Protecting the administrator and the pension fund
The best way to avoid errors and any ensuing lawsuits is to put into place mechanisms for making informed decisions and adequately monitoring the pension plan's administration. This is why plan administrators must adopt internal by-laws. Even though lawsuits against administrators are rare, liability insurance should be taken out.
internal by-laws must set out governance rules. The rules must cover financial risk management measures, internal controls and books and registers. Where a pension committee is the plan administrator, the internal by-laws must also provide for the committee's operating rules.
Liability insurance protects the administrator from the monetary consequences resulting from any lawsuit due to acts, errors or omissions related to its
obligations. It also covers administrative errors, breach of law or contract, or even an unacceptable choice of service provider. The insurer pays for the cost of legal defence whether or not the lawsuit is grounded.
The premium for such insurance is part of the pension plan's administration costs and is paid by the pension fund, or if the plan so provides, by the employer.
Personal liability insurance policies for administrators are complex. Therefore, it is important to have the insurance agent explain the terms of the contract and to check who is covered, which acts are covered, what the exclusions are and how much the premium, the deductible and the coverage are.
- It is preferable to have liability insurance specifically for the plan
administrator, commonly called "pension trustees' liability".
- Some plans have merely an agreement with the employer to compensate the administrator, that is, the pension committee members. In these cases, it can be difficult, or even impossible, to enforce such an agreement if the employer has financial difficulties.
- Some pension committee members can be protected by the employer's liability insurance. This type of insurance does not cover trustee risk. Furthermore, the protection may be withdrawn where the employer has financial difficulties or is bankrupt.
- In some plans, an agreement is made with the employer to indemnify the administrator for acts that are not covered by the liability insurance or for the deductible provided for in the insurance policy.
Compensation from the pension fund
In the absence of liability insurance, the pension fund must be used to compensate pension committee members who are
not guilty of any wrongdoing for any damages incurred while carrying out their duties. The cost of legal defence can be reimbursed from the pension fund if the lawsuit is unsuccessful. If, however, the lawsuit is successful - that is, if the members are at fault – the fees or damages cannot be reimbursed from the pension fund.
If the pension committee members' liability insurance has a deductible, the committee can reimburse it from the pension fund if the members are not guilty of any intentional fault or gross misconduct. Reimbursement is not automatic: before doing so, the committee must consider the financial impact on the fund and other circumstances.
These rules also apply to an employer who administers a plan having less than 26 members and beneficiaries.
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