PBSA Update - Issue 28

• Type of publication: Newsletter
• Date: December 2007
• No: 28

The PBSA Update includes descriptions of how the Office of the Superintendent of Financial Institutions (OSFI) applies selected provisions of the Pension Benefits Standards Act, 1985 (PBSA), its regulations and directives and OSFI guidelines. Plan administrators should obtain appropriate legal and actuarial advice on how the legislation and guidelines affect their pension plan.

1. Phased-in Retirement

The Federal Budget 2007 proposed changes to income tax rules to allow an employee to receive pension benefits from a defined benefit pension plan and simultaneously accrue further benefits, subject to certain constraints. The Budget also indicated that changes would be made to the PBSA to accommodate phased retirement in federally regulated pension plans.

The proposed amendments to the tax rules and pension legislation relating to phased retirement were tabled in parliament on November 21, as part of Bill C-28.

Under the proposed tax rules, pension payments made as part of a phased retirement arrangement will be limited to a maximum of 60 per cent of an employee’s accrued pension, and eligibility will be restricted to members aged 55 or older who are entitled to an unreduced immediate pension benefit, or those aged 60 or older who are entitled to a reduced immediate pension benefit under the terms of their pension plan.

The proposed changes to the PBSA accommodate the tax changes and permit the payment of phased retirement benefits, subject to certain conditions, including that there be an agreement between the employer and member that evidences their consent to the payment of those benefits. Under the proposed amendments to the PBSA, employers are not required to offer a phased retirement option to employees, nor are employees required to enter a phased retirement arrangement. Administrators and employers interested in offering phased retirement under the proposed rules will need to ensure that their pension plans provide for the payment of phased retirement benefits. Retirees currently receiving a pension, and who meet the eligibility requirements of the proposed tax rules, may be re-employed under a phased retirement arrangement subject to certain conditions. During the phased retirement period, they would receive a phased retirement benefit in place of the pension benefit they had been receiving.

Bill-C28 must be passed, and the amendments brought into force by an order of the Governor in Council, before federal pension plans can implement phased retirement arrangements under the proposed rules. Prior to the proposed PBSA changes being brought into force, OSFI intends to develop regulations respecting the information that plan administrators must provide to members who enter into a phased retirement arrangement. Developing these regulations will be a priority for OSFI in the coming months, and stakeholders will have an opportunity to provide their input.

2. Final Location Approach for Benefit Entitlement

OSFI has reviewed and revised its interpretation of the PBSA requirements for determining a member’s benefit if that member had service in included employment and in at least one other jurisdiction. Based on the review, OSFI interprets the PBSA as supporting the use of the final location^{Footnote 1} approach (rather than the checkerboard approach^{Footnote 2}) by plan administrators.

Under the PBSA, a member/survivor’s entitlement to a pension benefit arises upon the occurrence of a triggering event - cessation of membership, retirement/attaining pensionable age or death. Subject to the terms of a pension plan, if an active member changes jurisdiction without ceasing membership (i.e. no triggering event), the rights in accordance with the pension legislation applicable to that member at the time of the first triggering event should apply to that person's entire accrued benefit.

(In some circumstances, in respect of a spouse or common law partner, marriage breakdown can also be considered a triggering event. In this case, the spouse at the date of that breakdown will be entitled to the splitting allowed under the legislation that is applicable at the date of the marriage breakdown.)

3. Contributions in Kind

OSFI has been asked whether or not contributions to a pension plan can be made in a form other than cash.

Under the PBSA, employers must ensure that payments are made to the pension fund. The normal meaning of payment is a cash payment. Therefore an employer cannot unilaterally decide to make a payment to a pension plan in anything other than cash to satisfy the normal cost and special payment requirements of section 9 of the Pension Benefits Standards Regulations, 1985 (Regulations).

However, the plan administrator can agree to acquire an asset from the employer (the purchase price being satisfied, in whole or in part, by the amount owed to the pension plan). This agreement or transaction to acquire the assets would be considered an investment decision of the plan administrator. This decision, the investment and the transaction would have to meet the requirements and restrictions of the PBSA, the Regulations (including Schedule III), the terms of the plan documents and the Statement of Investment Policies and Procedures. Under Schedule III to the Regulations, the employer is a “related party”. Consequently, these requirements include the requirements and restrictions concerning related party transactions.

Section 16 of Schedule III of the Regulations prohibits a related party transaction unless it meets one of the exceptions for related party “transactions” under section 17(1) or 17(3) of this Schedule.

• the transaction is required for the operation or administration of the plan and the terms and conditions of the transaction are not less favourable than market terms and conditions or
• the value of the transaction is nominal or the transaction is immaterial to the plan^{Footnote 3}.

This type of related party investment transaction would not be viewed as required for the operation or administration of the fund but the transaction may be considered immaterial to the plan, depending on the value of the asset involved and how materiality is defined in the plan’s Statement of Investment Policies and Procedures (SIP&P).

Any related party transaction must meet the requirements of the PBSA, the Regulations (including Schedule III), the SIP&P, the terms of the plan and the fiduciary and conflict of interest rules applicable to the plan sponsor and plan administrator.

Please note that this interpretation relates to federally registered pension plans. Provincial pension regulators may have additional or other standards regarding the acceptability of contributions in kind.

4. Revised Declaration of Compliance Form

OSFI’s revised Declaration of Compliance, OSFI 522 (2007), now covers only plan amendments. For new plan registrations, the declaration of compliance has been incorporated into the recently revised Application for Registration Form. Other revisions to the OSFI 522 (2007) include:

• adding a paragraph to cover pension plans that are administered on behalf of provincial jurisdictions under existing reciprocal agreements and
• adding an optional paragraph that allows a plan administrator to disclose an area of non-compliance (e.g. not meeting minimum funding and amending to reduce benefits).

Administrators are reminded that both the OSFI 522 (2007) and the Pension Plan Amendment Information Form OSFI 521 (2004) are to accompany any pension plan amendment filed with OSFI.

5. Estimated Solvency Ratios (ESRs) Industry Summary Results

OSFI estimates solvency ratios for all federally registered defined benefit pension plans to assist with the early identification of solvency issues that could jeopardize the security of promised pension benefits. OSFI most recently reviewed the estimated solvency position of defined benefit plans for the period ending June 30, 2007. Please see Update 26 for an explanation of how OSFI calculates ESRs and how the results are used.

OSFI estimates that 50% of all OSFI-registered defined benefit plans were under-funded, on a solvency basis, on June 30, 2007. This is compared to 51% on December 31, 2006. The weighted average ESR for these pension plans was 1.06 as at June 30, 2007 and December 31, 2006.

Weighted average of ESRs for plans over OSFI’s solvency testing period

6. Solvency Funding Relief

In November 2006, the Minister of Finance released final regulations offering solvency funding relief to federally regulated defined benefit pension plans.

Pension plans registered under the PBSA were given the option of continuing to fund in accordance with the normal funding rules, or funding in accordance with the Solvency Funding Relief Regulations, provided that they meet the requirements set out in those regulations.

The Solvency Funding Relief Regulations offer plans a choice of different forms of funding relief, including consolidating past and current deficiencies and funding over five years, and extending the solvency funding period to 10 years, subject to various terms and conditions. Update 26 contains details on the options available and OSFI’s expectations regarding actuarial reports filed.

To date, OSFI has received approximately 70 Notification Forms that indicate which solvency funding relief option the plan administrator intends to use. Just over 50% of these have chosen to use the five year fresh start that will consolidate the solvency payment schedules and amortize the entire existing deficit over a single, new, five year period. The remainder will extend the solvency funding payments to ten years with the majority using a Letter of Credit (LOC). This LOC will cover the difference between the five year and ten year level of payments.

7. Electronic Filing

All pension plans with year-ends after October 1, 2006, were required to file their annual returns electronically (Annual Information Returns and Certified Financial Statements). Software for the electronic filing is available for purchase from private software vendors listed on the OSFI website.

Despite some technical problems, OSFI was able to populate our database with the electronically filed information. We are aware, however, that electronic filing has been problematic for some plan administrators. We are therefore seeking feedback from the pension industry that could be applied to making this initiative more effective. Comments or suggestions can be sent to Communications@osfi-bsif.gc.ca.

Administrators are asked to note the following list of the most common technical problems that OSFI encountered with the data received. OSFI will also be adjusting the software rules that will apply to the electronic filings so that the vendors may make appropriate changes in time for the next annual filings.

• Some number fields were entered incorrectly. Note that numbers may be rounded to the nearest $1000 but fields must include all digits.
• Many files were received in formats other than XML, such as PDF (from Adobe Acrobat) or XLS (from Excel). Files must be received in XML format in order to pass the validity tests and upload directly into our database.
• Many submissions included an attached list of participating employers instead of having the list as part of the XML file. In order to capture this information in our database, the list must be part of the XML file, not an attached list.
• Many submissions included “not applicable" or “N/A” in fields. These must be left blank.
• Some submissions contained names and titles in capital letters. Upper and lower cases must be used for these fields.
• Some submissions did not include the Auditor’s Report of the pension fund. If an Auditor’s Report is required for the pension fund, it must be submitted in hard copy along with the electronically filed Certified Financial Statements. The Guide to the CFS specifies which plans do not have to file Audit Reports.

FAQs for electronic filing are available on the OSFI Web site.

8. Completion of the Actuarial Information Summary (AIS)

We have found an increasing number of errors contained on the AIS forms. We would like to remind plan administrators and actuaries to review the Instructions for Completion of the AIS while completing these forms.

9. 60 Day Notice Requirement for Plan Termination

Subsection 29(5) of the PBSA states that if a plan administrator intends to terminate or partially terminate a pension plan, the Superintendent must be notified in writing at least 60 days before the date of the intended termination or winding-up. Therefore, in order to be considered for approval under subsections 29(9) and (10) of the PBSA, the effective date of the termination report must be at least 60 days after the Superintendent has been notified.

10. Statements for Members on Plan Termination

Administrators are reminded that subsection 28 (1)(d) of the PBSA requires that, within 30 days of the plan termination or partial termination date, the administrator must provide each affected plan member and that member's spouse with a termination statement.

If the plan administrator is unable to provide these termination statements within 30 days, the plan administrator must notify OSFI of the reason for the delay and the expected date that the member statements will be provided.

11. Transfer/Portability Options

OSFI has found that, in some instances, terminating members (or survivors) are not being given all of the portability options available to them. On cessation of membership or plan termination, members not yet eligible to retire (or their survivors) are entitled to all the portability options described in the PBSA and Regulations. Members eligible to retire (or their survivors) may be entitled to these portability options depending on the terms of the plan. The transfer options available to members (or survivors) are:

• a cash refund if the benefit is not locked in;
• a transfer of the pension benefit credit to another pension plan if that other plan permits;
• a transfer of the pension benefit credit to a locked-in registered retirement savings plan or a life income fund of the type prescribed in the PBSR;
• an immediate life annuity or
• a deferred life annuity.

Terminating members (or survivors) must be given at least 60 days to choose their option.

Plan administrators are reminded that they are responsible for ensuring that the portability vehicles offered to plan members comply with the PBSA and Regulations.

12. On-site Examination Findings

OSFI carries out periodic on-site examinations of pension plans registered under the PBSA to assist us in carrying out our supervisory duties and to improve communication and understanding between plan sponsors and OSFI.

The focus of many recent on-site examinations has been plan governance. While plan governance issues are receiving more attention from plan administrators, key examination findings indicate that a number of plan administrators could improve areas such as:

• governance self-assessments;
• governance documentation - roles and responsibilities of the various parties involved;
• documentation of criteria for hiring, monitoring and remuneration of external advisors;
• communication to members (e.g. the funded status of the plan and providing all information prescribed for member statements in Schedule IV of the Regulations ) and
• oversight of plan administration and investments (e.g. Statement of Investment Policy and Procedures, performance indicators).

To give plan administrators guidance in this area, the Canadian Association of Pension Supervisory Authorities (CAPSA) issued a Governance Guideline and Self Assessment Questionnaire and follow-up document Frequently Asked Questions. These documents are intended to give plan administrators a broad, flexible outline of good governance principles and guidelines to assist them in establishing and maintaining good governance practices for their pension plans.

13. Staff News

Henri Boudreau has recently been appointed Director of the Ottawa Financial Institutions Group at OSFI and is no longer involved in the supervision of private pension plans.