Office of the Superintendent of Financial Institutions
www.osfi-bsif.gc.ca
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Risk Assessment, Supervision and Intervention
Through 2009–2010, OSFI continued to monitor carefully the condition of private pension plans and, to the extent possible, that of their sponsors, and intervened when necessary to protect promised benefits.
A number of plans faced challenges during 2009–2010. Plans with financially weak sponsors and defined benefit plans with negotiated contributions are particularly vulnerable to funding pressures and volatility. OSFI addressed potentially risky situations in a timely manner, promoted actions that mitigate risks and intervened where appropriate.
OSFI continued initiatives during 2009–2010 to modernize the tools it uses to monitor and supervise pension plans. In particular, the initiative to upgrade the pension supervisory systems that support OSFI’s risk assessment framework is well underway and will be implemented over the next few years.
The main pillars of OSFI’s risk assessment framework for pension plans are: tiered risk indicators, solvency testing, on-site examinations, the watch list, use of intervention powers and ad hoc reviews.
Tiered Risk Indicators
OSFI applies a series of tiered risk indicators that detect risks based primarily on information submitted in regulatory filings; the results are used to identify higher risk plans. In an effort to assess whether further action should be taken, these higher risk plans are subjected to a more detailed analysis by OSFI’s pension plan supervisors. In 2009–2010, this analysis affected 19% of plans that submitted regulatory filings.
Solvency Testing
Early detection of solvency and funding problems is a key element in safeguarding members’ benefits. OSFI runs a solvency test on a semi-annual basis to estimate solvency ratios for all defined benefit pension plans. This test provides OSFI with important information, allowing it to intervene earlier in higher-risk pension plans. (See figure 14)
Defined Benefit Plans Estimated Solvency Ratio (ESR) Distribution (past 3 years)*
Through this testing, OSFI identified underfunded pension plans that were taking contribution holidays. In certain instances, it was OSFI’s view that taking a contribution holiday was not prudent. OSFI took action, ranging from requesting plan sponsors to cease contribution holidays, to requiring enhanced notification to members, and/or filing of an early actuarial valuation report to trigger enhanced funding.
On-Site Examinations
OSFI’s risk-based supervisory approach includes on-site examinations of selected pension plans, allowing OSFI to enhance its assessment of both the plan’s financial situation and the quality of administration.
OSFI performed a number of on-site examinations during the year, and also completed detailed desk reviews of selected plans. OSFI continued to focus on governance, risk management and disclosure to members — all areas that have generally been identified as requiring more attention from plan administrators.
OSFI remains committed to providing timely information to plan administrators. OSFI set a target of less than 27 working days after an examination wrap-up meeting to issue its findings. OSFI met this target 93% of the time in 2009–2010.
OSFI continued to focus on governance, risk management and disclosure to members.
Watch List
Consistent with a risk-based approach to supervision, OSFI considers the size of the plan’s deficit and the sponsor’s capacity to fund it. Pension plans that give rise to serious concern, due to their financial condition or for other reasons, are placed on a watch list and actively monitored.
The number of private pension plans on OSFI’s watch list increased slightly during 2009–2010 from 74 at the start of the year to 79 at the end of the year. Of these, 66 were defined benefit plans (62 in 2008–2009) and 13 were defined contribution plans (12 in 2008–2009). During the course of 2009–2010, 22 new plans were added to the watch list and 17 were removed, in part due to OSFI’s intervention. (See figure 15)
Intervention
OSFI continued to work closely with plan sponsors, administrators, custodians and other stakeholders in order to find reasonable solutions to issues that OSFI believes may jeopardize members’ benefits.
In 2009–2010, OSFI intervened with respect to high-risk pension plans, including taking measures to enforce minimum funding requirements and ensure timely remittance of contributions. OSFI also required plans to restrict portability of benefits and used its authority to terminate pension plans, with the objectives of stopping the impairment of the pension fund and providing equitable treatment of all members and beneficiaries in situations where the future of a plan was uncertain.
Ad hoc Reviews
Periodically, OSFI surveys its pension plans in an effort to better understand how they handle specific issues. Past reviews have included a survey of plans’ exposure to asset-backed commercial paper, as well as an assessment of the impact of the market downturn on pension plans.
In 2009–2010, OSFI surveyed selected pension plans regarding their use of stress testing. Over 67% of plans surveyed perform some kind of stress testing. These plans identified a range of reasons for this testing, which included supporting their review of funding policies, asset mix, benefit levels and monitoring risks, and determining whether an actuarial report should be filed. OSFI will continue to encourage the use of stress testing.
