Supervisory ratings for pension plans
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A pension plan’s Tier is based on its size and complexity, with consideration to potential system impact. While we start with data, the assigned Tier Rating reflects our supervisory judgment.
The Tier Rating guides the type of work that we carry out to identify risks.
We assign the Tier Rating using the same 1 to 5 scale that we use for financial institutions. This helps us apply our risk appetite consistently across our supervisory work. Table 8 outlines the definition of each Tier Rating.
|Large and/or complex institutions or pension plans with highest system impact
|Large and/or complex institutions or pension plans with significant system impact
|Mid-size institutions with moderate system impact | Large and/or complex pension plans
|Smaller and/or less complex institutions with low system impact | Mid-size and/or moderately complex pension plans
|Smallest, least complex institution with very low system impact | Small, least complex pension plans
Overall Risk Rating categories
A pension plan’s Overall Risk Rating (ORR) considers the following categories:
- business risk
- financial resilience
- operational resilience
- risk governance
You can find more information about the legislation, regulations and directives that apply to pension plans here: Pension Plans.
The Tier Rating determines the granularity of our risk assessment:
- For pension plans in Tier 5 we assign an ORR that considers the four risk categories.
- For larger and/or more complex pension plans, we also assign ratings for each of the four risk categories on the same 1 to 8 scale as the ORR.
Ratings are designed to respond quickly to the most serious risks
Our rating approach focuses on identifying the most serious risks facing a pension plan.
There are no weights in our framework, and for larger and/or more complex pension plans, any category has the potential to drive the ORR. We rate each category according to the level of risk it poses to the security of rights and benefits. In this way, the rating combines an assessment of risk and importance.
The category with the weakest rating becomes the starting point for the ORR. The ORR can’t be better than any of the rated categories. It can be worse, for example, where different issues have led to multiple categories being rated at the same level.
We use category ratings to spotlight areas where change is needed
Risks are often connected, and some issues will impact more than one risk category. For example, the supervisor may determine that risk governance is the root cause of an issue that impacts a pension plan’s financial resilience.
In these situations, we use the category ratings to reflect risk implications and spotlight where change is needed.
The business risk rating is a forward-looking assessment and includes the employer’s ability to fund the pension plan. For example, it includes indications about the financial strength of the employer(s), and strategic decisions that could affect the pension plan’s funding. We also consider the impact of the pension plan design on funding requirements.
The main driver of the business risk rating is the financial strength of the employer(s). Our focus for this category is on the ability of the employer(s) to meet current and future funding requirements.
The financial resilience rating assesses how the pension plan would be affected by financial stress. We do this by looking at the financial position of the pension plan and the performance of its assets.
The solvency position of the pension plan is an important part of the financial resilience rating because it is an indication of the risk to rights and benefits. For example, if a pension plan was to terminate underfunded, the ability of the pension plan administrator to pay members’ full benefits would depend on whether the employer(s) can fund any shortfall.
We consider risks related to the investment of plan assets, including factors such as the asset mix, returns, liquidity, liability profile, and use of leverage. In the case of defined contribution plans, we consider the appropriateness of investment choices provided to members.
The operational resilience rating assesses the ability of a pension plan administrator to deliver the promised pension benefits or respect rights through disruption.
The rating considers how rights and benefits could be at risk due to the operations of the pension plan. Oversight of third-party service providers, data management, and technological considerations all factor into this rating.
The risk governance rating reflects the ability of a pension plan administrator to identify significant risks to rights and benefits and to assess and manage their potential impact. We also assess the impact of any identified issues relating to non-compliance with the Pension Benefits Standards Act, 1985 or the Pooled Registered Pension Plans Act.
Our assessment of risk governance includes the frameworks used to identify, assess, and manage risks. This category reflects the overall effectiveness of risk governance for a pension plan.
Overall Risk Rating scale
ORRs map directly to OSFI’s existing Intervention Stage ratings as shown in Table 9. You can read more about our approach to intervention in our Guide to Intervention for Federally Regulated Private Pension Plans.
We use ratings to signal a need for early corrective action
We categorize pension plans as Stage 0 (or not staged) when no significant problems are identified. For the ORR, we split Stage 0 into four distinct rating categories to provide more granularity to our assessment of the pension plan’s risk profile. The expanded scale also helps us identify when a pension plan needs to take early action to address supervisory concerns.
We assign an ORR 1 when no significant issues are identified. We do not expect perfection at this level. Issues could come up, but there is confidence in the pension plan administrator’s ability to manage them. As a result, there is a minimal level of risk to rights and benefits.
An ORR 2 means that a pension plan has low risk. Issues have been identified, but these are not expected to have a significant impact on the pension plan.
An ORR 3 means that a pension plan has a moderate risk. While there is no anticipated risk to rights or benefits, we have identified issues that could significantly impact the pension plan unless they are addressed.
An ORR 4 is described as watchlist to make it clear that identified issues need prompt attention or the pension plan is likely to be staged.
For higher ratings, we think about how quickly threats are developing
An ORR 5 is assigned to pension plans that are in Stage 1 and is an early warning of issues that could impact rights and benefits.
An ORR 6 corresponds to Stage 2, and at this level the issues pose a threat to the security of rights and benefits. These could deteriorate into a serious situation if not addressed promptly.
An ORR 7 is assigned when there is serious doubt about the ability to deliver benefits or meet rights. The pension plan is placed in Stage 3 and plan termination is a strong possibility.
An ORR 8 is assigned to pension plans in Stage 4. At this point, the pension plan has terminated in an underfunded position and is in the process of wind-up. Benefits will likely be reduced.