Office of the Superintendent of Financial Institutions
Financial Services Regulatory Authority of Ontario (FSRA) and the
Office of the Superintendent of Financial Institutions (OSFI) established the Technical Advisory Committee on Defined Contributions plans (the Committee). The Committee was established to review the approaches of both regulators to supervising Defined Contributions (DC) plans and where possible find opportunities for regulatory improvement and harmonization. Through this collaboration, FSRA and OSFI worked with the Committee towards improving outcomes for plan members. The Committee also focused on enhancing regulatory efficiency and effectiveness for DC plans.
The Committee met six times with the following outcomes and recommendations:
October 7, 2021
The Technical Advisory Committee for the Review of Defined Contribution Plans (the “Committee”) is a collaboration between the Office of the Superintendent of Financial Institutions and the Financial Services Regulatory Authority of Ontario. The Committee is comprised of representatives from a cross section of the DC pension plan sector: plan administrators, unions, retirees, industry associations, advisors/consultants and insurance companies.
As part of its deliberations, the Committee arrived at the following recommendations for regulatory guidance to improve the outcomes of DC pension plans. In light of the wide acceptance of the Guidelines for Capital Accumulation Plans (the “CAP Guidelines”) of the Joint Forum of Financial Market Regulators, the Committee recommended putting forward its recommendations to the Canadian Association of Pension Supervisory Authorities (“CAPSA”) as a way to continue to support harmonization across Canada, improved regulatory efficiency and education of plan administrators/sponsors.
While this document reflects the overall view of the Committee, it may not in each instance reflect the view of a particular Committee member. Nonetheless, the recommendations reflect the practices and views of many leading plans and service providers, most of which have pan-Canadian scope.
Information about the Committee, including its members, summary of outcomes and meeting summaries, can be found on the websites of
Note: While these recommendations arose in the course of the Committee’s deliberations on DC pension plans, they may also benefit the operation of other CAP plans. Except as otherwise specified or unless the context requires otherwise, (i) the recommendations should be read as having general application to all forms of CAP plans, and (ii) the term “administrator” refers to the administrator of a DC pension plan (usually the employer) and the term “sponsor” refers to the entity (usually the employer) establishing a CAP plan other than a DC pension plan.
While the Guideline already includes guidance about defining the purpose of a CAP plan, it needs to go further in making this concept more resonant in plan governance activities.
Having a clear understanding of purpose in terms of member outcomes, within the parameters of the plan’s contribution formula, provides a framework for making decisions and evaluating effectiveness. A focus on outcomes provides clarity for prioritizing decisions with the greatest impact on outcomes, e.g., (i) participation in a plan, (ii) early and greater contributions, and 3) appropriate investment selection. A focus on outcomes can highlight the benefits of automatic plan features, such as enrolment and escalation, and simplified investment decisions. Attention to outcomes can serve to differentiate the characteristics of different CAP plans and assist plan sponsors in choosing the CAP plan or combination of CAP plans most suitable for the intended member outcomes.Footnote 2
For DC plans, defining purpose in terms of retirement income can shift focus from savings to income, e.g., to considering the kind of lifetime income that could be produced from savings or creating awareness about the kinds of savings needed to generate specific retirement incomes.
While the Guideline should continue to be clear that members bear responsibility for making informed decisions, it should be updated to include additional guidance for addressing the challenges of enhancing member engagement.
By shifting focus to how information is provided, the Guideline can lead to more effective member engagement practices, which in turn can lead to better plan-member decisions and outcomes. In DC pension plans, the onus often rests on members to take a number of actions, both during and after employment, for the plan to deliver its intended outcome (e.g., whether to join the plan, how much to contributeFootnote 4, investment selection and asset allocation over different life stages, reviewing retirement scenarios and income projections, and how to draw down savings in retirement). However, varying levels of financial literacy and interest, financial capacity to save and ability to access plan information, create challenges for members in engaging with their plans and making informed decisions Footnote 5. Assessing the need for and effectiveness of member engagement practices can often be difficult in practice but tying engagement practices to the intended outcomes is a way to start.
The Guideline should provide more specific guidance into appropriate default fund selections and investment line-up design principles.
Investment line-up practices have evolved since the CAP Guidelines were first introduced, including as result of innovations in fund design (e.g., target date/risk funds and other fund-of-fund designs). The default option can be suitable as the core, if not all, of a member’s investments, not just in the context of an absence of member choice. Considerations of investment complexity, behavioural economics and minimizing administrator governance burden favour designs anchored by the default investment option with a small number of additional options added to allow customization by members. The Guideline could serve to make administrators, sponsors and their advisors aware of the risks to their standard of care in providing too many options.
The Guideline should make clear that administrators and sponsors of all CAPs are expected to adhere to common standards of governance and responsibility to plan members regardless of the regulatory regime applicable to the plan.
For non-pension CAP plans (RRSPs etc.), it is believed a degree of uncertainty exists in the broader CAP plan sector about the responsibilities and standards of care of sponsors in administering CAPs. This may contribute to a perception that non-pension CAPs are subject to significantly less onerous governance responsibilities and obligations – despite often having a similar structure and set of administrative decisions as DC pension plans. The same factors that inform the common law fiduciary duty within DC pension plan administration may similarly lead a court to find such a duty in non-pension CAP administration.Footnote 7 To support the continuous improvement and development of industry practices, the Guideline should explicitly set an expectation of common standards for all CAPs, regardless of the regulatory regime under which the plan operates.
While it is often advisable for plans to retain service providers, this practice can sometimes have the unintended consequence of disengaging administrators/sponsors from the administration of their plans. A practical, easy-to-use checklist can perform the work of distilling the CAP guidelines into best practices and efficiently focusing administrator/sponsor attention on the key activities and considerations for on-going plan governance.
The Guideline should highlight the importance of aiming to achieve value for money when making administration and investment decisions.
CAP plans can assist members in achieving the intended retirement outcomes by pooling administrative and investment expenses; in this way, CAP plans can provide value relative to individual savings and investment vehicles. Low costs are important but so too are the services and investment strategies that can lead to better overall member outcomes given the unique characteristics and needs of each plan membership, which leads to a focus on value for money.
Administrators/sponsors, in meeting their standard of care, are in a position to ask questions to obtain the information needed for informed decision-making and understanding the tangible benefits to members of the fees paid. It is believed there exists among administrators and sponsors a relatively low level of awareness of the main categories of fees payable by plans.
Members have different information needs in that they are not selecting services and service providers as administrators/sponsors. While the current CAP Guidelines provide guidance on describing member-borne fees and expenses to members, the Guideline could emphasize the importance of clearly explaining this information so that members can understand the value of their plan. This information can be particularly relevant when comparing in-plan savings opportunities relative to other opportunities, such as can be the case if a plan offers decumulation options or the ability to transfer-in assets from outside the plan (e.g., additional voluntary contributions for a DC pension plan or combining other RRSP or TFSA savings). Unnecessary detail when communicating to members, such as a breakdown of fees relative to different services, should however be avoided, consistent with the current CAP Guideline about the aggregation of fees.
CAPSA should consider the outcomes of its decumulation committee and what guidance or action may be useful for plan administrators / sponsors to help support members in the decumulation phase. CAPSA should consider if sponsors and administrators would benefit from guidance on how decumulation options and practices should be communicated to members and / or encouraging in-plan decumulation options to be offered.
The Committee was clear that effective decumulation options are critical to producing the intended outcomes of DC pension plans. In leaving their DC pension plan, many members are faced with making new kinds of investment choices for which they may not have any prior experience. Plans should consider the needs of members for making informed decisions as they enter the decumulation phase and begin to drawdown income. These needs include understanding longevity issues, such as sequencing risk,Footnote 9 and being informed of strategies for dealing with such issues. Member needs also include understanding the different investment options available, the importance of fees, and that fees can vary depending on the investment option and may be higher (and have more of an impact) on a retail basis than under their plan.
For registration of a pension plan under the Income Tax Act, a condition is that “the primary purpose of the plan is to provide periodic payments to individuals after retirement and until death in respect of their service as employees” (section 8502(a) Income Tax Regulations).
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Committee members noted that assets tended to be stickier in DC pension plans than in other kinds of CAP plans, likely due to the locking-in rules of pension legislation.
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Committee members noted the relatively high degree of trust between plan members and the plan sponsor can be valuable when seeking to engage members. Incorporating the plan sponsor into the plan member communication activities of a third-party service provider – e.g., by having the sponsor introduce and support communications – can be an effective tactic to engage members.
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The option for members to decide how much to contribute, including whether and what level of matching employer contributions there will be and whether additional voluntary contributions are permitted, is determined by plan design. In plans where members are collectively bargained, contribution amounts and other design features may be negotiated through collective agreements.
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International pension activity, commentary and research highlight issues of DC member engagement. For instance,
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CAPSA’s Guideline No. 4 and related Self-Assessment Questionnaire and FAQs provide useful guidance but also reflect a DB orientation. A separate checklist for CAP plans would be beneficial as it could be streamlined to focus on the decisions specific to CAP plans.
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Depending on the circumstances of a particular plan, these factors could include the discretionary authority of sponsors to make decisions on behalf of members (e.g., in respect of service providers, fees, investment options and governance practices), the financial importance of these decisions to members, the varying levels of financial literacy among members, the imbalance between sponsors and members in their ability to access information from service providers and investment managers, and the reliance and expectation of trust by members (including by virtue of the employment relationship) on plan sponsors.
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While CAPSA’s Guideline No. 8 raises the consideration of the impact of fees on return, the importance of this consideration for all kinds of CAP plans and the relative prominence of the CAP Guidelines warrant the inclusion of this consideration in the CAP Guidelines.
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Sequencing risk can be defined as follows: “Most retirement planning tools use average return assumptions. They do not demonstrate the uncertainty or risk produced by the random nature of the annual returns that make up the average. This is called sequencing risk. Where regular withdrawals are taken, below average or negative returns early in the sequence have a reverse compounding effect. Unless spending is reduced or stopped, this can cause the CAP balance to become depleted more quickly than projections based on the average return would suggest.” ACPM,
Decumulation, The Next Critical Frontier: Improvements for Defined Contribution and Capital Accumulation Plans (March 27, 2017).
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