Office of the Superintendent of Financial Institutions
The Office of the Superintendent of Financial Institutions (OSFI) is issuing the final version of the instruction guide for the
Authorization of Amendments Reducing Benefits in Defined Benefit Pension Plans (the Instruction Guide). The Instruction Guide sets out the applicable filing requirements, as well as the principles and considerations that OSFI takes into account with respect to an application seeking authorization for an amendment with respect to paragraph 10.1(2)(a) of the PBSA.
OSFI issued a revised draft Instruction Guide and the accompanying
Application form for consultation in 2019. OSFI has carefully reviewed all comments received and has presented them in the annex which also includes how OSFI has addressed them.
Questions and comments concerning any of OSFI’s requirements or expectations set out in the Instruction Guide may be sent to
Regulatory Affairs and Strategic Policy
Several groups and individuals were concerned that the draft revisions could allow a defined benefit plan to become a target benefit plan.
The concern focused on the similarity of some wording used in the revised Instruction Guide to that used in Bill C-27 (the October 2016 Bill to amend the
Pension Benefits Standards Act, 1985 (PBSA) to provide a framework for the establishment of target benefit plans at the federal level).
The draft revisions were not intended in any way to imply that a plan could introduce target benefits by way of a plan amendment.
Changes have been made to three sections of the Instruction Guide to address the concern:
Introduction: Added language to confirm that while the PBSA has always provided that the Superintendent can authorize an amendment that reduces an accrued benefit, target benefits, as proposed under Bill C-27, are not permitted under the PBSA.
What Constitutes a Reducing Amendment: Clarified language regarding an amendment that replaces a consumer price index (CPI) indexed pension with a fixed level indexed benefit. We believe our use of the word “could” in that context created the concern here. See notes below on Section 2 for more details.
General Principles and Considerations: Added a general principle to confirm that OSFI would not authorize an amendment that had the effect of creating a target benefit plan.
OSFI should not always require evidence of financial need in order to use its authority to allow a Reducing Amendment. OSFI should consider the wider context within which the Reducing Amendment is occurring (for example an amendment that addresses a benefit design that is expensive or impossible to replicate through an annuity purchase).
OSFI considers financial need to be the main reason for a Reducing Amendment. If a different scenario would somehow benefit members or beneficiaries, OSFI could consider authorizing the Reducing Amendment. However, encouraging annuity purchases would likely not meet OSFI’s criteria for authorization.
No changes made to reflect this proposal.
It is important that the reference to the DPPWS be re-included or an explanation be given of how the Instruction Guide would function alongside the DPPWS.
The DPPWS provides an alternative means of funding relief to plan sponsors without requiring the reduction of accrued benefits.
The draft revisions had deleted a sentence from the Introduction reminding readers of potential scheduling issues for any Reducing Amendment that was part of a DPPWS.
Added a more meaningful reference to the DPPWS to the General Principles and Considerations section. Note, however, that although the DPPWS does provide an alternative approach to funding relief, that process might also result in a Reducing Amendment.
OSFI should remove the language referring to amendments that could affect indexing paid on accrued benefits to allow the Superintendent the flexibility to determine whether an alternative form of indexing is acceptable.
As it may be possible to replicate the aggregate commuted value of CPI-based indexation through a plan amendment providing an alternative indexation formula or approach, OSFI should not automatically consider such an amendment a reducing amendment. For example, in circumstances where a plan termination and annuitization of pension benefits is unavoidable, such as the insolvency of the employer, indexed annuities reflecting CPI-based increases may be difficult and prohibitively expensive to obtain.
To automatically apply paragraph 10.1(2)(a) regardless of how generous the alternative form of indexing proposed may be would unduly burden the administrator by requiring their compliance with the Instruction Guide’s application requirements.
OSFI should take the view that substituting fixed rate indexation of an equivalent value to CPI-based indexation is not a Reducing Amendment because CPI-based indexed annuities are unattractive to insurers and deters annuity purchases.
OSFI’s position that an amendment replacing CPI-based indexation with fixed rate indexation is a Reducing Amendment is long-standing. OSFI included this position in the draft revisions to the Instruction Guide for added transparency. This position does not prevent the administrator from seeking the authorization for the amendment from the Superintendent.
The PBSA protects the value of the accrued pension benefit (i.e., the pension benefit credit) as well as the pension benefit itself (i.e., the periodic amount to which the individual is or may become entitled to). The fact that a future CPI rate higher than the fixed rate would result in a lower periodic payment is why OSFI presumes such an amendment to be a Reducing Amendment.
It may be possible to replicate the aggregate commuted value of benefit payments; however, the PBSA does not define pension benefits in terms of aggregate value as other pension legislation may. We therefore do not feel this is a basis for accepting that such an amendment is not a Reducing Amendment.
The PBSA permits annuity purchases when a plan administrator decides that such an annuity purchase is appropriate for their plan. OSFI does not encourage or discourage their use. While CPI-based indexed annuities may be costly and not always readily available, their availability or lack thereof is not an appropriate basis upon which to assess what constitutes a Reducing Amendment for the purposes of the PBSA.
Without a legislative change to allow alternative forms of indexing as proposed, OSFI will continue to view the replacement of CPI-based indexing with a fixed rate alternative as a Reducing Amendment. As noted earlier, this position does not prevent a plan administrator from making a request to the Superintendent to authorize such an amendment if they feel it is justified.
Changes made to this section to address other concerns (see notes below), but no changes made to reflect this proposal.
The language in subsection 10.1(2) does not capture an amendment that merely “could” reduce an accrued pension benefit at some point in the future rather than “would”.
Paragraph 10.1(2)(a) protects pension benefits accrued before the date of the amendment. This implies that the effect of the amendment is ascertainable on the date of the amendment. An amendment dealing with a benefit that is conditional or contingent on future unknowable factors such as CPI, that does not reduce a member's pension benefit credit, should not be considered a reducing amendment.
See the Ontario Financial Services Tribunal decision
McGrath v Ontario (Superintendent Financial Services) 2010 ONFST 5, and a decision of the New Brunswick Superintendent of Pensions regarding The Co-op Atlantic Employees’ Pension Plan.
OSFI’s position is that the accrued benefit is a benefit indexed to CPI and this is ascertainable on the date of the amendment.
Since specific future CPI rates are not known on the date of the amendment, it similarly cannot be known whether fixed rate indexing would always be equal to or higher than CPI at each time it is to be applied. OSFI’s position presumes that in at least one year, the fixed rate will be less than CPI.
The Ontario tribunal decision and the decision of the New Brunswick Superintendent are both based on provincial pension legislation that differs from the PBSA in terms of language regarding accrued pension benefits and the powers of the Superintendent to accept a different method of calculating indexation.
The description of a Reducing Amendment includes the scenario of an amendment that reduces or
could reduce an accrued benefit – this description resembles target benefit plan language too closely and allows benefits to be changed such that they may be reduced in the future, a feature of target benefit plans.
The addition of the words “or could reduce an accrued benefit” was intended to capture amendments that changed certain indexing formulas – see comments above. It was not meant to
allow for amendments that would permit future reductions not subject to the authorization of the Superintendent.
Clarified the intention and added language in the General Principles and Considerations section to confirm that OSFI would not authorize an amendment that contemplated further possible reductions of accrued benefits.
OSFI should limit the scenario for an amendment that “could” reduce an accrued benefit to indexation and clarify the intent.
See comments above.
Changes made to reflect this proposal.
The phrase "the employer or administrator should consider the interests of all affected groups… and apply its discretion in an even-handed manner in deciding on reductions that may apply to each of the affected groups" could be interpreted as suggesting that any benefit reduction should be applied equally to all affected groups.
In addition, acting in an even-handed manner is a fiduciary concept. In the case of an amendment made by the plan sponsor to a single-employer plan, the sponsor may be subject only to a duty of good faith rather than fiduciary duties.
OSFI should remove the reference to acting in an even-handed manner, especially when differentiating between negotiated contribution plans and single employer pension plans.
Although plan administrators are always held to a fiduciary standard, OSFI would not necessarily expect an employer or administrator to apply a benefit reduction equally to all affected groups. We expect a plan administrator to take the particular circumstances of the plan into consideration in making any amendment, and design amendments to take into account the interests of all affected groups.
Removed the reference to applying discretion in an even-handed manner.
The description of duties and new references to "employer" do not reflect the legal nature and the distinct roles of the employer and administrator.
OSFI added the references to employer to some of the General Principles and Considerations to reflect the fact that, in many plans, the employer puts forward the amendment. We believe the references to employers or administrators are appropriate.
The Instruction Guide indicates that OSFI expects written agreement to a Reducing Amendment by "anyone" whose pension benefit is affected.
There are some situations where having less than unanimous consent of members affected by a Reducing Amendment may be appropriate. For instance, where: (i) there are unlocatable members; (ii) some members are incapable of consenting due to capacity issues; (iii) some affected members refuse to consent in order to obtain leverage against an employer; or (iv) in an insolvency where a Court is supervising a restructuring process.
Wording changed to clarify that the Superintendent will consider the level of agreement to the Reducing Amendment from the affected parties along with all other relevant factors when deciding whether to authorize the amendment or not.
The change from unanimous agreement to agreement of individual plan members or agreement of a bargaining agent on behalf of a unionized member reflects the intent in Bill C-27 that was strongly opposed by many groups.
This individual agreement places undue stress on retirees and survivors and allows former employers to exert pressure on each retiree to agree to changes.
Individual agreement could allow for coercion of these individuals.
The change in the agreement mechanism would lead to labour strife, as employers would be motivated to offload their pension risks by achieving consent through labour disruption.
The proposed changes do not respect the concept of informed consent.
It is not clear whether these changes mean that if a retiree or survivor does not opt for the changes, whether or not their pension could be changed.
In the situation where a plan administrator does not have the authority to make a Reducing Amendment, and agreement is being sought from those affected, anyone who is being asked to agree to a Reducing Amendment must be given the opportunity to express any concerns to the Superintendent with the way agreement is being sought.
Added language to the Instruction Guide to emphasize the obligation on the plan administrator to inform anyone being asked to agree to a Reducing Amendment of this opportunity.
Added wording to clarify that OSFI would not consider a union to represent deferred members and retirees even if they are still members of that union.
Added language to sections 3.2 and 3.4 to specify that the notice to affected persons must specify that they are able to make representations to the Superintendent about how agreement to the amendment was sought.
Added wording to the notice requirements for what OSFI would expect to be included for informed consent.
As noted above, the guide now states that the Superintendent will consider the level of agreement to the Reducing Amendment from the affected parties along with all other relevant factors when deciding whether to authorize the amendment or not.
Where the terms of the pension plan are contained in the collective agreement, the employer cannot simply approach individual members to consent to change a collectively bargained term of employment. Where the terms of the pension plan are not collectively bargained, individual consent must not be allowed to be coerced in a bid to overcome a bar in a pension plan.
Clarified that if a union collectively bargains with respect to the pension plan, OSFI will consider agreement by the bargaining agent on behalf of their unionized active plan members. Any agreement to an amendment is not determinative but will be considered among other factors in making the decision to authorize the amendment or not. As mentioned above, the Superintendent will accept representations about how agreement was sought to address any concerns regarding possible coercion.
See other changes noted above regarding notice requirements.
Should delete a new requirement for stress testing because it is similar to the modeling requirements used as a rationale in legislative efforts to permit the retroactive conversion of defined benefit plans to target benefit plans.
OSFI has always expected a plan to address longer-term sustainability when reviewing a Reducing Amendment. We added the reference to stress testing to clarify what we expect for a “demonstration of the ongoing ability of the plan to meet the minimum funding requirements of the PBSA”.
The Instruction Guide sets out a requirement to submit all current and historical plan texts and supporting documents relating to the power to amend the plan when applying to make a Reducing Amendment. This requirement is too onerous. It may be difficult for longstanding plans to comply with this requirement.
Suggest a more flexible approach, for instance, requiring all available, relevant historical documentation if OSFI determines it is required or a requirement to file all historical documentation in the administrator's possession. Alternatively, add “an attestation that they have taken reasonable steps to search for all other relevant documents”.
The employer/administrator has a responsibility to maintain historical documents. If OSFI does not have access to historical documents, it will not be in a position to assess whether current language allowing for reducing amendments was appropriately introduced into a plan. If the documents are not available, the assumption may be that the plan documents do not include the power to make a Reducing Amendment.