InfoPensions – Issue 21 – May 2019

InfoPensions includes announcements and reminders on matters relevant to federally regulated private pension plans and pooled registered pension plans. It includes descriptions of how the Office of the Superintendent of Financial Institutions (OSFI) applies various provisions of the Pension Benefits Standards Act, 1985, Pooled Registered Pension Plans Act, their regulations, directives and OSFI guidance. Administrators should obtain appropriate professional advice on how the legislation and guidelines affect their particular pension plan.

We invite you to visit the Pension Plans – Main page of OSFI's website where additional pension-related information is available. To receive email notifications of new items posted to OSFI's website, including this newsletter and other pension-related documents, please subscribe using Email Notifications.

If you have any questions about the articles you read in InfoPensions or if you have suggestions for future articles, please contact us at pensions@osfi-bsif.gc.ca.

Pension Industry Forum

OSFI will host its next Pension Industry Forum in Toronto on May 28, 2019. The forum provides an opportunity for administrators of federally regulated private pension plans, their advisors, and related service providers to hear from OSFI about current issues.

Topics covered will include OSFI's supervision of pension plans, recent pension litigation related to federally registered pension plans, and policy initiatives for the Pension Benefits Standards Act, 1985 and Pooled Registered Pension Plans Act.

If you would like to attend but did not receive an invitation, please contact jessica.resch@osfi-bsif.gc.ca. Please note that seating is limited.

Targeted review of pension plans with defined contribution provisions

In December 2018, OSFI initiated a targeted review of all federally regulated pension plans with defined contribution (DC) provisions. We requested administrators of these plans to complete a questionnaire that collected information about plan fees, the default investment option and the number and type of investment options offered to members. The purpose of this review is to determine whether enhancements are required to our risk-based approach to the supervision of pension plans with DC provisions.

We requested information from 891 pension plans and we are currently analysing the information received. We thank respondents very much for their cooperation and we expect to provide our conclusions in the fall 2019 edition of InfoPensions.

Amendments to Assessment of Pension Plans Regulations

Regulations Amending the Assessment of Pension Plans Regulations (the Regulations) made under the OSFI Act were published in Part II of the Canada Gazette on March 6, 2019. The amendments came into force on April 1, 2019.

As previously communicated to administrators by email and as described in the last issue of InfoPensions (Nov 2018), the amendments streamline the assessment process and eliminate assessments for certain terminated pension plans.

OSFI-issued invoice instead of self-assessment form: The amendments enable the Superintendent to determine a pension plan's assessment after the plan has filed its Annual Information Return (AIR). OSFI will determine the assessment due and send an invoice to all plans with AIRs that were due to be filed on or after April 1, 2019. Plans that have filed an Application for Registration will also receive an invoice from OSFI if the application is filed on or after April 1, 2019.

The due date of the AIR will trigger the determination of the assessment and administrators can expect to receive the invoice approximately 45 days after the AIR was due to be filed. For example, if a plan's AIR is due by June 30, 2019, the administrator can expect to receive an invoice in August 2019 (even if the AIR was filed before its due date).

Elimination of assessments for certain terminated pension plans: The amendments specify that there is no assessment to be paid by the plan in the following two scenarios:

• The plan has been terminated for five or more pension plan years
• The plan is underfunded on the termination date and either the plan is a negotiated contribution plan (a multi-employer plan with employer contributions limited to an amount determined by an agreement) or the employer for the plan is bankrupt or insolvent for the purposes of the Bankruptcy and Insolvency Act, or undergoing proceedings under the Companies' Creditors Arrangements Act.

Clarification to the definition of beneficiary: The amendments clarify that members, survivors or any other persons who chose to transfer their pension benefit out of the pension plan before or after plan termination are not included as beneficiaries (which means that they are not considered for purposes of the assessment calculation). The amendments also clarify that any person for whom the administrator has purchased an immediate or deferred annuity as part of the wind-up of a terminated plan is not considered a beneficiary for purposes of the assessment calculation.

Pension plan governance guidelines

As a member of the Canadian Association of Pension Supervisory Authorities (CAPSA), OSFI encourages administrators to follow CAPSA's Guideline No. 4: Pension Plan Governance Guideline and Self-Assessment Questionnaire (CAPSA Governance Guideline). The CAPSA Governance Guideline provides a broad outline of good governance principles and assistance on establishing and maintaining best governance practices.

OSFI's Guideline for Governance of Federally Regulated Pension Plans issued in 1998 had been maintained on the OSFI website as a potential reference document; however after a recent review of its contents, it has now been removed. It was determined that the CAPSA Governance Guideline and other OSFI guidance material, such as the Risk Assessment Framework, reflected OSFI's up-to-date expectations for administrators for the governance of pension plans.

OSFI supervisory observations

Examinations

OSFI conducts examinations of a select number of pension plans each year (see InfoPensions 18). Desk reviews and on-site examinations performed in 2018 revealed some recurring areas of concern that resulted in similar recommendations for the plans examined. The areas of concern included the following:

1. Member statements did not contain all required information

   Some member statements (i.e. annual member statements and statements on, cessation of membership, death and retirement) did not contain all of the information required by the Pension Benefits Standards Regulations, 1985 (PBSR).

   The information that administrators must include in member statements on cessation of membership, death and retirement must be given in the prescribed forms found in Schedule IV of the PSBR. Please refer to InfoPensions 12 for an explanation of acceptable variances from a prescribed form. The annual member statement does not have a prescribed form but the information required to be provided in the statement is set out in subsections 23(1) of the PBSR. Variances similar to those described in InfoPensions 12 would generally be permitted.

2. Governance documents are not sufficiently detailed and no governance self-assessments are completed

   Some plans did not have comprehensive written documentation regarding the roles, responsibilities and accountabilities of those involved in the plan administration. Additionally, not all administrators were performing periodic self-assessments to determine the effectiveness of the administration of their plans.

   We understand that, depending on the size and type of the plan, governance documents and self-assessments may vary. Although OSFI does not require administrators to use a specific type of governance model or self-assessment technique, the Canadian Association of Pension Supervisory Authorities' Guideline No. 4: Pension Plan Governance and the Self-Assessment Questionnaire are recommended resources to help administrators meet their governance responsibilities.

Actuarial Reports

Actuarial reports submitted to OSFI are generally reviewed by the relationship manager in the Private Pension Plans Division assigned to the plan, and may be referred to the actuarial team for a more detailed review.

The Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans sets out the reporting requirements for actuarial reports filed with OSFI. Based on the Canadian Institute of Actuaries (CIA) Standards of Practice, we expect plan actuaries to provide sufficient details in their actuarial report to enable another actuary to assess the reasonableness of the data, assumptions and methods used.

We would like to remind plan actuaries of OSFI's expectations relating to the following items that often cause concern in the actuarial reports that we review in more detail:

1. Going concern valuation – Continuous experience losses

OSFI expects actuarial assumptions to be best estimates reflecting future expectations while taking into account pertinent observable experience and plan characteristics. A set of actuarial assumptions should be appropriate in aggregate for the purpose of the valuation as well as independently reasonable.

The financial position of the pension plan on a solvency basis should not affect the selection of going concern assumptions, as each valuation basis is independent. Assumptions should not be based on facts that are unrelated to the expected experience of the plan with respect to the relevant assumption.

OSFI considers that consistent and material experience losses from year to year that relate to a given assumption would generally indicate that it might not be appropriate. Where a plan experiences continuous losses from year to year with respect to a particular assumption, OSFI expects the actuary to address the losses in the actuarial report by reviewing the assumption and related assumptions to ensure that they remain appropriate.

For example, where a plan experiences continuous losses attributed to termination of employment prior to retirement or death of the member, OSFI expects the actuary to review the assumed withdrawal rates, commuted value take-up rates, and the interest rates and mortality rates used in the determination of the commuted value, as applicable.

2. Going concern and solvency valuations – Unisex mortality assumption

An administrator or the provisions of the pension plan may require the actuary to calculate a pension benefit credit using mortality rates that do not vary according to the sex of the member. Where a unisex mortality table is used for the going concern or solvency valuations, the actuarial report should explain, using supporting data, how the mortality basis was derived. OSFI expects the actuarial report to state that total liabilities for members for which a unisex mortality table was used would have resulted in the same total liabilities had sex-distinct mortality been used. Such a statement confirms that the mortality blend used is a best estimate assumption.

For benefits expected to be settled by a commuted value transfer, the mortality table should be determined according to the CIA Standards of Practice. The Standards of Practice state that separate mortality rates should be used for male and female members, but allow for commuted values that do not vary according to sex in specified situations, where the actuary may use a mortality table based on a blend of the sex-distinct tables or a weighted average of the commuted values based on the sex-distinct tables. The weights should be appropriate for the pension plan.

The mortality assumption to be used to value benefits expected to be settled by the purchase of an annuity is provided in CIA Guidance.

While the administrator may choose to do so, the PBSA does not require the use of unisex mortality rates in the calculation of a pension benefit credit for a portability transfer. Subsection 27(3) of the PBSA states that "Notwithstanding subsection (1), amounts transferred pursuant to section 26 may vary according to the sex of the member if the variation is such that the pension benefit payable at pensionable age, based on the amount so transferred, does not vary materially according to the sex of the member."

3. Transfer and annuity purchase restrictions

a) Transfer deficiencies

Where the solvency ratio is less than one restrictions are placed on the transfer of pension benefit credits, which may affect the portability of benefits and result in additional funding requirements in accordance with the Directives of the Superintendent pursuant to the Pension Benefits Standards Act, 1985.

The full value of the pension benefit credit may be transferred where an amount equal to the transfer deficiency has been remitted to the fund. The full value may also be transferred if the transfer deficiency for any individual transfer is less than 5% of the Year's Maximum Pensionable Earnings for that year, provided that the aggregate value of all such transfer deficiencies transferred since the effective date of the most recent actuarial report does not exceed 5% of the assets of the plan at that date.

Transfer deficiency payments to the fund are not considered special payments because they do not improve the plan's solvency ratio. They restore the solvency ratio of the plan to its level prior to the payout of the commuted value to the member. Therefore, transfer deficiency payments to the fund should not be included in the present value of special payments for the purpose of calculating the average solvency ratio.

In cases where the member's full pension benefit credit has not been transferred, the transfer deficiency must be transferred no later than five years from the date of determination of the pension benefit credit. Transfer deficiency payments are not required to be remitted to the fund under this scenario since they are implicitly included in special payments made after the date of determination of the pension benefit credit. The transfer deficiency must be transferred before the end of that five-year period if the solvency ratio is determined to be at least one.

OSFI expects all aspects of the restrictions that may apply to the transfer of pension benefit credits, which may affect the portability of benefits and result in additional funding requirements, to be discussed in the actuarial report. The amount of transfer deficiencies owed to members should be disclosed in the actuarial report as a separate item in the balance sheet or in a note to the balance sheet.

b) Purchase of annuities

Some pension plans use immediate and deferred annuities (buy-out annuities) and buy-in annuity products to limit the plan's exposure to various risks related to retiree liabilities.

Funding requirements are not impacted if the solvency ratio following the purchase of an immediate or deferred annuity remains at 0.85 or above. Where the purchase reduces the solvency ratio of the plan below this level or where the solvency ratio of the plan in the most recent actuarial report is below this level, additional contributions may be required. An amount must be paid to the pension fund to maintain the solvency ratio following the purchase of an immediate or deferred annuity at the lesser of 0.85 and the solvency ratio of the plan set out in the most recent actuarial report. The solvency assets and liabilities that are attributable to benefits that are paid by means of immediate or deferred annuities should be excluded for purposes of calculating the plan's solvency ratio.

Buy-in annuities are not considered immediate or deferred annuities but are rather considered investments of the plan. Buy-in annuities are not subject to the restrictions noted above for immediate or deferred annuities.

OSFI expects assets and liabilities with respect to buy-in annuities to be included and shown separately in the going concern and solvency balance sheets. Information on the valuation approach to be used for buy-in annuities is included in the guidance published by OSFI on Buy-in Annuity Products.

No OSFI approval of amendments or actuarial reports

We would like to remind administrators that under the Pension Benefits Standards Act, 1985 (PBSA), OSFI does not register or approve pension plan amendments other than amendments that reduce accrued benefits. Such amendments are void unless authorized by the Superintendent. As required by subsection 10.1(1) of the PBSA, administrators must file a plan amendment within 60 days after it is made. This requirement includes amendments to the plan text and any document that creates or supports the plan or the pension fund. OSFI relies on the administrator's declaration of compliance made in the plan amendment information form¹ that must accompany every amendment. However, the relationship manager in the Private Pension Plans Division (PPPD) assigned to the plan will contact the administrator if an issue with plan documents is discovered during ongoing monitoring activities.

Similarly, OSFI does not approve annual or triennial actuarial reports. The actuarial team in PPPD does however review a select number of actuarial reports each year. These reviews may be either a full review of the actuarial report or a targeted review where the relationship manager has requested that specific issues in the actuarial report be reviewed. PPPD will contact the plan's actuary and the administrator if there are any concerns identified during a review.

¹ OSFI 594 (Defined benefit plans) and OSFI 593 (Defined contribution plans)

Estimated solvency ratio results

OSFI regularly estimates the solvency ratio for pension plans with defined benefit provisions. The Estimated Solvency Ratio (ESR) results help us identify any solvency issues that could affect the security of members' promised pension benefits, before a plan files their actuarial report. The ESR results also help identify broader trends.

The ESR results are calculated using the most recent actuarial, financial and membership information filed with OSFI for each plan before the analysis date. Assets are projected based on either the rate of return provided on the Solvency Information Return or an assumed rate of return for the plan. Solvency liabilities are projected using relevant Canadian Institute of Actuaries' commuted value and annuity proxy rates. Expected contributions, benefit payments, and expenses are taken into account and an ESR, based on the estimated adjusted market value of the fund, is then calculated for each plan.

The median ESR for all 361 plans was 0.94 as at December 31, 2018, down from 0.96 at the end of 2017. The liability-weighted average ESR for all plans was 0.98 as at December 31, 2018, down from 1.02 at the end of 2017. The graph below shows the current and previous ESRs and median ESRs dating back to December 2009.

The bar graph below illustrates the distribution of the ESR results for federal pension plans with defined benefit provisions as at December 31 of each year since 2009. It shows the percentage of plans with ESRs below 0.80, between 0.80 and 0.90, between 0.90 and 1.00, and over 1.00 in each year. The most recent ESR results indicated that 74% of defined benefit plans were underfunded as at December 31, 2018, up from 63% at the end of 2017. In addition, there has been an increase of the number of plans that are more significantly underfunded (ESRs below 0.80), from 13% at the end of 2017 to 16% at the end of 2018.

Recently posted on OSFI’s website

• In May 2019, OSFI issued a revised instruction guide for Amendments Reducing Benefits in Defined Benefit Pension Plans and accompanying Authorization Request Form for Amendments Reducing Benefits replacing the July 2012 versions. The revisions to the instruction guide include clearer information for multi-jurisdictional plans and negotiated contribution plans. The revisions to the form include enhanced reporting on the members, former members and other persons entitled to benefits under the plan that are affected by the amendment. The revised instruction guide was issued in draft form so that stakeholders have the opportunity to provide input on these changes. Please see the memo to stakeholders for further information on the proposed revisions and consultation process.

Canadian Association of Pension Supervisory Authorities recent publications

OSFI is a member of the Canadian Association of Pension Supervisory Authorities (CAPSA), a national association of pension regulators whose mission is to facilitate an efficient and effective pension regulatory system in Canada. The following is a list of publications recently posted on the CAPSA website:

• Guideline No.2 – Electronic Communication in the Pension Industry
  (replaces February 2002 version)
• Solvency hypothetical wind-up liabilities based on actual life insurance company annuity quotation
• Recommendations - Funding of Benefits for Plans Other than Defined Contribution Plans
• Communique - Review of Leverage use within Pension Plans
• Guideline No.8: Defined Contribution Pension Plans Guideline
  (replaces March 2014 version)
• Guideline No.9: Searching for Un-locatable Members of a Pension Plan

Important reminders and dates

Annual filings must be filed using the Regulatory Reporting System (RRS).

Documents submitted in support of an application that requires the Superintendent's authorization should be submitted electronically at pensions@osfi-bsif.gc.ca. There is no need to mail a hard copy of the application in addition to the electronic one.

Under the Pension Benefits Standards Act, 1985:

Action or Required Filing	Deadline
All Plans:
Annual Information Return (OSFI 49)	6 months after plan year end
Pension Plan Annual Corporate Certification (PPACC)	6 months after plan year end
Certified Financial Statements (OSFI 60) and, if required, an Auditor's Report	6 months after plan year end
Plan Assessments OSFI sends an assessment invoice based on the number of members and other beneficiaries (i.e. the "Grand Total" in the OSFI 49) as at the end of the preceding plan year.	Payable upon receipt of the invoice
Annual Statements to members and former members and spouses or common-law partners	6 months after plan year end
Defined Benefit Plans Only:
Actuarial Report and Actuarial Information Summary and, if required, Replicating Portfolio Information Summary	6 months after plan year end
Solvency Information Return (OSFI 575)	The later of 45 days after the plan year end or February 15

Under the Pooled Registered Pension Plans Act:

Action or Required Filing	Deadline
Pooled Registered Pension Plan Annual Information Return (includes financial statements)	April 30 (4 months after the end of the year to which the document relates)
Pension Plan Annual Corporate Certification (PPACC)	April 30 (4 months after the end of the year)
Plan Assessments OSFI sends an assessment invoice based on the total number of members (including survivors that hold an account) as at the end of the preceding calendar year.	Payable upon receipt of the invoice
Annual statements to members and their spouses or common-law partners	February 14 (45 days after the end of the year)