InfoPensions - Issue 7

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InfoPensions - Issue 7 – May 2012

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 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 website. To automatically receive new issues of this newsletter and other OSFI pension related documents by e-mail, subscribe through the Subscription Centre.

The next issue of InfoPensions will be posted in November 2012.

Legislative Developments

Reforms announced by the federal government in October 2009 continue to be implemented through changes to the PBSA and the Pension Benefits Standards Regulations, 1985 (PBSR). For a detailed description of the status of these changes, please refer to the Key PBSA/PBSR Amendments and In Force Dates table which can be found on the OSFI website (PDF, 187 kB).

All amendments to the PBSA required to implement these reforms received Royal Assent in 2010; however, not all amendments have come into 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.

With respect to the PBSR, changes that have already been made are described in the table referred to above. Other regulations that include further amendments to the investment rules, new requirements for disclosure to members and former members, as well as regulations respecting variable benefits paid from a defined contribution plan and agreements for the regulation and supervision of multi-jurisdictional pension plans, are expected to follow.

Pooled Registered Pension Plans

Bill C-25, an Act relating to pooled registered pension plans and making related amendments to other Acts, was tabled in Parliament on November 17, 2011. This Act establishes the federal regulatory framework for pooled registered pension plans.

Pension Assessments (Fees)

The Assessment of Pension Plans Regulations (Regulations) were published in Part II of the Canada Gazette on January 4, 2012. The Regulations make adjustments to the assessment formula with the objective of providing a better alignment between plans’ assessments and the cost incurred by OSFI in connection with administering the PBSA. Please refer to InfoPensions – Issue 6 for additional details on changes to the annual assessment of federally regulated pension plans.

New Assessment Rate and Instructions for Payment

The assessment rate is $10 for plan years ending between October 1, 2011 and September 30, 2012 and for newly established plans filing for registration on or after April 1, 2012Footnote 1. This assessment rate was published in Part I of the Canada Gazette on January 28, 2012 and can also be found on the OSFI website.

The annual pension assessment is due six months after the plan year end, at the same time as pension filings. Plans should calculate their assessment using the new Pension Assessment Remittance Form on the OSFI website. Plans should not wait for an invoice from OSFI, as assessments are to be paid by the due date.

For more information on the instructions for payment at the time of plan registration, please refer to the Defined Benefit and Defined Contribution Registration Guides.

First Nations Pension Plans - Supreme Court of Canada Decision

In InfoPensions – Issue 5, OSFI provided information on the potential implications of the Supreme Court of Canada (SCC) decision in NIL/TU,O Child and Family Services Society v. B.C. Government and Service Employees' Union for some federally regulated First Nations pension plans. The SCC decision provides direction on the jurisdiction applicable to labour matters in respect of First Nations. 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 are subject to provincial jurisdiction.

OSFI has begun identifying pension plans that may be affected by the SCC decision. To date, OSFI has communicated with plan administrators and employers in British Columbia, Alberta and Saskatchewan to inform them that, based on OSFI’s review, their plans appear to fall under provincial jurisdiction. As part of the dialogue, plan administrators and employers are given the opportunity to provide OSFI with information demonstrating otherwise. Through this process, a number of plans have been identified as being subject to provincial jurisdiction and OSFI has begun transferring the supervision of these plans to the relevant provincial jurisdictions.

In addition, OSFI has delivered Webinars to plan administrators and other external stakeholders to provide information on the SCC decision and OSFI’s process for identifying and transferring plans that fall under provincial jurisdiction.

OSFI will continue its process of identifying federally registered First Nations pension plans affected by the SCC decision. OSFI also expects the administrators of these pension plans to assess the impact that the SCC decision may have on their pension plans.

Pre-Retirement Death Benefit - Dependent Children

OSFI has recently received questions regarding whether a plan can pay a pre-retirement death benefit to a dependent child/children, where there is no survivorFootnote 2 at the time of death. Subsection 23(1.1) of the PBSA provides that where there is no survivor on the death of the member or former member, the value of the pre-retirement death benefit must be paid to the designated beneficiary or, if there is none, the estate or succession. As such, in order for dependent child/children to receive the pre-retirement death benefit, the member would need to have no survivor at the time of death and the child/children would have to be the named designated beneficiary.

If the plan does not allow the designation of a beneficiary or if the member or former member has not designated a beneficiary and the member or former member does not have a survivor at the time of death, then the value of the pre-retirement death benefit must be paid to the estate or succession.

The PBSA does not allow plans that provide a dependent child pension to reduce the pension benefit credit paid to a designated beneficiary or, if there is none, an estate, by the value of the child pension paid from the pension fund. Plan administrators will need to amend their plan texts to ensure that the pre-retirement death benefit is in accordance with the PBSA. Subsection 23(1.1) of the PBSA came into force on July 1, 2011, therefore child benefits already being paid prior to that date are not affected.

The PBSA does not specify the manner in which the pre-retirement death benefit under subsection 23(1.1) is to be paid. However, it is not subject to the locking-in provisions under section 18 of the PBSA and therefore is an unlocked amount.

Registration Forms and Plan Amendment Form

In March 2012, OSFI issued draft versions of the following documents:

  • Separate Defined Benefit (DB) and Defined Contribution (DC) Registration Forms and Guides.
    • Registration form and explanatory guide that should be used when submitting an application to register a pension plan with OSFI.
  • Separate DB and DC Plan Amendment Information Form.
    • Should be filed with OSFI at the time of registration and anytime thereafter when an amendment is made to plan documents.

Prior to this, DB and DC plans used the same Form when filing an application for registration and plan amendments with OSFI. The issuance of separate registration and amendment forms is consistent with OSFI’s effort to provide separate DC and DB guidance. These documents should be used while in draft form and comments from external stakeholders are requested by September 30, 2012.

Pension Industry Survey

As part of an ongoing commitment to be responsive to stakeholder input, OSFI conducted a survey of pension plan administrators, advisors and consultants in late 2011. OSFI appreciates the candid feedback that was provided in this consultation. The results suggest that these stakeholders are generally satisfied with how OSFI supervises and regulates federal pension plans. However, there is always scope to increase effectiveness, and OSFI is developing action plans that will address key areas where opportunity for improvement was identified.

This consultation is performed on a periodic basis in order to monitor OSFI’s effectiveness as a supervisor and regulator and to collect suggestions for improvements. The confidential survey – which was conducted both on-line and via telephone interviews – sought to measure the level of satisfaction with OSFI’s supervision, transaction approvals, policies and guidance. Respondents were also asked about their overall impressions of OSFI, how well OSFI identifies emerging risks and the usefulness of our website.

A complete report on the survey results will be published on OSFI’s website by early summer. Details will be provided in the next issue of InfoPensions.

2012 Pension Industry Forum

On February 16, 2012, OSFI held a Pension Industry Forum in Toronto. The Forum provided an overview of the activities and priorities of the Private Pension Plans Division of OSFI. In addition, the Forum provided an update on legislative and regulatory developments, and an overview of recent guidance for federal plans and implications for plan administrators. Some of the topics covered included the CAPSA Funding Policy Guideline, OSFI’s Stress Testing Guideline, letters of credit and the distressed workout scheme regulations. OSFI would like to thank those who attended for the suggested topics that were sent to our office prior to the Forum, for their engagement during the event, and for the helpful feedback that we received after the Forum.

Benefit Reduction Guide

In January 2012, OSFI posted the Draft Instruction Guide for Authorization of Amendments Reducing Benefits in Defined Benefit Pension Plans. Key changes to the Guide reflect recent legislative changes and provide details on what constitutes a reduction of an accrued benefit. OSFI invited comments from external stakeholders. OSFI received comments and expects to issue the final Benefit Reduction Guide and Authorization Request Form shortly. This Instruction Guide sets out the factors, as well as the specific requirements OSFI generally considers with respect to an application seeking the Superintendent’s authorization of an amendment that reduces accrued benefits.

Policy Advisory—Buy-in Annuity Products

In January 2012, OSFI issued a draft Policy Advisory to inform plan administrators of OSFI’s expectations regarding investments by federally regulated pension plans in buy-in annuity products. This draft Policy Advisory covers investments in a buy-in annuity issued by a life insurance company for pensions in pay only. OSFI received comments from a number of external stakeholders and expects to issue the final Policy Advisory shortly.

Instruction Guide - Preparation of Actuarial Reports

In May 2011, OSFI issued the Draft Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans and invited comments from external stakeholders. Following OSFI’s review of the comments, the final version of the Instruction Guide was posted in April 2012. The Instruction Guide outlines OSFI’s current filing and reporting requirements for actuarial reports for defined benefit pension plans. OSFI expects actuaries to follow the requirements set out in both the Instruction Guide and the Canadian Institute of Actuaries Standards of Practice.

Interest on Delayed Transfers - Adjustments to Member Pension Benefit Credits

An article published in PBSA Update 26 outlined that, with respect to delayed benefits paid from the pension fund and consistent with CIA Standards of Practice, interest should be applied to member pension benefit credits until the beginning of the month in which the pension benefit credit is paid out. OSFI has received questions and would like to clarify that it expects interest to be applied to members’ pension benefit credits up to and including the last day of the month that precedes the month in which the pension benefit credit is paid out. The rate of interest is that used to determine the pension benefit credit.

OSFI Findings - Review of Actuarial Reports

OSFI reviewed approximately 100 actuarial reports between October 1, 2010 and September 30, 2011. The following is a list of the most common findings uncovered during these reviews:

  • Solvency:
    • Liability settlement methodFootnote 3.
      • The report either did not clearly identify the assumption, or the assumption was not in line with OSFI’s expectations.
    • Maximum pension under the Income Tax Act
      • The report either did not clearly identify the assumption, or there was no assumption made where one should have been.
  • Going Concern:
    • Expense assumption
      • The report either did not clearly identify the expense assumption or the stated assumption was too low given the plan’s historical experience.
    • Discount rate
      • The assumption was higher than OSFI’s expectation that the discount rate for a plan, whose investments in variable securities account for 50% or more of all assets, not exceed 6.5% before expenses.
  • Asset Mix
    • Either the asset mix or the targeted asset mix was not disclosed in the report.
  • Terminology
    • The terminology used in the report was not consistent with the terminology used in the PBSR. Please refer to the PBSR to ensure that the terminology used in actuarial reports is consistent with the PBSR terminology.

For more information on OSFI’s expectations with respect to the preparation of actuarial reports, please refer to the Instruction Guide.

Estimated Solvency Ratio (ESR) Results and Charts

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. Please see InfoPensions – Issue 2 for details on how OSFI calculates ESRs.

The weighted average ESR was 0.81 at December 2011, compared to 0.90 at June 2011 and 0.93 at December 2010.

Weighted Average ESRs

Not yet defined 

OSFI estimated that 90% of the approximately 400 defined benefit plans were underfunded on a solvency basis at December 2011, compared to an estimated 81% at June 2011. At December 2011, it is estimated that 68% of all federally regulated pension plans had a solvency ratio of less than 0.80, whereas at June 2011, the comparable proportion was 25%.


Footnote 1

The new assessment formula under the Assessment of Pension Plans Regulations was effective as at April 1, 2012. The new rate for plan years ending between October 1, 2011 and September 30, 2012 is based on that formula.

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Footnote 2

A survivor is the common-law partner at the time of the member or former member’s death or if there is no common-law partner then it is the spouse at the time of the member or former member’s death.

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Footnote 3

If it is expected that members eligible for early retirement (i.e. who are within 10 years of pensionable age) would, upon plan termination, be offered the choice of an immediate annuity or commuted value, the actuary should assume that at least 50% of members who have a right to receive either an immediate annuity or a commuted value will choose the option that creates the highest solvency liability.

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