supportively (Government of Canada, 2001).** On other pension matters, Pat Martin (MP, NDP) continues to raise the question of bankruptcy and insolvency. On February 9, 2004 he introduced Bill C-474 to amend the Bankruptcy and Insolvency Act (unpaid wages to rank first in priority in distribution), which was seconded by Sheila Copps, then MP for Hamilton East (Liberal) (Martin, 2004). Pat Martin has also questioned the CPPIB’s investments, calling them paradoxical to government policy (especially regarding the war in Iraq). He called for prohibition “from investing in companies and enterprises that manufacture and trade in military arms and weapons, have records of poor environmental and labour practices or whose conduct and practices are contrary to Canadian values” (Curry, 2004).