Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Guidelines for Capital Accumulation Plans Nurez H. Jiwani Chair, Capital Accumulation Plans Committee Joint Forum of Financial Market Regulators Canadian Institute Of Actuaries General Meeting Montreal, Quebec November 17-18, 2004 – G3-PD

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Topics to be covered: 1.Highlights of the guidelines 2.Industry Reaction 3.Implementation of the guidelines

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier 1. Highlights of the guidelines

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Capital accumulation plan (CAP)  Tax assisted investment or savings plan  Permits members to make investment decisions  Offers two or more investment options

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Examples of CAPs  Defined contribution pension plans  Group registered retirement savings plans  Deferred profit sharing plans  Group registered education savings plans

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier CAP sponsors, service providers and members  CAP sponsors  Employers, trade unions, associations that establish CAPs  Service providers  Any provider of services or advice required by CAP sponsors in the design,establishment and operation of CAPs  CAP members  Individuals who have assets in CAPs

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Purpose of guidelines  Outline and clarify rights and responsibilities of CAP sponsors, service providers and members  Ensure that CAP members are provided the information and assistance they need to make informed investment decisions in CAPs  Achieve similarly regulatory result for CAP products and services regardless of the applicable regulatory (pensions, insurance or securities) regime

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Implications for CAP sponsors  CAP sponsor responsible for:  Setting up the plan  Providing investment information and decision-making tools to CAP members  Introducing the plan to members  Providing on-going communication to plan members  Maintaining the plan  Ensuring termination of CAP or CAP member in accordance with the terms of the plan

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Delegation  CAP sponsor may delegate their responsibilities within a CAP to a service provider  Where CAP sponsor delegates responsibilities, responsibilities of CAP sponsor and service provider should be carefully documented

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Implications for service providers  To the extent that the responsibilities of the CAP sponsor are delegated to a service provider, the service provider is responsible for following the guidelines  Service providers engaged by the CAP sponsor should have the appropriate level of knowledge and skill to:  Perform the tasks delegated to them  Provide any advice within their area of expertise requested by the CAP sponsor

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Implications for CAP members  Responsible for making investment decisions within the plan:  How much to contribute  How much to contribute to any particular investment option  Whether an investment in a particular option should be moved to another option

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Implications for CAP members (cont.)  Use the information and decision-making tools made available to them in making their decisions  Consider obtaining investment advice from an appropriately qualified individual in addition to using information or tools provided by CAP sponsor

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Purpose  CAP sponsor should define purpose of CAP:  Retirement savings  Tax efficient compensation  Profit sharing  Savings for education or home purchase

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Use of service providers  CAP sponsors should decide whether to use service providers:  Does CAP sponsor have the necessary knowledge and skills to carry out their responsibilities?  If not, service providers should be used

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Selection of service providers  CAP sponsor should establish criteria and use criteria for selecting service providers  Factors to be considered when establishing criteria may include:  Professional training  Experience  Specialization in the type of service to be provided

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Selection of service providers (cont.)  Cost of services  Understanding of employee benefits, pension legislation, etc.  Consistency of service offered in all geographical areas in which members reside  Quality, level and continuity of services offered

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Selection of investment options  Factors CAP sponsors should consider in selecting investment options include:  Purpose of CAP  Number of investment options to be made available  Fees associated with the options  CAP sponsor’s ability to periodically review the options

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Selection of investment options (cont.)  Diversity and demographics of CAP members  Degree of diversification among investment options to be made available  Liquidity of risk associated with the investment options

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Selection of investment funds  Additional factors to consider when selecting investment funds:  Attributes of the investment funds – investment objectives, investment strategies, investment risks, manager(s) historical performance, fees  Whether investment fund(s) selected provide CAP members with options that are diversified in styles and objectives

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Compliance of investment funds with applicable investment rules  If funds offered in a registered pension plan – must comply with investment rules under applicable pension standards legislation  If investment fund is a mutual fund under securities law – must comply with investment rules governing conventional public mutual funds

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Compliance of investment funds with applicable investment rules (cont.)  If investment fund is an insurance product, must comply with:  Investment rules applicable to individual variable insurance contracts  Investment rules governing public mutual funds; or  Investment rules under applicable pension standards legislation

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Transfers, failure to make investment choice  CAP members should be provided opportunity to transfer among investment options available in the plan at least quarterly  CAP sponsor should establish and provide to member policy that outlines what happens if a CAP member does not make an investment choice

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Investment information  CAP sponsors should provide investment information to members, such as:  Glossaries explaining terms used in investment industry  Information about how investment funds work  Information about investing in different types of securities (e.g. equities, bonds).

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Investment information (cont.)  Information regarding relative level of risk and return associated with different investment options  Product guides  Performance reports for any investment funds offered in the CAP

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Decision-making tools  CAP sponsor should provide CAP members with investment decision-making tools, such as:  Asset allocation models  Retirement planning tools  Calculators and projection tools  Investor profile questionnaires

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Investment Advice In addition to providing investment information and decision-making tools, CAP sponsor may choose to:  Enter into an arrangement with a service provider Or  Refer members to a service provider who can provide member with advice about their investment decisions

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Introduction of the CAP to members  CAP sponsors should provide following information to CAP members when they become eligible to join the plan:  Information on purpose, nature and features of the plan  Rights and responsibilities of CAP members  Investment options available  Transfer options  Description of fees, expenses and penalties

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Information to be provided on investment funds  Name of investment fund  Investment management companies responsible for day- to-day management  Investment objectives  Types of investment fund may hold  Description of risks associated with investing in a fund

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Information to be provided on investment funds (cont.)  Where a member can obtain more information about fund’s holdings and other detailed disclosure  Whether fund is considered foreign property for income tax purposes and, if so, summary of the implications of that status

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Ongoing communication to members  Member statement at least annually  Access to other information  Report on significant changes in investment options  Performance reports for investment funds at least annually

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Information to be provided in member statements  Listing of investments by type  Investment activity  Investments in investment funds  Summary of transactions  How to get specific information on each investment option, fees and expenses, transaction details and transfer options

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Information to be provided in performance reports for investment funds  Name of fund  Name and description of benchmark for the fund  Corresponding returns for benchmarks  One, three, five and 10 year historical performance

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Information to be provided in performance reports for investment funds (cont.)  Whether investment performance is gross or net of investment management fees and fund expenses  Identification of method used to calculate fund performance return and where more detailed explanation could be found  Statement that past performance not necessarily an indication of future performance

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Maintenance of a CAP  CAP sponsor should periodically review:  Service providers  Investment options  Decision-making tools  CAP sponsor should decide what action to take based on review

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Termination  CAP sponsor should terminate CAP or CAP member’s termination in the plan in accordance with the terms of the plan  CAP sponsor should provide information to members regarding options available to the member, actions the member must take, deadlines for taking action, etc.

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier 2.Industry Reaction

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier 3.Implementation of the guidelines

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Implementation strategies  Pension sector –  Adoption of guidelines by pension regulators for application to defined contribution pension plans  Securities sector –  Proposed registration and prospectus exemption  Insurance sector –  Adoption of guidelines by Canadian Life and Health Insurance Association (CLHIA)

Joint Forum of Financial Market Regulators Forum conjoint des autorités de réglementation du marché financier Implementation timelines  Guidelines released  May 28, 2004  Securities exemption in place  Dec. 31, 2004 (target)  CLHIA adoption  Dec. 31, 2004  Regulators’ expectations that guidelines will be followed in full  Dec. 31, 2005  Evaluation of success of implementation of guidelines  2006