Issue 17 – May 2017

InfoPensions is the Office of the Superintendent of Financial Institutions' (OSFI) newsletter on pension issues. InfoPensions includes announcements and reminders on matters relevant to federally regulated private pension plans. It includes descriptions of how OSFI applies various provisions of the Pension Benefits Standards Act, 1985, Pooled Registered Pension Plans Act, their regulations, directives and OSFI guidance. Plan administrators should obtain appropriate professional advice on how the legislation and guidelines affect their particular pension plan.

InfoPensions is available on the Pension Plans main page of OSFI's website. Plan administrators can also find pension-related information on OSFI's website under Defined Benefit Plan, Defined Contribution Plan and Pooled Registered Pension Plan. To receive new issues of this newsletter and other OSFI pension-related documents automatically by email, please subscribe under the Email Notifications link.

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 available in November 2017.

Disclosure of information to plan members and former members

Annual statements for members and former members

As announced in InfoPensions 15, a number of amendments to the Pension Benefits Standards Regulations, 1985 (PBSR) came into force on July 1, 2016. These amendments include a new requirement to send annual statements to former members (including retirees) and new disclosure requirements for annual statements to members. All annual statements that are due to be issued after July 1, 2016 must comply with the new disclosure rules.

Plan administrators can refer to the instruction guides titled Disclosure Requirements for Defined Contribution Pension Plan (DC Disclosure Guide) and Disclosure Requirements for Defined Benefit Pension Plans for more information. 

OSFI has received enquiries about which annual written statement should be sent if a recipient was an active member at the plan year end but a former member at the time the statements are mailed out. We have communicated that, based on the requirements of the PBSR, administrators should determine the type of annual statement that should be provided based on the recipient’s status at the end of that plan year.

Plan administrators are also reminded that annual member statements must accurately reflect the benefits that are payable to that member. If, for example, a member’s benefits have been adjusted as a result of credit splitting following the breakdown of a marriage or common-law partnership, this adjustment should be reflected in the member’s accrued pension benefit amount shown in the annual statement.

Defined contribution plans – new disclosure requirements

Member choice

If assets of the plan are held in respect of member choice accounts, members are entitled to receive annual statements that include a description of each investment option available to them, how their funds are currently invested and any timing requirements that apply in making an investment choice. The details of what must be included can be found in subsection 7.3(1) of the PBSR and Appendix A of the DC Disclosure Guide.

Variable benefits

Plan administrators of defined contribution plans paying variable benefits to former members are reminded that the annual statements provided to these former members must include additional information as set out in paragraph 23(1.1)(i) of the PBSR and Appendix B of the DC Disclosure Guide.

Plan amendments – determining which parties should receive notice

Subparagraph 28(1)(a)(i) of the Pension Benefits Standards Act, 1985 states, in part, that a pension plan must provide, to each member and employee who is eligible to join the plan and that person’s spouse or common law partner, a written explanation of any applicable amendment, within 60 days after the amendment is made.

Individuals who may be affected by the plan amendment and who should therefore receive a written explanation of that amendment are those who were either members of the plan or eligible to join the plan when the amendment was made. The spouses or common law partners of these individuals should also receive a written explanation of the applicable amendment.

In order to ensure that new members or new employees eligible to join the plan receive up-to-date information on the plan, any amendments made before these individuals became members or became eligible to join the plan should be included in the information package provided to them.

Defined contribution asset transfers subject to provincial legislation

An asset transfer related to the defined contribution provisions of a federally regulated pension plan, other than a transfer to a pooled registered pension plan, does not normally require the permission of the Superintendent. However, if the benefits of any of the transferring members, former members, or other persons entitled to benefits are subject to provincial pension legislation, the Superintendent’s permission, on behalf of a provincial regulatory authority, is required. If a transfer of assets related to defined contribution provisions involves individuals subject to provincial pension legislation, plan administrators are expected to complete the Standardized Asset Transfer Form.

Before transferring assets related to defined contribution provisions of a plan, plan administrators are asked to determine whether or not the benefits of any of the transferring individuals are subject to provincial pension legislation, thereby triggering the requirement to obtain the Superintendent’s permission. 

Please see OSFI’s Guidance Note, Asset Transfers related to Defined Contribution Provisions of Pension Plans for more information regarding defined contribution asset transfers.

Plan amendments to incorporate legislative changes

In InfoPensions 13, OSFI communicated that, because amendments to the Pension Benefits Standards Regulations, 1985 (PBSR) had been passed, plan administrators were expected to take steps to make the necessary revisions to their plan texts as soon as possible, taking into account the delayed coming into force dates of certain amendments. As indicated in the Key PBSA/PBSR Amendments and In Force Dates table, the last amendments to the PBSR came into force on July 1, 2016.

With all of the amendments to the Pension Benefits Standards Act, 1985 and PBSR now in force, all pension plan documents should reflect all of these amendments.

Plan administrators that have not already done so are asked to send electronic copies of their re-stated plan texts to pensions@osfi-bsif.gc.ca.

Proposed amendments to regulations

On April 29, 2017, amendments to the Pension Benefits Standards Regulations, 1985 and the Pooled Registered Pension Plans Regulations were pre-published in Part 1 of the Canada Gazette and they include a change to the maximum allowable amount of letters of credit.

A qualifying letter of credit can be obtained by the employer instead of paying a required solvency special payment into the pension fund. Currently, the total face value of all letters of credit held for the benefit of a plan cannot exceed 15% of the market value of plan assets as determined on the valuation date. Once the amendments are in force, the total face value of all letters of credit held by the employer will not be permitted to exceed 15% of solvency liabilities of the plan as at the last filed valuation date. This modification essentially increases the threshold for underfunded plans that hold letters of credit.

The proposed amendments also add provisions to the various prescribed retirement savings plans sections to clarify that a non-resident is permitted to unlock funds from these vehicles and to allow a survivor to surrender the death benefit payable from these vehicles to a dependent.

Estimated solvency ratio results

OSFI regularly estimates the solvency ratio for approximately 370 pension plans with defined benefit provisions that it supervises. The Estimated Solvency Ratio (ESR) assists OSFI with the early identification of solvency issues that could affect the security of members’ 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 helps provide an early indication of a plan's financial condition and can be used to identify broader trends.

The weighted average ESR for all pension plans was 0.97 as at December 31, 2016, up from 0.95 at the end of 2015. The line graph below shows the current and previous ESRs dating back to December 2007.

The bar graph below illustrates the distribution of the ESR results for federal defined benefit plans as at December 31 of each year since 2007. It shows the percentage of pension plans with ESRs below 0.80, between 0.80 and 0.90, between 0.90 and 1.00, and over 1.00 in each year. The most recent ESR exercise indicated that 80% of defined benefit plans were underfunded as at December 31, 2016, approximately the same percentage as at December 31, 2015. There has been a decrease in the number of plans that are more significantly underfunded (ESRs below 0.80) from 19% at the end of 2015 to 16% at the end of 2016.

Common concerns raised in the review of actuarial reports

Actuarial reports submitted to OSFI are generally reviewed by the plan’s relationship manager and may also be referred to the Private Pension Plans Division’s actuarial team for a more detailed review. The following items are often identified as concerns in these detailed reviews, and we would like to remind plan actuaries of OSFI’s expectations for actuarial reports related to these issues:

1. Going concern valuation – Interest rate: Assumptions for administration, active and passive investment management expenses should cover all expenses paid by the plan. The provision for each expense item should be clearly and separately disclosed in the actuarial report, and quantified so that the appropriateness of expense provisions taken individually and as a whole may be assessed.

   In particular, where a plan buys units of an investment fund, investment expenses might not all be paid directly by the pension fund. A portion of investment expenses might be paid through net investment income received by the plan. These indirect expenses paid by the plan should be clearly and separately disclosed in the actuarial report, and taken into consideration in the determination of the discount rate.

2. Going concern valuation –Provision for adverse deviations (PfADs): OSFI expects that a set of actuarial assumptions would, as a whole, include an appropriate provision for adverse deviations, and that the actuarial present value of this provision be disclosed in the actuarial report. It is not necessary that each assumption include a margin for adverse deviations. Most actuaries select best estimate assumptions for all contingencies except the discount rate, and disclose in the actuarial report the actuarial present value of the provision for adverse deviations included in the interest rate.

   Some actuarial reports include additional margins in other economic assumptions (e.g. salary increase) or demographic assumptions (e.g. mortality). This approach is acceptable to OSFI provided that the margins are explicitly stated. In such cases, the actuarial present value of the provision for adverse deviations disclosed in the actuarial report should include the present value of these margins as well. 

3. Asset mix: The actuarial report should include information on the actual asset mix of the plan by major asset category at the valuation date. Both the target asset mix and ranges stipulated by the Statement of Investment Policies and Procedures (SIP&P) of the plan should also be disclosed.

The Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Planssets out the reporting requirements of actuarial reports filed with OSFI for pension plans with defined benefit provisions. Based on the CIA 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.

Entitlement to bridge benefits payable at pensionable age

Many federally regulated private pension plans provide a bridging benefit that is payable to former members for a temporary period from the date of retirement to when the former member is eligible to receive benefits under the Old Age Security Act or the Canada Pension Plan/Quebec Pension Plan.

When the plan’s pensionable age is or can be earlier than the date that these bridging benefits cease to be paid (typically age 65), the bridging benefits must be considered when determining a terminating member’s pension benefit. Pensionable age is defined in subsection 2(1) of the PBSA as the earliest age at which a pension benefit is payable to the member under the terms of the plan without the consent of the administrator and without reduction by reason of early retirement. Depending on the plan, pensionable age may be expressed as a specific age, a number of years of service, a combination of both, or a minimum combined age and service point total. All members who terminate employment prior to pensionable age are assumed to grow into any minimum age requirement or the age portion of a minimum point total for pensionable age.

As described below, bridging benefits payable at pensionable age are considered to be part of the pension benefit payable to a member at pensionable age (see Vested Benefits Payable to Terminating Employees). 

Section 17 of the Pension Benefits Standards Act, 1985 (PBSA) provides that, on cessation of membership in the plan, a member is entitled to a deferred pension benefit that is calculated in a similar manner and payable on the same terms and conditions as the immediate pension benefit they would have received had they attained pensionable age. This provision of the PBSA prohibits a pension plan from restricting eligibility for pension benefits payable at pensionable age (including bridging benefits) to members who retire from active service.

Therefore, if a terminating member would have met any eligibility requirements for bridging benefits by their pensionable age (assuming age grow-in), bridging benefits payable as of their pensionable age must be included in their pension benefit.

An example of where special attention is needed to ensure that pension benefits are calculated correctly for terminating members is where a plan has a pensionable age of at least age 55 with 85 points and the plan terms provide that the bridging benefit is payable on retirement to all retiring members until age 65. As noted above, a pension plan cannot restrict pension benefits payable at pensionable age (including bridging benefits) to those retiring from active service. Therefore, a member who ceases membership from this plan before reaching pensionable age must, at a minimum, be provided with the bridging benefit from their pensionable age to age 65. If the member ceases membership at age 50 with 25 years of service, their pensionable age is age 60 (60 + 25 = 85 points) and the deferred pension benefit provided to the terminating member must include bridging benefits payable from age 60 to age 65. The value of these bridging benefits must also be reflected in their pension benefit credit.

Special care must also be taken with respect to the pension benefits of members who retire (rather than terminate) prior to pensionable age from a plan whose plan terms restrict eligibility for bridging benefits to members who retire after reaching a particular age or with a particular number of points. Pursuant to section 16 of the PBSA, where a member who retires prior to pensionable age would have met the plan’s eligibility requirements for bridging benefits by the time they reached their pensionable age (assuming age grow-in), their pension benefit must also account for bridging benefits payable from their pensionable age.

Pension payments to former members beginning after pensionable age

In cases where a former member begins receiving their monthly pension after pensionable age, for example age 67 where the pensionable age of the plan is age 65, the former member is entitled to retroactive pension payments for the two year period after age 65. OSFI expects retroactive pension payments owed to be credited with a reasonable rate of interest.

In the example above, in lieu of paying the former member retroactive pension benefit payments plus interest, a plan administrator may offer this former member the option of receiving a pension benefit that is actuarially increased from pensionable age. The administrator’s decision to allow the actuarially increased pension benefit must not be contrary to the statutory rights of the former member’s spouse or common-law partner at pensionable age. Where it is offered, the plan text should expressly provide for this option.

Update on the pooled registered pension plan multilateral agreement

The Multilateral Agreement Respecting Pooled Registered Pension Plans and Voluntary Retirement Savings Plans (PRPP Agreement) has been in effect between the federal government and British Colombia, Nova Scotia, Quebec and Saskatchewan since June 15, 2016. As noted in InfoPensions 16, the PRPP Agreement is intended to streamline the regulation and supervision of pooled registered pension plans (PRPPs) that are subject to the federal Pooled Registered Pension Plans Act and the PRPP legislation of at least one province participating in the agreement.

In January 2017, the Government of Ontario signed the PRPP Agreement and became a party to that agreement effective March 31, 2017. Minor changes to the original agreement were made coincident with Ontario signing.

Pooled Registered Pension Plan Annual Information Return: new form, guide, and filing deadline

OSFI has posted a revised version of the Pooled Registered Pension Plan Annual Information Return (PRPP AIR) along with a new Guide to the return (Guide to the Pooled Registered Pension Plan Annual Information Return – Form RC368). The purpose of the Guide is to assist administrators of PRPPs in completing the joint PRPP AIR that must be filed with OSFI and the Canada Revenue Agency.

To provide administrators more time in order to obtain all the necessary information requested, a new filing deadline has also been established for the PRPP AIR. On February 15, 2017, the Superintendent of Financial Institutions issued a directive pursuant to the Pooled Registered Pension Plans Act changing the filing deadline to provide PRPP administrators with an additional month to file the return, which includes an auditor’s report on the PRPP’s assets. The new filing deadline, which takes effect immediately, is four months after the end of the year to which the document relates. A copy of the Superintendent’s directive can be found on the Acts, Regulations & Directives page of OSFI’s website.

Please note that the PRPP annual assessment due date of March 31 is unchanged. OSFI will send an assessment invoice to each PRPP administrator based on the total number of members and other account holders of the PRPP as at the end of the preceding year.

Pension Plans Survey

Since 2005, OSFI has commissioned consultations with pension plan administrators and professional advisors to obtain their assessment of OSFI's effectiveness as a regulator and supervisor of private pension plans. These consultations are part of our ongoing commitment to be responsive to stakeholder input and to continuously improve performance. OSFI’s previous Pension Plans Survey was conducted in November 2014 and the results of that survey can be found on the Consultations and Surveys page of OSFI’s website.

We expect that the next Pension Plan Survey will be conducted in the Fall 2017.

Pension Industry Forum

Since 2010, OSFI’s Private Pension Plans Division has hosted its Pension Industry Forum, as well as a number of web-based outreach events to give administrators of federally regulated private pension plans, their advisors, and related service providers the opportunity to hear from OSFI staff about current issues and ask questions.

OSFI is planning to host the next Pension Industry Forum in Toronto in late October 2017. If you have suggested topics for the upcoming Forum, please direct them to information@osfi-bsif.gc.ca.

A video of the March 2016 Pension Industry Forum including the transcript and presentation materials can be found on OSFI’s website.

Important Dates

Plan administrators are reminded that required filings must be filed using the Regulatory Reporting System. Documents filed in support of an application that requires the Superintendent’s authorization should be filed electronically at pensions@osfi-bsif.gc.ca.

Under the Pension Benefits Standards Act, 1985:

Action or Required Filing	Deadline
All plans:
Annual Information Return (OSFI 49)	6 months after plan year end
Pension Plan Annual Corporate Certification (PPACC)	6 months after plan year end
Certified Financial Statements (OSFI 60) and, if required, an Auditor’s Report	6 months after plan year end
Plan Assessments Plan administrators are reminded that the number of members and other beneficiaries used to determine the annual pension assessment is the “Grand Total” number reported in the plan’s OSFI 49 for the preceding plan year end.	6 months after plan year end
Annual Statements to members and former members and those person’s spouse or common-law partner	6 months after plan year end
Defined Benefit Plans Only:
Actuarial Report and Actuarial Information Summary and, if required, Replicating Portfolio Information Summary	6 months after plan year end
Solvency Information Return (OSFI 575)	The later of 45 days after the plan year end or February 15

Under the Pooled Registered Pension Plans Act:

Action or Required Filing	Deadline
Pooled Registered Pension Plan Annual Information Return (RC368) (includes financial statements)	April 30 (4 months after the end of the year to which the document relates)*
Pension Plan Annual Corporate Certification (PPACC)	April 30 (4 months after the end of the year)*
Plan Assessments OSFI sends plan assessment invoices to all pooled registered pension plans (PRPP) registered with OSFI based on the total number of members and other account holders of the PRPP as at the end of the preceding year.	March 31 (3 months after the end of the year)
Annual Statements to members and their spouses or common-law partners	February 14 (45 days after the end of the year)

* See article on “Pooled Registered Pension Plan Annual Information Return: new form, guide, and filing deadline” regarding change in filing deadline.