InfoPensions – Issue 22 – November 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. Plan 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. The next issue of InfoPensions will be available in May 2020.

Basic rate for assessment of pension plans

The Assessment of Pension Plans Regulations require the Superintendent of Financial Institutions to publish annually in the Canada Gazette, Part I, a notice setting out the basic rate that will be applied to the assessment of pension plans in the upcoming fiscal year.

A notice was published in Part I of the Canada Gazette on September 28, 2019, setting out that the basic rate in effect for assessments that are invoiced by OSFI for plan years ending between October 1, 2019 and September 30, 2020 is $10. This basic rate is an increase of $1 from the basic rate that is currently in effect. This results in an increase of $50 to the minimum assessment amount ($450 to $500) and $20,000 to the maximum amount ($180,000 to $200,000) for the 2020-2021 fiscal year.

The Superintendent will determine a pension plan’s assessment after the plan has filed its Application for Registration or its Annual Information Return (AIR). OSFI expects to prepare the invoice approximately 45 days after determining the assessment. For example, if a plan’s AIR is due by June 30, 2020, the plan administrator can expect to receive an invoice in August 2020 even if they have filed the AIR before its due date. For more information, please refer to our notice on Regulations Amending the Assessment of Pension Plan Regulations.

Please refer to the Pension Plan Assessment Rate schedule on our website for more information.

OSFI’s expectations for actuarial reports

OSFI’s expectations included in the Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans (the Guide) relate mostly to legislative requirements, such as the calculation of the average solvency ratio or the use of letters of credit, and to the actuarial assumptions and methods to be used in actuarial reports. These expectations are based on subsections 9(2) and 12(3.1) of the Pension Benefits Standards Act, 1985 (PBSA) that require actuarial reports to be prepared on the basis of actuarial assumptions and methods that are adequate and appropriate, and also in accordance with the standards of practice of the Canadian Institute of Actuaries.

Actuarial reports submitted to OSFI are generally reviewed by the plan’s relationship manager who is a member of OSFI’s Private Pension Plans Division’s (PPPD’s) supervision team. The relationship manager, after reviewing the actuarial report, may refer it to PPPD’s actuarial team for a more detailed review. Note that OSFI does not review all actuarial reports and does not approve actuarial reports, except for plan termination reports. If reviewed, findings and requests for additional information, if any, are then communicated to the actuary and the plan administrator. While disclosure issues are sometimes raised along with more significant issues, they are generally not part of the main focus of our reviews.

When we review an actuarial report, our current approach is to communicate first in writing with the actuary. Most actuaries prefer this approach for initiating communication as it provides them with more context with respect to the issues being raised. OSFI welcomes the opportunity for any discussions, and it is always an option for actuaries to request a conference call to ask questions or request clarifications after having received the letter.

The context is different for plan termination reports, where a conference call is generally offered before we send our letter. This provides an opportunity to discuss specific elements related to the plan termination before OSFI finalizes its review.

In addition to the personalized communication for specific plans, we publish some of the items that often cause concern once a year in the spring edition of InfoPensions. The spring edition also contains items where we feel that greater clarity is required. For example, the items covered in InfoPensions 21 touched on continuous experience losses, unisex mortality assumptions, and transfer and annuity purchase restrictions.

OSFI strives to be transparent, and our expectations are clearly outlined in the Guide, and communicated in InfoPensions, or as required to plans. OSFI values the ongoing dialogue it has with actuaries and our expectations are periodically adjusted based on these communications to better assist actuaries in meeting the requirements set in legislation and in the directives.

Late contributions and communications with plan custodians

As mentioned in the article titled “Late Contributions and Communications with Plan Custodians” in InfoPensions 11, section 9.1 of the Pension Benefits Standards Act, 1985 (PBSA) states that plan administrators must inform the trustee or custodian of the pension fund in writing of all amounts to be remitted to the pension fund. Most plan administrators inform their custodian of these amounts by sending the custodian what is often referred to as a “contribution planner”. This document allows the custodian to compare the money that was remitted to the pension fund with the amounts that were expected.

Subsection 9.1(2) of the PBSA requires that if a payment is not remitted within 30 days of the expected date of remittance, both the plan administrator and the trustee or custodian (if the administrator is the employer) have an obligation to notify the Superintendent of the late remittance issue.

OSFI would like to remind plan administrators that these requirements apply to both defined contribution and defined benefit plans. OSFI may contact a plan custodian when following up with a reported late remittance issue. We may also contact a custodian to confirm amounts remitted as part of OSFI’s normal plan monitoring where we have identified concerns with respect to the pension plan or if a plan had late remittance issues in the past.

To assist all parties in meeting their obligations under the PBSA, OSFI has posted a contribution planner, the Schedule of Expected Contributions Form, on its website. The use of this form is not compulsory and administrators may choose to use another format to notify the trustee or custodian of expected contributions.

Defined contribution pension plan study

In December 2018, OSFI requested information from nearly 900 federally regulated pension plans with defined contribution (DC) provisions and obtained a 55% response rate. Many of the questions related specifically to “member choice account” plans. In accordance with the Pension Benefits Standards Regulations, 1985 (PBSR) a member choice account is an account where the member is permitted to make investment choices. This type of arrangement would typically include a default option should the member not make an investment selection.

While we continue to analyze the data received and intend to share more observations in the future, some preliminary observations on the responses received can be found below:

Default investment option

Our study found that 55% of member choice account plans use a target-date fund as their default investment option, making this type of fund the most popular default option. Target-date funds generally provide a rebalancing feature of the asset allocation that is based on the age or retirement date of the plan member, thus gradually reducing the investment risk over time. 

The second most popular default investment option is a balanced fund, with 25% of plans using this type of fund as their default option. Balanced funds offer a mixture of safety, income and capital appreciation. The typical asset allocation is between 40% and 60% in equities and the remainder in fixed income investments. Unlike the target-date fund, the asset allocation of a balanced fund does not change over time, but rather is rebalanced periodically to maintain the same asset allocation.

The study also revealed that some administrators have chosen a money market fund as the default option for the pension plan. A money market fund would not normally be considered a suitable default option for most members. Plan administrators are reminded that subsections 8(4), 8(4.1) and 8(4.3) of the Pension Benefits Standards Act, 1985 impose a standard of care for administering a pension plan and establish expectations for administrators of member choice account plans. When providing investment options, the administrator must offer investment options of varying degrees of risk and expected return that would allow a reasonable and prudent person to create a portfolio of investments that is adapted to their retirement needs.

When selecting a default option, plan administrators should consider the age and/or risk profile of the plan members, the suitability of the default option, and the costs associated with that option. Costs are an important consideration given that they reduce investment returns.

Number of investment options

Our study revealed that the average number of investment options offered in member choice account plans is 34, and the median number of investment options offered is 22. While the average number of investment options offered may appear high, it is explained by 10% of the plans offering more than 75 options.

As mentioned in the Canadian Association of Pension Supervisory Authorities (CAPSA) Guidelines No. 3 for Capital Accumulation Plans, a DC plan administrator should establish criteria for the periodic review of each of the investment options in the plan. Review of the investment options should be conducted at least annually.

In addition to establishing criteria for reviewing the investment options, we wish to remind DC plan administrators that, as plan fiduciaries, they are responsible for providing investment information and decision-making tools to plan members. Plan administrators should review the number and type of investment options offered to ensure that member education is an achievable goal.

Offering over 75 investment options would seem to be overwhelming for most pension plan members. It would also seem difficult for a plan administrator to conduct a fitting annual review of all of these options in accordance with CAPSA guidance. As part of the analysis behind this study, OSFI will consider what we expect an appropriate level of investment choice to be.  

Administrative fees

Plan administrators should be aware of all costs related to offering a DC plan. While it appears that there is an awareness of investment fund management fees among administrators, the responses and comments received suggest that the amount of administrative fees paid by the plan members and/or by the employer is not well known. 

Plan administrators are encouraged to gain awareness of all fees relating to the plan by inquiring about fees with their service providers.

Plan administrators are also reminded of subsection 7.3(1) of the PBSR, where there is an annual requirement to provide a written statement to member choice account holders which discloses the investment objectives and fees, among other things.

OSFI continues to analyze the responses received and will share more information in a future edition of InfoPensions. Based on the results of the study and risks identified, OSFI will make adjustments to supervisory procedures and changes to external guidance.

Amendments to the Pensions Benefits Standards Act, 1985 in the 2019 Budget Implementation Act

On June 21, 2019, Bill C-97 – An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019 and other measures (the Budget Implementation Act or BIA) received royal assent. The BIA included amendments to the Pension Benefits Standards Act, 1985 (PBSA).

Entitlement Not Affected (Section 17.1)

The BIA introduced an amendment to the PBSA providing for greater certainty that a pension plan cannot provide for a pension benefit or option that is affected when a plan is terminated. This for greater certainty provision communicates the fundamental principle that it is prohibited for a pension plan to provide a pension benefit while the plan is ongoing but not on plan termination. It is OSFI’s view that this amendment is clarifying only and that making entitlement to a specific form of pension benefit specifically contingent on a plan remaining in operation was prohibited under the PBSA prior to the amendment.

The amendment does not impose any new or additional requirements and does not change how OSFI interprets and administers the PBSA. Benefits that were compliant prior to the introduction of section 17.1 should continue to be compliant after it is in force.

Life Annuities (Section 17.2)

The BIA added section 17.2 to the PBSA, allowing the purchase of an immediate or deferred life annuity by the plan administrator to satisfy an obligation under the plan to provide a pension benefit to a former member or survivor. Under the current PBSA, plan administrators are not prohibited from purchasing annuities for a former member or survivor. However, the obligation to provide the pension may remain under the plan in the event the annuity provider were to fail.

Section 17.2 also sets out conditions that must be satisfied in order to take advantage of this provision:

• In the case of an immediate life annuity, payments must be in the same amount and form as the pension benefit to which the former member or survivor would otherwise be entitled under the terms of the pension plan
• In the case of a deferred life annuity, payments must be in the same amount as the pension benefit as well as any related benefit or option to which the former member or survivor would otherwise be entitled under the terms of the pension plan
• The administrator must comply with notice requirements that will be prescribed in regulations
• The annuity purchase must be authorized under the plan text
• If the annuity is purchased from an entity that is not a life company as defined in the Insurance Companies Act, the plan administrator must obtain the Superintendent’s approval of that entity.
• The life annuity must meet the requirements that will be further prescribed in regulations (not yet effective).

A life company as defined in the Insurance Companies Act includes branches of foreign companies licensed in Canada, but it does not include provincially incorporated life insurers.

Section 17.2 grants plans the flexibility to purchase a life annuity for a portion of the pension benefit. In this case, the purchase will only satisfy the obligation under the plan in respect of the applicable portion.

Section 17.2 will come into force on a day to be fixed by order of the Governor in Council, and will also require the implementation of enabling regulations.

Updated returns for regular annual filings

OSFI has made changes to some of its annual regulatory returns applicable to pension plans registered under or having filed an application for registration under the Pension Benefits Standards Act, 1985. The revisions to these returns include changes to remove duplicate or unnecessary data, to streamline the information and ensure consistency across the returns, and to include additional information that will improve OSFI’s supervision of pension plans.

The following returns have been amended:

• Actuarial Information Summary (AIS)
• Solvency Information Return (OSFI 575)
• Annual Information Return (OSFI 49) and its accompanying Schedule A
• Certified Financial Statements (OSFI 60)
• Pension Plan Annual Corporate Certification (PPACC)
• Replicating Portfolio Information Summary (RPIS)

The changes to the AIS and the Solvency Information Return will apply to filings for plan years ending October 31, 2019 and later. The changes to the other listed returns will apply to filings for plan years ending December 31, 2019, and later.

In addition, a new Auditor’s Report Filing Confirmation (ARFC) return has been developed, to be completed by all plans. The return is comprised of four questions that are noted below. This return will allow each plan to confirm whether an Auditor’s Report is required to be filed, and to upload the report if required. A plan is not required to submit an Auditor’s Report if the response to any of the following questions is “Yes”:

• Are all assets of the pension funds held by one insurance company in any type of account?
• Are all assets of the pension fund held in the pooled funds of one trust company?
• Are all assets of the pension fund held by one trust company but not in its pooled funds, and the fair market value of the total assets of the pension fund is less than $5,000,000?
• Is the plan a fully insured plan (i.e. all benefits are paid by means of an annuity or insurance contract)?

All other plans are required to upload an Auditor’s Report to be able to submit their return in RRS.

The accompanying instruction guides will be revised and re-issued on the OSFI website by no later than spring 2020.

Filing amendments through RRS

Subsection 10.1(1) of the Pension Benefits Standards Act, 1985 (PBSA) requires the plan administrator to file with the Superintendent a copy of any amendments to the plan and any amendments to documents that create or support the plan or the plan fund within 60 days after the amendment is made.

As of April 1, 2020, plan administrators will be required to file plan amendments through the Regulatory Reporting System (RRS). In order to file an amendment, administrators will complete and upload in RRS either the OSFI 593: Defined Contribution Pension Plan Text Information Form or the OSFI 594: Defined Benefit/Combination Plan Amendment Information Form and all other relevant documents (e.g. plan amendment, Board resolution, custodial agreement). The forms, as well as guidance on making and filing amendments, are available on the OSFI website in the Guidance by Topic area for defined benefit or defined contribution plans, under the topic Amendments.

However, even after April 1, 2020, amendments requiring the Superintendent’s authorization (e.g. a void amendment under subsection 10.1(2) of the PBSA or an asset transfer under section 10.2 of the PBSA) cannot be submitted via RRS. Documents in support of an application for the Superintendent’s authorization must continue to be submitted electronically to pensions@osfi-bsif.gc.ca.

2019 Pension Industry Forum

On May 28, 2019, OSFI held a Pension Industry Forum in Toronto. The forum provided an opportunity for administrators of federally regulated private pension plans, their advisors, and related service providers to hear from OSFI staff about current issues. Topics covered included OSFI’s 2019-2022 Strategic Plan, the results of OSFI’s 2017 Pension Plans Survey, an update on OSFI’s recent approvals-related guidance, an update on OSFI’s supervision practices and a summary of recent cases regarding the jurisdiction of indigenous pension plans.

OSFI would like to thank everyone who suggested topics prior to the Forum and who attended the event. Your input, engagement, and feedback are much appreciated.

Important dates

Plan administrators are reminded that required 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. One application is sufficient. 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) and Schedule A – Canada Revenue Agency Information Requirements (OSFI 49A)	6 months after plan year end
Pension Plan Annual Corporate Certification (PPACC)	6 months after plan year end
Certified Financial Statements (OSFI 60), Auditor’s Report Filing Confirmation (ARFC) and, if required, an Auditor’s Report	6 months after plan year end
Plan Assessment	Payable upon receipt of the OSFI-issued invoice
Annual Statements to members and former members and their spouses or common-law partners	6 months after plan year end
Plans with Defined Benefit Provisions:
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 Assessment	Payable upon receipt of the OSFI-issued invoice
Annual statements to members and their spouses or common-law partners	February 14 (45 days after the end of the year)