Issue 13 – May 2015

InfoPensions is the Office of the Superintendent of Financial Institutions' (OSFI) 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, Pooled Registered Pension Plans Act, their regulations, 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 is available under the Pension Plans link of OSFI's website. Plan administrators can also find information on various topics on OSFI's website under Defined Benefit Plans, Defined Contribution Plans and Pooled Registered Pension Plans. To automatically receive new issues of this newsletter and other OSFI pension-related documents by email, please subscribe under the Email Notifications link of OSFI's website.

If you have any questions about the articles you read in InfoPensions or if you have suggestions for future articles, please contact OSFI at information@osfi-bsif.gc.ca. The next issue of InfoPensions will be posted in November 2015.

 

Update on the Regulatory Reporting System

We appreciate the efforts of plan administrators and other pension professionals to register with Regulatory Reporting System (RRS) and to file returns using this new system.

Plan administrators are required to file the following returns using RRS:

• Pension Plan Annual Corporate Certification^[1]
• Certified Financial Statements (OSFI 60)
• Annual Information Return/Schedule A (OSFI 49/OSFI 49A)
• Actuarial Report and the Actuarial Information Summary
• Auditor's Report (if required to be filed by the pension plan)
• Solvency Information Return (OSFI 575)

A description of the filing process can be found on OSFI's website at the following links:

• Filing Process for Defined Benefit Pension Plan Returns
• Filing Process for Defined Contribution Pension Plan Returns

Plan administrators are also reminded that they should have two designated Local Registration Authorities (LRA) for their plan. Having two designated LRAs will help minimize any disruptions that may occur should, for example, one of the LRAs leave the organization.

An LRA is responsible for managing the RRS user permission and access rights and should periodically review them to ensure that the appropriate individuals continue to have access to the plan in RRS. If an authorized user's access rights are no longer necessary they should be removed.

Additional information about RRS can be found on the RRS page of OSFI's website.

For general assistance with RRS and regulatory filings, please contact our Regulatory Data Management Team by phone at 613-991-0609, or by email at ReturnsAdmin@osfi-bsif.gc.ca.

[1] By submitting the Pension Plan Annual Corporate Certification, the plan administrator is certifying that the information in their Organizational Profile is complete and accurate.  The Organizational Profile of a pension plan includes information such as the contact name, address and email for the various roles associated with the pension plan (e.g. plan actuary, custodian).

 

Amendments to the Pension Benefits Standards Regulations, 1985

Proposed amendments to the Pension Benefits Standards Regulations, 1985 (PBSR) were pre-published for public comment on September 27, 2014 and the 30 day comment period ended on October 27, 2014.

The final regulations have now been approved by the Governor in Council, and were registered and published in the Canada Gazette, Part II on March 25, 2015. Not all of the amendments are coming into force on the same day. Please refer to the chart titled Key Amendments and In Force Dates for further information.

OSFI has previously communicated that it did not expect plan administrators to make formal amendments to plan documents until all PBSA and PBSR amendments related to the federal government's pension reform were in force. Now that this latest round of regulations has been passed, OSFI expects plan administrators to take steps to make the necessary amendments to their plan texts as soon as possible, taking into account the delayed coming into force dates of certain provisions of regulations.

All provisions of the PBSA and PBSR that are currently in force must be administered by the plan administrator, regardless of whether or not the plan text has been amended to reflect the changes. Similarly, actuarial reports prepared this year should reflect the relevant PBSA and PBSR amendments that are currently in force.

 

Pension Plan Stakeholder Survey

In November 2014, OSFI conducted a survey of plan administrators and professional advisors of federally regulated private pension plans through an independent research firm. Since 2005, OSFI has commissioned consultations with administrators and professional advisors to obtain their assessment of OSFI's effectiveness as a supervisor and regulator of private pension plans. These consultations are a part of our ongoing commitment to be responsive to stakeholder input and to seek suggestions for improvement. The previous survey was conducted in late 2011 and its results are posted on OSFI's website.

In the 2014 survey, respondents were asked to rate OSFI's effectiveness with respect to guidance, supervision, approval transactions and communications relating to private pension plans. Respondents were also asked about their overall impressions of OSFI.

The survey results will be published on OSFI's website in June 2015.

Thank you to everyone who participated in the survey.

 

OSFI's Study of Defined Contribution Plans

OSFI is intending to conduct a study that will collect information from 40 federally registered pension plans with defined contribution provisions. These pension plans will be asked about their plan demographics and investment information. 

OSFI will review the results of this study with the goal of determining whether the information currently required to be filed by these plans with OSFI continues to be appropriate. 

 

Industry Risk Management Practices and Trends

In the fall of 2014, OSFI approached some actuarial consulting firms to seek their views on current trends in pension plan risk management. OSFI undertook this exercise in order to better understand risk management strategies being implemented or expected to be implemented by sponsors of federally regulated private pension plans. OSFI recognizes that each pension plan is unique, and that plan administrators are in the best position to identify the risks that affect their pension plan and the risk management strategies appropriate to their plan.

According to the consulting firms, plan sponsors have demonstrated increased openness to discussing and adopting risk management strategies since 2008. The main observations that were shared with OSFI include:

• The purchase of buy-out annuities, liability driven investing, and dynamic strategies (i.e., strategies involving increasing a plan's exposures to investments in fixed income securities as their financial position improves) are among the more popular risk management strategies currently being discussed with and adopted by plan sponsors.
• Generally, plan sponsors are showing limited interest in purchasing longevity risk hedging products, which may be due to a lack of understanding of these products and/or plan sponsors currently focussing on reducing other risks inherent in their pension plans (e.g. market risk, interest rate risk).
• Other risk management strategies that consulting firms are discussing with clients include investing part of the asset portfolio in alternative investments such as real estate, infrastructure, and hedge funds, and plan design changes such as the introduction of defined contribution provisions into a plan with only defined benefit provisions.

As a result of its research, OSFI is considering whether it may be appropriate to issue new or revised guidance relating to pension plan risk management strategies. We welcome suggestions regarding what guidance in this area might be helpful to plan sponsors, administrators, and consultants. You may forward your comments and suggestions on this topic to information@osfi-bsif.gc.ca or directly to your Relationship Manager or contact in OSFI's Private Pension Plans Division.

 

Estimated Solvency Ratio Results

OSFI estimates solvency ratios for approximately 400 defined benefit pension plans that it supervises. The Estimated Solvency Ratios (ESRs) assist OSFI with the early identification of solvency issues that could affect the security of promised pension benefits.

The exercise uses the most recent actuarial, financial and membership information filed with OSFI for each plan before the analysis date. Assets are projected based on either the actual rate of return provided on the Solvency Information Return or an assumed rate of return for the plan. Solvency liabilities are projected using relevant Canadian Institute of Actuaries' commuted value and annuity proxy rates. Expected contributions, benefit payments and expenses are taken into account and an ESR, based on the estimated adjusted market value of the fund, is then calculated for each plan. While the ESR for any particular plan is only an estimate, it can help provide an early indication of a plan's financial condition and can be used to identify broader trends.

The previous ESR exercise was conducted as at December 31, 2013.

The weighted average ESR for all defined benefit pension plans was 0.94 as at December 31, 2014. This compares to 0.98 in December 2013. The line graph below shows the current and previous ESRs dating back to December 2005.

The bar graph below illustrates the distribution of the ESR results for defined benefit pension plans since 2005 as at December 31. The bar graph shows the percentage of pension plans with ESRs below 0.80, between 0.80-0.90, between 0.90-1.00 and over 1.00 in each year. The most recent ESR exercise indicated that 79% of defined benefit plans were underfunded as at December 31, 2014.

 

Common Concerns Raised in the Review of Actuarial Reports

The Actuarial team in OSFI's Private Pension Plan Division (PPPD) regularly reviews actuarial reports that have been referred to them by the Relationship Managers in PPPD's Supervision team. The following three concerns are often identified in these reviews and we would like to remind plan actuaries of OSFI's expectations:

1. Going concern expense assumptions vary from recent plan experience: We expect that investment and administration expense assumptions in going-concern valuations are based on recent plan experience. If not, then we would expect plan actuaries to include an explanation that justifies any variation in the actuarial report.
2. All deferred members are assumed to choose a commuted value for solvency valuation purposes: Deferred members are entitled to a deferred annuity on plan termination. A plan administrator may offer a deferred vested member other portability options such as a transfer of the commuted value into a prescribed locked-in savings vehicle. It is OSFI's view that is not reasonable to assume that all members who had previously opted for a deferred pension will choose to receive a commuted value upon plan termination if they are given a second opportunity to choose. Plan actuaries should consider this when setting and justifying the assumption for how deferred pension benefits will be settled in the actuarial report.
3. The duration of liability for retirees is not specified: The Canadian Institute of Actuaries (CIA) provides guidance for the duration of liabilities to be considered in setting the annuity proxy rate used for non-indexed pensions for solvency valuation purposes. OSFI expects plan actuaries to disclose the duration of the underlying liabilities in their actuarial reports. The most recent guidance on this issue was published in January 2015.

Based on the CIA's Standards of Practice, OSFI expects plan actuaries to provide sufficient details in their actuarial report to enable another actuary to assess the reasonableness of the data, assumptions and methods used.

 

Application of the 50% Rule Exception (Subsection 21(3) of the PBSA)

It has come to our attention that some plan administrators and consultants may be applying subsection 21(3) of the Pension Benefits Standards Act, 1985 (PBSA), respecting the minimum pension benefit credit, incorrectly.

Section 21 of the PBSA addresses the rights and entitlements of individual members. It does not address the provisions of the plan as a whole. Subsection 21(1) of the PBSA provides that if, on retirement, cessation of membership, death or the termination of the plan, a member's required contributions plus interest exceeds 50% of the pension benefit credit, the member's pension benefit shall be increased by the amount that can be provided by that excess.

Subsection 21(3) of the PBSA is a qualifier to subsection 21(1) of the PBSA and provides an exception to the application of this “50% rule”. Subsection 21(3) provides that the 50% rule, as described above, does not apply to the calculation of a deferred pension benefit if the plan provides for annual indexation of that deferred pension benefit up to the day on which payment begins.

It is our understanding that some plan administrators and consultants are incorrectly applying the exception in subsection 21(3) to all benefits being paid from a plan that offers indexation in the deferral period. Such plans must still apply the 50% rule to the calculation of pension benefits other than deferred pension benefits (i.e. for a member who retires from active employment or for a survivor whose pre-retirement death benefit is being paid as an immediate pension benefit).

Subsection 21(3) also does not provide an exception to the application of the 50% rule to any benefit calculation (immediate or deferred) if a pension plan offers post-retirement indexation only. The application of the 50% rule may not result in an increase in the pension benefit credit in these plans; however, the calculation must still be done to confirm this.

 

Filing Financial Statements and an Auditor's Report

In accordance with the Pension Benefits Standards Act, 1985, Pension Benefits Standards Regulations, 1985 and the Directives of the Superintendent pursuant to the Pension Benefits Standards Act, 1985 (Directives), pension plan administrators must file the OSFI 60 – Certified Financial Statements and may also have to file an Auditor's Report of the pension fund.

As described in OSFI's Instruction Guide titled Guide to Completing the OSFI 60 – Certified Financial Statements and Filing Auditors Reports, the Directives provide that an auditor's report is not required if the plan is an insured plan or if the pension fund is deposited as follows:

1. all funds are held by one insurance company in any type of account, or
2. all funds are held in the pooled funds of one trust company, or
3. all funds are held by one trust company but not in its pooled funds and the fair market value of the total assets of the pension fund is less than $5,000,000.

All plans that do not meet one of the exceptions mentioned above, including plans that are funded through a Pension Fund Society, are required to file an Auditor's Report with OSFI.

The exceptions listed above are based on all assets of the pension fund. For example, if a pension plan has defined benefit (DB) and defined contribution (DC) provisions and the DC assets are held in the pooled funds of one trust company and the DB assets are held in the pooled funds of another, then the plan administrator is required to file an Auditor's Report with their OSFI 60.

The OSFI 60 and, where applicable, the Auditor's Report, must be filed with OSFI within six months after the plan year end. If the plan is terminated but assets remain in the pension fund then the plan administrator must continue to prepare and file the OSFI 60 and the Auditor's Report, if applicable, within the same timeframe.

 

Filing and Funding Requirements Prior to Confirmation of Registration

In accordance with section 10 of the Pension Benefits Standards Act, 1985 (PBSA), an administrator of a pension plan that is subject to the requirements of the PBSA must, before administering the plan, file all documents that create and support that pension plan with the Superintendent within 60 days after the plan is established. Plan administrators are reminded that the plan must be administered in accordance with the PBSA and the PBSR whether or not it has received confirmation of registration from OSFI. This includes the requirements relating to funding the pension plan and submitting regular filings.

 

Portability and Annuity Purchases by Members

One of the choices that a pension plan offers members when they cease membership before they are eligible for early retirement is to use the value of their pension benefit credit to purchase an immediate or deferred life annuity. A pension plan may also offer this option to members who cease membership after becoming eligible for early retirement.

Terminating members should be informed that the assumptions and methods used by the insurance company offering the deferred or immediate annuity may differ from those used to calculate the member's pension benefit credit payable from the plan. As a result, the amount of their pension benefit credit from the plan may not be sufficient to purchase an annuity that would provide the same amount of annual pension that they would receive from their pension plan.

 

Marriage Breakdown and Administering Court Orders or Agreements

Subject to provincial property law and the Pension Benefits Standards Act, 1985 (PBSA), spouses on divorce and former common-law partners on the breakdown of their common-law partnership may agree on how pension benefits will be divided between the parties. Under subsection 25(4) of the PBSA, one option available to a member or former member is to assign all or part (e.g., 100%, 40% etc.) of their pension benefit, pension benefit credit or other benefit under the plan to their (former) spouse or (former) common-law partner. This option is available in addition to any division method provided for under provincial property law.

It has come to our attention that some pension plan administrators are incorrectly advising plan members under federal jurisdiction that their benefits must be divided in a specific way and are refusing to administer a court order or an agreement which does not correspond to their division method.

Subsection 25(5) of the PBSA provides that the administrator must determine and administer any pension benefit, pension benefit credit or other benefit of a pension plan in accordance with an applicable court order or agreement between the parties. An administrator must also administer an assignment made under subsection 25(4) of the PBSA.

Where a court order is not clear with respect to the distribution of any pension benefit, pension benefit credit, or other benefit under a pension plan, it may be necessary for the plan administrator to request that the parties seek further directions from the court. OSFI does not have a role in interpreting a provincial property law court order or agreement.

 

Important Dates

Under the Pension Benefits Standards Act, 1985:

Action or Required Filing[1]	Deadline
Actuarial Report and Actuarial Information Summary	6 months after plan year end
Annual Information Returns (OSFI 49)	6 months after plan year end
Certified Financial Statements (OSFI 60) and Auditor's Report (if required)	6 months after plan year end
Solvency Information Return (OSFI 575)	The later of 45 days after the plan year end or February 15
Annual Member Statements	6 months after plan year end

[1] Plan administrators are reminded that they must be registered for the Regulatory Reporting System (RRS) in order to be able to file all required regulatory filings. For more information on RRS, please visit the RRS page on OSFI’s website.

Under the Pooled Registered Pension Plans Act:

Action or Required Filing	Deadline
Pooled Registered Pension Plan Annual Information Return (includes financial statements)[2]	3 months after the end of the plan year
Annual Member Statements to members and spouses	45 days after the end of the plan year

[2] Administrators must file this return directly with OSFI.