Newsletter Express. Liability insurance for pension committee members

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1 1 December 2010 Liability insurance for pension committee members The voting members of pension committees are solidarily liable for pension plan administration. Though implementing thorough rules for administering the plan helps reduce the risk of error or being sued, it does not eliminate it completely. That s why it is important for the pension committee to ensure its members have liability insurance. In order to provide an overview of the liability insurance coverage of pension committee members, in 2007 the Régie des rentes du Québec surveyed representatives of the pension plans it monitors. This issue of Newsletter Express gives the main survey results. It also provides information on liability insurance to help pension committee members evaluate their situation and adjust their coverage, if necessary. Liability insurance coverage of pension committee members Representatives from plans completed the survey, for a 96% participation rate. Among the plans represented: 67% are defined benefit plans and 33% are defined contribution plans; 77% are private sector employer plans and 23% are plans in the municipal and university sectors.

2 The pension committee members of 80% of the plans have liability insurance. The coverage rate varies depending on the type of plan and the sector, as shown in the following table. Type of plan and sector Members covered Members not covered All plans that took part in the survey 80% 20% Defined contribution plans 55% 45% Defined benefit plans 92% 8% Private sector 78% 22% Municipal and university sectors 87% 13% Coverage is markedly higher for defined benefit plan members (92%) than for defined contribution plan members (55%). The sector of activity has less of an influence on the rate of coverage, which is somewhat higher in the municipal and university sectors (87%) compared with the private sector (78%). The pension committee members of 20% of the plans are not covered. Our findings show that this applies mainly to small defined contribution plans with assets less than 5 million $ and for which members choose the investments. This is one of the reasons given for the lack of coverage as well as the lack of knowledge regarding liability insurance. 1 December / 8

3 Main types of liability insurance There are three main types of liability insurance. Fiduciary liability insurance This is insurance specifically for the pension committee. It protects members against fiduciary failings stemming from an action, error or omission in carrying out their duties. This can concern, for example, the choice of fund manager, service provider or investment policy. Rider to the employer s liability insurance policy A rider is an additional clause added to the employer s liability insurance policy. As a result, the civil liability insurance of administrators and directors also protects pension committee members. In general, such a rider offers less comprehensive protection than fiduciary liability insurance. For example, the indemnification and scope of the protection are often less and are usually limited to errors and omissions of an administrative nature, such as an error in the calculation of a retirement pension. Indemnification agreement An indemnification agreement usually rounds out another type of liability insurance. It is an agreement between the pension committee and the employer or union. In the event of a claim, the latter agrees to pay certain fees not covered by the fiduciary liability insurance or the rider, such as the liability insurance deductible or the amount of the claim exceeding the insurance coverage. Where an indemnification agreement is the only protection the pension committee has, member protection varies according to the agreement with the employer or the union. The agreement can cover part or all of the fees incurred in the event of a claim. 1 December / 8

4 Benefits and drawbacks of the types of insurance The cost of a rider to the employer s policy is generally lower than that of fiduciary liability insurance. However, it has the following drawbacks: Though a rider provides protection against administrative errors and omissions, it does not usually protect against fiduciary failings concerning, for example, the choice of fund manager, service provider or investment policy. This protection can be ineffective in the event of financial problems or the employer s bankruptcy, when the risk of being sued can increase. Since insureds under the same policy cannot sue each other, this protection is of no use in solving disputes between pension committee members and the employer. Since the rider is part of the employer s or union s policy, it can be amended or cancelled as the employer or union sees fit. Pension committee members must therefore stay abreast of any changes to the rider concerning the protection it provides or its cancellation. An indemnification agreement provides piecemeal protection. It can be difficult or even impossible to have the agreement respected if the employer is having financial problems or if the agreement is verbal (not in writing). Who pays liability insurance? The liability insurance premium is an administrative expense for the pension plan. In this regard, it is paid by the pension fund or the person named in the plan text. In addition, the Act allows the pension committee to compensate its members up to the amount of the policy s deductible, provided they have not committed any deliberate or gross fault. 1 December / 8

5 Protection afforded to members The following table gives a breakdown of the pension plans that offer protection to pension committee members, depending on the type of plan and sector. Type of plan and sector Fiduciary liability insurance for the pension committee Type of liability insurance Rider to the employer s liability insurance policy Indemnification agreement All plans covered 59% 38% 3% Defined contribution plans 50% 49% 1% Defined benefit plans 61% 35% 4% Private sector 51% 47% 2% Municipal and university sectors 82% 12% 6% Overall, fiduciary liability insurance is the most common. Among the plans whose members have coverage: 59% have fiduciary liability insurance; 38% have a rider to the employer s liability insurance policy; 3% have only an indemnification agreement. However, fiduciary liability insurance is more common among defined benefit plans, particularly in the municipal and university sectors. 61% of defined benefit plans offer fiduciary liability insurance to pension committee members compared with 50% of defined contribution plans; 82% of municipal and university sector plans offer fiduciary liability insurance compared with 51% of private sector plans; defined contribution plans and private sector plans are as likely to offer fiduciary liability insurance as a rider to the employer s insurance policy. 1 December / 8

6 Even though an indemnification agreement generally rounds out another type of liability insurance, for a minority of plans it is the only protection afforded to members. Most of the time, the agreement is in writing and reimburses only the insurance deductible. However, the more assets a plan has, the more likely it is that the agreement will also reimburse other expenses. A quarter (25%) of the plans whose members are covered have an indemnification agreement, most often to complement another type of insurance. Among the plans: 88% have an agreement to complement another type of insurance; 12% have an agreement as the only protection provided to members. Twenty percent of indemnification agreements are verbal, and they are more common with defined contribution plans. Among plans with an agreement: 17% of defined benefit plans have a verbal agreement (83% have a written agreement); 52% of defined contribution plans have a verbal agreement (48% have a written agreement). Extending the coverage period An insurance policy covers pension committee members for their actions while the policy is in effect and for the claims made during that period. In order to extend the coverage period, insurance policies generally provide a retroactive date and an extension of the claim period. Policies can therefore cover actions in previous years by specifying a retroactive date, which generally corresponds to the effective date of the first insurance policy underwritten by the insurer. For example, if the committee annually renews its policy with Insurer A from 1 January 2006 to 31 December 2008, the members are covered for actions taken since 1 January 2006, even if a claim is made in December / 8

7 If the committee cancels the insurance policy, it is no longer covered for its actions during the period the policy was in effect. It could therefore be sued for its actions during that period. To avoid this problem, the pension committee can purchase from the former insurer an extension of the claims period (e.g., for the three years following the policy expiry date). This would cover claims for actions taken during the time the policy was in effect but that are made after the policy expires. Such an extension could be even more useful in difficult situations. For example, if the committee changes insurers on 1 January 2009, the new policy will not cover a claim for actions before that date. The committee could purchase from Insurer A an extension of the claims period (e.g., for the three years following the policy expiry date). This would cover claims made between 1 January 2009 and 31 December 2011 for actions taken while the policy was in effect, from 1 January 2006 to 31 December What the survey reveals about extending the coverage period Excluding indemnification agreements, half of the liability insurance policies for pension committee members have a retroactive date. In addition, most of the policies allow a claims period extension to be purchased, as follows: 80% of plans whose members are covered by fiduciary liability insurance; 70% of plans whose members are covered by a rider to the employer s policy. Important protection for all The pension committee members of most pension plans are covered by liability insurance. Over half (60%) of these plans provide fiduciary liability insurance the best kind of insurance specifically for the pension committee. 1 December / 8

8 The other plans mainly offer members a rider to the employer s policy (40%). An indemnification agreement is generally offered as a complement to another type of liability insurance. However, some agreements are verbal, which can lead to them being applied in a haphazard way. Defined contribution plans where members choose their investments are most likely to provide committee members with no protection. And yet these members assume responsibilities and expose themselves to risks. To learn what some of their responsibilities are, they can consult the Guidelines for Capital Accumulation Plans published by the Joint Forum of Financial Market Regulators. A summary of these guidelines and their application in regard to supplemental pension plans is given in Newsletter number 20 published by the Régie in June All pension committee members should have liability insurance. It is in their interest to learn more about their current protection to ensure it is sufficient and have it changed, if necessary. This subject should also be discussed during a pension committee meeting. More information on the roles and responsibilities of pension committee members is provided in The Role and Responsibility of a Pension Committee, published as instalment 2 in the collection Administering a Pension Plan Well. It is available on our Web site. Writer: Gina Brassard Translator: Keith Ebsary This document is available on our Web site. (Version originale française disponible sur notre site Web.) For more information, contact our: Information Officer Direction des régimes de retraite Régie des rentes du Québec Case postale 5200 Québec (Québec) G1K 7S9 Telephone: Québec region Toll-free Fax: Internet: 1 December / 8