Office of the Superintendent of Financial Institutions
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InfoPensions is the Office of the Superintendent of Financial Institutions’ (OSFI’s) electronic newsletter on pension issues. InfoPensions includes announcements and reminders on issues relevant to federally regulated private pension plans as well as descriptions of how OSFI applies selected provisions of the Pension Benefits Standards Act, 1985 (PBSA), its regulations and directives and other OSFI guidance. Plan administrators should obtain appropriate legal and actuarial advice on how the legislation and guidelines affect their particular pension plan.
InfoPensions and PBSA Update (OSFI’s predecessor pension newsletter) are available on the Pensions Page of the OSFI Web site. To automatically receive new issues of this newsletter and other OSFI pension related documents by e-mail, subscribe through the Subscription Centre Link.
The next issue of InfoPensions will be posted in November 2011.
Proposed changes to the federal private pension legislative framework were announced by Finance Canada in October 2009 (Backgrounder). Some of these proposed changes were included as part of Bill C-9, which received Royal Assent on July 12, 2010 and Bill C-47, which received Royal Assent on December 15, 2010. Other changes have been included in amendments to the Pension Benefits Standards Regulations, 1985 (PBSR), various provisions of which came into force on July 1, 2010, January 1, 2011 and April 1, 2011. Further amendments to the PBSR are expected to follow.
OSFI expects plan administrators to consider the impact of legislative amendments on the provisions of their plan documents. As some legislative changes still require regulations, OSFI will not expect formal amendments to plan documents until all PBSA and PBSR amendments have come into force. However, plan sponsors may amend their plan texts earlier or once coming into force dates are known. The PBSA applies to all federally registered pension plans and plan administrators must administer their plans in accordance with the PBSA and PBSR. Therefore, the provisions of the PBSA and PBSR that are in force will apply to the plan and must be administered by the plan administrator, regardless of what the plan text says.
This table, originally posted in InfoPensions - Issue 4, has been updated to include the current status of key changes to the PBSA and PBSR. For details with respect to these changes please refer to the specific sections of the PBSA and PBSR.
All amendments to the PBSA have now received Royal Assent; however, not all amendments are in force. Amendments not yet in force will come into force on a day or days to be fixed by order of the Governor in Council. All PBSR amendments listed here came into force as of their adoption date.
Where there is no survivor on the death of the member or former member, an amount, as described in the provisions of the PBSA, must be paid to the designated beneficiary. If there is no designated beneficiary, the death benefit is payable to the estate.
The differentiation between a pre-retirement death benefit for members eligible for early retirement and members who are not has been removed.
Members’ pension benefits are immediately vested upon joining a pension plan. An amendment to 18 (1)(c) provides that all pension benefits are locked-in after two years of plan membership.
Most pre-1986 and post-1987 references affecting benefits have been removed throughout the PBSA.
A lump sum payment may be made to a member or survivor on cessation of membership or death, if the value of the pension benefit is less than 20% of the Year’s Maximum Pensionable Earnings (YMPE).
For additional details regarding the application of this provision please refer to the Small Benefit Unlocking – Transitional Issues article in this newsletter.
Where no part of a pension benefit is required to be distributed to a spouse, former spouse or former common-law partner under a court order or agreement, the plan can adjust a pension benefit to be payable in the normal form rather than a joint and survivor benefit.
This section of the PBSA should be read in conjunction with section 25(5) of the PBSA which requires an administrator to determine and administer the pension benefit in accordance with a court order or agreement.
Where a member who is eligible to retire ceases membership in the plan, consent of the spouse or common law partner is required prior to transferring pension benefit credits to a prescribed retirement savings plan.
The consent form will be set out in the PBSR.
After the whole of a plan is terminated, a written statement must be provided to members, former members and their spouses or common-law partners informing them of:
“Termination” refers to situations described in s.29(1), (2), (2.1) and (4.2).
Further amendments to the PBSR are expected to follow and will outline information requirements to be included in the written statement. Disclosure is not expected until these regulations come into force.
Notice to the Superintendent of a voluntary termination or winding-up shall be not less than 60 and not more than 180 days before the date of termination or winding-up.
Other than situations where the Superintendent terminates a plan, a plan may only be terminated if the administrator or employer notifies the Superintendent in writing of their decision.
With the exception of Negotiated Contribution plans, pension plans are required to fully fund their obligations with respect to pension benefits following plan termination.
An employer must pay an amount equal to the solvency deficit at the date of plan termination, either by:
Plans must continue to file annual actuarial reports after the date of plan termination, until the plan is wound up. These annual actuarial reports must, in part, set out the remaining payments required to liquidate the solvency deficit as at the valuation date.
April 1, 2011
OSFI has developed a set of FAQs to provide more specific guidance on changes to the funding rules.
In respect of pension plans other than multi-employer plans, the employer shall pay all amounts required to meet the prescribed tests and standards for solvency.
In respect of multi-employer pension plans, each participating employer shall pay all contributions required under an agreement among participating employers or a collective agreement, statute or regulation. However, pursuant to 9(1) of the PBSA, the plan as a whole must be funded in accordance with the prescribed tests and standards for solvency.
An employer may obtain a qualifying letter of credit instead of paying solvency special payments into the pension fund, except amounts deducted from members’ remuneration. Letters of credit cannot be used where a plan has terminated.
The total face value of all letters of credit held for the benefit of a plan cannot exceed 15% of the market value of assets as determined on the valuation date. Other detailed requirements that must be met are outlined in section 9.1 of the PBSR.
Agent crown corporations are permitted to reduce their solvency special payments, recognizing that it would be through a different means than obtaining a letter of credit.
The conditions that agent crown corporations have to meet in order to reduce solvency special payments are outlined in section 9.16 of the PBSA.
Employer contributions, including current service cost contributions and any special payments, must be remitted to the pension fund monthly (within 30 days following the end of each period for which the instalment is paid).
The timing of member contributions is unchanged - must be remitted within 30 days following the end of the period in which the contributions were deducted.
Plan administrators should ensure their 2011 contribution planners reflect their schedule of monthly payments.
An employer may make a declaration that:
Upon making the declaration, special payments may be deferred for up to nine months. During that period, the parties may negotiate a new funding arrangement that would be subject to:
Section 10.1 to 10.991 of the PBSR provide additional detail with respect to:
among other requirements.
The purchase of immediate or deferred annuities are restricted if the purchase would impair solvency.
Section 9 of the Draft Directives of the Superintendent pursuant to the Pension Benefits Standards Act, 1985 provides direction on the restricted purchase of immediate and/or deferred annuities by plan administrators.
The existing authority to develop void amendment regulations has been enhanced
For the purposes of paragraph 10.1(2)(c) of the PBSA, the prescribed solvency ratio level is 0.85. Unless the Superintendent authorizes the amendment, an amendment is void if it would reduce the solvency ratio of the plan to below 0.85 once the amendment is made.
Oct. 31, 2010
Each former member of the plan and former member’s spouse or common-law partner must be provided with a written statement containing the prescribed information within six months after the plan year end.
The responsibilities of an administrator are clarified with respect to offering plan members investment options in respect of defined contribution provisions or additional voluntary contributions; and
The authority to develop regulations respecting investment options offered by an administrator has been added.
8(4.2) to 8(4.4) PBSA
39(1)(n.2) & (n.3) PBSA
The Superintendent’s permission to transfer assets related to DC plan provisions is no longer required.
Please refer to OSFI’s August 2010 Guidance Note on DC Asset Transfers.
Variable benefits (i.e. payments similar to those paid from a life income fund) may be paid from a DC plan.
The PBSA provides certain minimum requirements with respect to the payment of variable benefits such as survivor benefits and transfer options. Further details will be set out in the PBSR.
In March 2011 OSFI posted its Draft Stress Testing Guideline for Pension Plans with Defined Benefit Provisions. This Guideline provides general information on stress testing and outlines OSFI’s expectations regarding the use of stress testing as a risk management tool. In the past, OSFI has communicated the importance of stress testing however this is the first Guideline that OSFI has issued on this topic with respect to pension plans. Comments on the draft Guideline were requested by April 30, 2011 and OSFI is in the process of reviewing the comments received. Plan administrators may refer to this Guideline while in draft form.
On February 16, 2011 OSFI held its 2nd Pension Industry Forum in Toronto. The Forum focused on recent legislative changes and their impact on plan administration. Some of the topics included legislative developments, new funding rules and OSFI’s expectations of plan administrators. Breakout sessions were held to focus on both DB and DC topics. OSFI would like to thank those who attended and for the valuable feedback that was provided.
Pension plans subject to the PBSA provide pension benefits to employees employed in a work, undertaking or business to which the federal Parliament has exclusive legislative authority (known as “included employment”). The federal government's jurisdiction over "included employment" is derived from the Constitution Act 1867. Subsection 4(4) of the PBSA defines included employment and sets out a list of what is generally considered “included employment”.
The November 4, 2010 Supreme Court of Canada (SCC) decision in NIL/TU,O Child and Family Services Society v. B.C. Government and Service Employees' Union provides direction on the jurisdiction applicable to labour matters in respect of First Nations. The SCC found that in determining jurisdiction of an entity established to provide services to First Nations, one must determine the nature of the undertaking in which the employer is engaged. Where the employer's business, work or undertaking is not in an area over which Parliament has exclusive legislative authority, the employer (and its pension plan) is subject to provincial jurisdiction.For example, if an employer is exclusively engaged in areas such as
provincial labour and pension legislation would apply. If an employer is engaged in an area of exclusive federal jurisdiction (for example, it operates a radio station) then the plan and employment is governed by federal legislation.
OSFI is in the process of reviewing the SCC decision and its potential impact on federally regulated First Nations pension plans. OSFI also expects plan administrators to assess the impact the SCC decision may have on their pension plans.
The amendment to paragraph 18(2)(c) of the PBSA allowing a lump sum payment to be made to a member or survivor if the value of the pension benefit credit is less than 20% of the Year’s Maximum Pensionable Earnings (YMPE) came into force on December 15, 2010.
Prior to December 15, 2010, this section of the PBSA allowed a lump sum payment to be made to a member or survivor if the annual pension benefit payable was less than 4% of the YMPE.
OSFI has recently received questions with respect to a transitional issue. OSFI would like to clarify that the 20% rule is currently in effect however any transactions that were in process at the time the 20% rule came into effect may be completed using the 4% rule. Moving forward, a plan may only continue to apply the 4% rule if the pension benefit credit is less than 20% of the YMPE.
Plan administrators may apply the 20% rule effective December 15, 2010 even if plan amendments reflecting paragraph 18(2)(c) of the PBSA have not yet been filed with OSFI.
In April 2009, OSFI posted its Risk Assessment Framework for Federally Regulated Pension Plans and accompanying Guidance Notes. OSFI has begun an initiative to periodically review these Guidance Notes to ensure they remain up to date. OSFI will re-issue revised Guidance Notes as required.
Amendments to section 23 of the Office of the Superintendent of Financial Institutions Act (OSFI Act) were included in Part 8 of Bill C-47 and will come into force on a day to be fixed by order of the Governor in Council. This section of the OSFI Act was amended to move the assessment of annual pension fees from the PBSA to the OSFI Act. In general, the intent of the pension plan assessment methodology is to reflect the cost incurred by OSFI in connection with administering the PBSA. OSFI is in the process of reviewing this methodology with the objective of providing a better alignment between plans’ assessments and the effort undertaken by OSFI. Any changes to the method of calculating pension plan fees or assessments will need to be implemented through regulations.
Some of OSFI’s considerations in reviewing possible changes to the current methodology include:
Any changes to the methodology based on the above considerations will not increase the total value of fees or assessments charged to federal pension plans. Rather, changes would have the effect of adjusting the relative amounts that pension plans pay in order to better align those amounts with the effort undertaken by OSFI. OSFI will continue to communicate further information as this work moves forward. Questions and/or comments regarding this matter may be directed to Pirjo.Davitt@osfi-bsif.gc.ca.
OSFI estimates solvency ratios for the approximately 400 defined benefit pension plans it regulates to assist with the early identification of solvency issues that could jeopardize the security of promised pension benefits.
The actual solvency ratio of a plan can differ from the ESR for a number of reasons. Please see InfoPensions – Issue 2 for details on how OSFI calculates ESRs and our intervention activities based on these solvency testing results.
The weighted average ESR was 0.93 at December 31, 2010. The average ESR at December 2010 shows an improvement from the ratio of 0.87 at June 2010, and is also moderately better than the December 31, 2009 ratio of 0.90.
OSFI estimated that 76% of the approximately 400 defined benefit plans were underfunded on a solvency basis at December 2010, compared to an estimated 79% at June 2010. At December 2010, it is estimated that 16% of all federally regulated pension plans had a solvency ratio of less than 0.80, whereas at June 2010, the comparable proportion was 22%.
On June 25, 2010 OSFI posted changes to Section 2 of the Directives issued on June 30, 1987. These changes set out the frequency requirements for the preparation of actuarial reports referred to in subsection 12 (2) of the PBSA. We have updated our FAQs on Changes to the Funding Rules to include the following table. This table is intended to help plan administrators and other external stakeholders determine when actuarial reports are due to be filed.
Details regarding filing requirements are outlined in Section 2 of the Directives of the Superintendent as amended on June 25, 2010.
In response to several questions that were raised, OSFI would like to clarify that once the first actuarial report is filed with OSFI on or after July 1, 2010, the solvency ratio based on market value of assets should be used when applying the portability restrictions in section 9 of the Directives. This is the case even if the first actuarial report filed with OSFI on or after July 1, 2010 used a smoothed asset value to calculate the average solvency ratio.