InfoPensions – Issue 19 – May 2018

InfoPensions is the Office of the Superintendent of Financial Institutions (OSFI)’s newsletter on pension issues. InfoPensions includes announcements and reminders on matters relevant to federally regulated private pension plans and pooled registered 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.

We invite you to visit the Pension Plans – Main page of OSFI’s website where additional pension related information is available on the specific website pages dedicated to the various types of plans (i.e. defined benefit, defined contribution and pooled registered pension plan). To receive email notifications of new items posted to OSFI’s website, including this newsletter and other pension-related documents, please subscribe using Email Notifications.

If you have any questions about the articles you read in InfoPensions or if you have suggestions for future articles, please contact us at information@osfi-bsif.gc.ca. The next issue of InfoPensions will be available in November 2018.

Pension Plans Survey

As communicated in InfoPensions 18, in November 2017, OSFI conducted an online survey of administrators and professional advisors of federally regulated private pension plans. In the survey, respondents answered questions about their perceptions of OSFI’s performance, including our effectiveness at supervising pension plans. We expect to publish the survey results on our website in June 2018.

Thank you to those who participated in the survey.

Recently posted on OSFI’s website

• Based on feedback received, OSFI added, in May 2018, an index that contains links to our guides and forms related to pension plans. Website users can also still access these guides and forms through the topic index for each plan type (i.e. defined contribution, defined benefit or pooled registered pension plan).
• A revised version of the Guide to Intervention for Federally Regulated Private Pension Plans was posted in March 2018 replacing the December 2010 version. As mentioned in the guide, plans are assigned a stage rating, from 0 to 4, depending on OSFI’s overall risk assessment of the plan. The guide was primarily revised to clarify what typically occurs at each stage including the degree of supervisory actions or interventions that plan administrators could expect OSFI to take.
• A new guidance note, Default Option for Member Choice Defined Contribution Plans, was posted in March 2018. This guidance note sets out OSFI’s interpretation and expectations relating to the requirements for the investment option selected by the administrator of a member choice plan as the default investment option.
• A revised instruction guide for Asset Transfers related to Defined Benefit Provisions of Pension Plans and accompanying Approval Request Form were posted in March 2018 replacing the November 2010 versions. The revisions to the instruction guide include clearer information for multi-jurisdictional plans, clarifications regarding the remittance of normal cost and special payments after the effective date of the transfer, and additional information on what is meant by a material negative impact on the receiving plan. The revisions to the form include enhanced reporting regarding the transferring individuals.
• A revised guidance note for Asset Transfers related to Defined Contribution Provisions of Pension Plans and accompanying Standardized Asset Transfer Request Form were posted in March 2018, replacing the June 2011 versions. The revisions to the guidance note include clearer information for multi-jurisdictional plans and clarifications regarding the scenarios under which the Superintendent’s permission to transfer assets is required. The revisions to the form include enhanced reporting regarding the transferring individuals.
• A revised instruction guide for completing the Actuarial Information Summary (AIS) was posted in February 2018. The revisions reflect recent changes made to the AIS form and include modifications that streamline the information and make it more user-friendly. This instruction guide replaces the previous version dated June 2015.
• A revised instruction guide for completing the Replicating Portfolio Information Summary (RPIS) was posted in February 2018. The revisions reflect recent changes made to the RPIS form and include modifications that streamline the information and make it more user-friendly. This instruction guide replaces the previous version dated April 2016.
• The final version of the guideline for Derivatives Sound Practices for Federally Regulated Private Pension Plans was posted in February 2018 replacing the 1997 guideline Derivatives Best Practices. The new guideline outlines the factors that OSFI expects administrators of federally regulated private pension plans to consider when developing policies and procedures for the sound risk management of derivative activities.
• A new instruction guide for the Solvency Information Return (SIR) was posted in January 2018 to assist plan administrators with defined benefit provisions in completing the SIR.

Late or Non-Remittance of Contribution Notification Checklist

In December 2017, the Canadian Association of Pension Supervisory Authorities (CAPSA) released a Late or Non-Remittance of Contribution Notification Checklist and associated tables. The checklist provides a harmonized approach for the reporting of either non-remittance or late remittance of contributions owing to a pension plan to the appropriate regulator.

The two associated tables provide the notification requirements and the contribution remittance timeframes by jurisdiction.

For federally regulated pension plans, the administrator, and if the administrator is the employer, the trustee or the custodian of the pension plan, is responsible for immediately notifying the Superintendent if payments are not remitted within 30 days after the expected date of the remittance (subsection 9.1(2) of the Pension Benefits Standards Act, 1985 (PBSA)).

Although neither the PBSA nor its regulations require a specific form for notifying the Superintendent, the checklist is a helpful document and plan administrators or the person responsible for providing the notice are encouraged to complete the checklist and submit it to OSFI when required.

Notifying OSFI in advance of plan termination

OSFI continues to receive applications for plan terminations without first receiving the required notice as provided in subsection 29(5) of the Pension Benefits Standards Act, 1985. We remind plan administrators that if they are terminating their pension plan, they must notify us in writing at least 60 days and not more than 180 days before the date of termination. If OSFI does not receive this notice, we may require the plan administrator to amend the termination date and re-file the termination report, which may lead to additional required contributions that will have to be paid into the plan.

Regulatory Reporting System

Plan administrators and other users of the Regulatory Reporting System (RRS) should review the following:

• The Private Pension Plans Division is currently reviewing options to replace our paper notification letters for late filings with email notifications. In the meantime, we encourage plan administrators to consult the Draft Returns section in RRS and immediately file any outstanding returns with OSFI. The plan administrator should contact Returns Admin or the plan’s Relationship Manager at OSFI if they determine that the returns listed in the Draft Returns section are incorrect (i.e. missing returns or returns not needed for the plan such as an Auditor’s Report).
• Plan administrators must complete the Pension Plan Annual Corporate Certification (PPACC) every year. As mentioned in the Guide to Completing the PPACC, the certification confirms that the pension plan has reviewed its Organization Profile and that the information is complete and up-to-date. In order to encourage the timely filing of this required return, the PPACC is now packaged with the Annual Information Return (i.e. one cannot be filed without the other).
• In addition to completing the PPACC, plan administrators are asked to update their authorized representatives (referred to as Local Registration Authorities (LRAs) in RRS) as needed. A pension plan must have a minimum of two LRAs. For information on how to add, edit or deactivate a LRA or other authorized RRS portal user please refer to InfoPensions 16 or refer to the Documents section after you log into RRS.
• Before submitting a plan’s Annual Information Return, plan administrators should review the membership they have reported to confirm it is correct (e.g. all “other beneficiaries” have been reported). Plan beneficiaries whose benefits are subject to provincial pension legislation must be included, even if the plan is subject to dual registration in Quebec or Newfoundland and Labrador. In addition, plan administrators must indicate the number of members that work in “included employment”. For more information, please refer to InfoPensions 15 and the instruction guide for Completing the OSFI 49 Annual Information Return and OSFI 49A Schedule A - Canada Revenue Agency Information Requirements.

OSFI is interested in any suggestions that you may have that would increase RRS’ efficiency for users. OSFI is limited in the changes it can make given the overall importance of ensuring the security of the information the system accepts. If you have any comments regarding RRS, please email OSFI at pensions@osfi-bsif.gc.ca.

Frequently occurring regulatory findings

Actuarial Reports

Actuarial reports submitted to OSFI are generally reviewed by the plan’s Relationship Manager in the Private Pension Plans Division and may be referred to its actuarial team for a more detailed review.

The Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans sets out the reporting requirements for actuarial reports filed with OSFI. Based on the Canadian Institute of Actuaries (CIA) Standards of Practice, we expect 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.

We remind plan actuaries of OSFI’s expectations relating to the following items that often cause concern in the actuarial reports that we review in more detail:

1. Going concern valuation – Disclosure of sources of experience gains and losses

   OSFI considers the reconciliation of the going concern valuation results a useful disclosure in an actuarial report because it includes the sources of experience gains and losses.

   Experience gains and losses should be shown separately for each assumption made in the actuarial report (e.g. investment return and expenses), unless the gain or loss related to the assumption is considered not material. Where gains and losses with respect to two or more assumptions are combined, the report should state that gains or losses for assumptions not shown separately are not considered material.

   The actuary should explain any significant or unusual gains or losses in the actuarial report.

2. Solvency valuation – Mortality assumption for benefits expected to be settled by the purchase of annuities

   The mortality basis for benefits expected to be settled by the purchase of annuities should be the CPM2014 mortality table (and CPM-B projection scale), unless the actuary justifies and explains in the actuarial report why the use of this table would not be appropriate. Where adjustments are made in accordance with the CIA mortality study (e.g. for pension size or industry) and/or where another base mortality table (e.g. CPM2014Priv) is chosen, a detailed justification should be included in the actuarial report.

   Only very large plans (e.g. 10,000+ retirees) are expected to have sufficient actual credible experience to customize published mortality tables such as the CPM2014 or use plan-specific mortality tables. Other plans may only have partially credible or insufficient experience to develop broad adjustments to the CPM2014.

   While the CIA Final Report on Canadian Pensioners’ Mortality includes actual to expected (A/E) ratios for industries, it also warns that industry analysis has not proven to be conclusive, and that the A/E ratios used to adjust mortality should be used with caution. Mortality experience for larger and more homogenous groups is expected to exhibit more credible results than for smaller, diverse industries.

   Unless an annuity quote is provided by a life insurance company, the extent to which a group’s substandard mortality would be reflected in the pricing of annuities is unclear. As such, it generally cannot be concluded that a life insurance company would use the same basis for the purchase of annuities as is used for the going concern valuation.

   Therefore, in the context of benefits expected to be settled by the purchase of annuities, OSFI expects that the mortality adjustments included in the actuarial report would reflect only the characteristics of the plan that are significantly different from the underlying data of the CPM2014 mortality table.

3. Going concern and solvency valuation – Disclosure of assumption for consent benefits

   Some plans offer benefits that are subject to administrator or employer consent, such as unreduced early retirement benefits. In these cases, OSFI expects the actuary to make a reasonable assumption of the number of members that will be granted consent and clearly disclose this assumption in the actuarial report. Unless plan experience justifies otherwise, it would generally not be acceptable to assume that no members will be granted consent for the purpose of the going concern valuation.

   OSFI allows the exclusion from solvency liabilities of benefits genuinely subject to consent of the plan administrator. If the plan includes such benefits, the actuarial report should specify whether consent to these benefits is assumed to be granted for solvency valuation purposes. When making this assumption the actuary should consider how the benefits are administered in practice, and obtain confirmation from the plan administrator of the treatment of consent benefits in the event of a plan termination.

Examinations

As communicated in InfoPensions 18, OSFI conducts examinations of a select number of pension plans each year. Desk reviews and on-site examinations performed in 2017 revealed some recurring areas of concern that resulted in similar recommendations for the plans examined. These included the following:

1. Governance documents are not sufficiently detailed and governance self-assessments are not completed

   Some plans do not have comprehensive written documentation regarding the roles, responsibilities and accountabilities of those involved in the administration of the plan. In addition, not all plan administrators are performing periodic self-assessments to determine the effectiveness of the administration of their plans. We understand that, depending on the size of the plan, governance documents and self-assessments may vary.

   Although OSFI does not require plan administrators to use a specific type of governance model or self-assessment technique, the Canadian Association of Pension Supervisory Authorities’ Guideline No. 4 – Pension Plan Governance and the Self-Assessment Questionnaire are recommended resources to help plan administrators meet their governance responsibilities.

2. The Statement of Investment Policies and Procedures (SIP&P) is not reviewed annually

   Some plan administrators have not been reviewing their SIP&P annually as required by section 7.1 of the Pension Benefits Standards Regulations, 1985. The results of this annual review should be documented.

3. There is no formal process to report to the board of directors/trustees and meeting minutes documenting the reporting are not sufficiently detailed

   Some plans do not have a formal process in place to regularly report to the board of directors/trustees (board) on matters pertaining to the operation of the plan. The level of reporting should be sufficient to allow the board to determine that it is fulfilling its fiduciary obligations, as plan administrator, to members and other plan beneficiaries.

   In addition, OSFI has found that the minutes of meetings/discussions held by the board or pension committee(s) relating to the plan are not comprehensive. Minutes of meetings are an important historical record of the decisions taken and should include the rationale and factors that were considered. Plan administrators should maintain appropriate records of key meetings and decisions affecting the plan, and confirm follow-up action.

Plan administrators are encouraged to review these recommendations in the context of their pension plans to address and prevent similar concerns.

Update on the pooled registered pension plan multilateral agreement

Effective November 15, 2017, the Government of Manitoba entered into the Multilateral Agreement Respecting Pooled Registered Pension Plans and Voluntary Retirement Savings Plans (PRPP Agreement). As communicated in InfoPensions 17, the federal government, British Colombia, Nova Scotia, Quebec, Saskatchewan and Ontario are the other signatories to the PRPP Agreement.

Revisions to the Actuarial Information Summary and the Replicating Portfolio Information Summary

OSFI revised the Actuarial Information Summary (AIS) form and the Replicating Portfolio Information Summary (RPIS) form in November 2017.

The AIS captures information that is set out in the actuarial report. A completed AIS must accompany any actuarial report that is filed with OSFI.

The RPIS also captures information that is set out in the actuarial report, but the information is specific to plans using a replicating portfolio approach. The completed RPIS must accompany any actuarial report that is filed with OSFI if that plan uses a replicating portfolio for solvency valuation purposes.

The revised AIS includes revisions that streamline its contents and make it more user-friendly. It also now captures additional information needed to present a better summary of what is contained in the actuarial report, including the following:

• mortality table adjustments
• percentage of members assumed to choose a commuted value
• transfer deficiencies
• present value of the provision for adverse deviations
• present value of future expenses payable by the plan
• buy-in and buy-out annuities
• number of months assumed between termination and wind-up reflected in the termination expenses
• incremental cost

Revisions to the RPIS are minor and include two new pieces of information collected from the actuarial report:

• present value of the provision for adverse deviations
• present value of future expenses payable by the plan

The AIS and RPIS must be filed using the Regulatory Reporting System (RRS). If an actuarial report also supports an application for the Superintendent’s authorization of a transaction such as a plan termination or an asset transfer, the AIS and RPIS must also be submitted electronically to pensions@osfi-bsif.gc.ca along with any required approval request form. The AIS and the RPIS forms to use when submitting an approval application can be found on OSFI’s website.

As noted in the Recently posted on OSFI’s website article above, revised instruction guides to assist plan administrators in completing the AIS and the RPIS and that reflect these changes were posted on our website in February 2018.

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) results help us identify any solvency issues that could affect the security of members’ promised pension benefits, before a plan files their actuarial report. The ESR results also help identify broader trends.

The ESR results are calculated using 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.

The median ESR for all pension plans was 0.96 as at December 31, 2017, up from 0.91 at the end of 2016. The weighted average ESR for all pension plans was 1.02 as at December 31, 2017, up from 0.97 at the end of 2016. The graph below shows the current and previous ESRs and median ESRs dating back to December 2008.

The bar graph below illustrates the distribution of the ESR results for federal pension plans with defined benefit provisions as at December 31 of each year since 2008. 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 results indicated that 63% of defined benefit plans were underfunded as at December 31, 2017, down from 80% at the end of 2016. Also, there has been a decrease in the number of plans that are more significantly underfunded (ESRs below 0.80) from 16% at the end of 2016 to 13% at the end of 2017.

Important dates

Plan administrators are reminded that required filings must be filed using the Regulatory Reporting System. Documents submitted in support of an application that requires the Superintendent’s authorization should be submitted electronically at pensions@osfi-bsif.gc.ca. One application is sufficient. There is no need to mail a hard copy of the application in addition to the electronic one.

Plans 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 Important Reminder: 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 spouses or common-law partners	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

Plans under the Pooled Registered Pension Plans Act:

Action or Required Filing	Deadline
Pooled Registered Pension Plan Annual Information Return (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 (including survivors that hold an account) 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)