With regard to investing pension assets, Canadian law of the past was especially detailed, prescribing strictly what allocations could and could not be made and under what conditions. Beginning in 1987 with the Pension Benefits Act of Ontario, regulatory frameworks across the country were gradually revised to make the investment decision-making process of fiduciaries more broadly, if no less stringently, guided by the "prudent person rule." Generally speaking, this rule states that a fiduciary must exercise care, diligence and skill in her or his decisions as one person might in handling another's property under common law. The prudent person rule is now the central underlying theme of pension regulation and supervision in Canada, as it is in Australia, New Zealand, the United Kingdom and the United States.Endnote 23
Under this rule, the process by which an investment decision gets made is the central focus, and not strictly the outcomes of that decision. This means that pension fiduciaries can and should be judged according to whether they exhibit the legally-ascribed qualities of prudence as they allocate and manage assets with reasonable expectations of returns. By extension, they cannot necessarily be held accountable for poor returns resulting from unforeseen market circumstances or sheer bad luck, unless it is apparent that imprudent fiduciary behaviours led to this end. Put another way, the prudent person rule will be deemed fulfilled if, throughout the hierarchy of roles and responsibilities among trustees and their agents, attention has evidently been paid to cautious, informed and transparent decision-making.
The Canadian Employment Benefits and Pension Guide, published by CCH Canadian Limited, notes that the first step towards modern standards legislation for employer-sponsored pension funds came with enactment of the Pension Benefits Act of Ontario in 1965. This statute was intended to take stock of evolutionary changes in the country's retirement income system in the early 1960s, including inception of the Canada Pension Plan and the Fonds du Régime de rentes du Québec. Over the years, all other government jurisdictions amended or introduced legal provisions in harmony with those of Ontario, beginning with the Supplemental Pension Plans Act of Quebec, also in 1965.
In was not for another two decades, however, that Canadian statutory frameworks were again revised to incorporate the common law concept of the "prudent investor" or the "prudent portfolio" - otherwise known as the prudent person rule - in relation to the allocation and management of pension assets. The following is CCH's synopsis of the precise meaning of this concept as it is embodied in Section 58 of the Pension Benefits Act of New Brunswick (1991):
"The administrator of a pension plan must exercise "care, diligence and skill in the administration of a pension fund that a person of ordinary prudence would exercise in dealing with the property of another person." This is known as the prudent investor rule. If the administrator has professional or specialized skills, then the administrator must apply the relevant knowledge that the administrator possesses or "ought to possess" by reason of his or her profession, business or calling to the management of pension funds.
The rules regarding the prudent investor apply to members of a pension committee or board of trustees that is an administrator.
Where it is prudent and reasonable to do so, the administrator may appoint an agent to assist in the administration and investment of pension funds. If the administrator decides to appoint or employ an agent to assist in the administration of the pension fund, then it is the responsibility of the administrator to personally select the agent and to satisfy his or herself that the agent is suitable to perform the delegaged tasks. Once the agent has been appointed, the administrator must "carry out such supervision of the agent as is prudent and reasonable." The agent so appointed is under the same obligations of the administrator to avoid conflicts of interest, act as a prudent person, and apply the relevant skill and knowledge that a person in their profession ought to possess to their assigned duties. Any person engage in the investment of pension funds must ensure that those funds are invested in accordance with the Pension Benefits Act and regulations."
Comparable wording is found or referenced in legislation in other provinces and the federal Pension Benefits Standards Act.
Source: CCH Canadian, Ltd., Canadian Employment Benefits and Pension Guide, 1998