PBSA Update - Issue 27

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• Type of Publication: Newsletter
• Date: June 2007
• No: 27

1. New Application for Registration Form and Instruction Guide

The Office of the Superintendent of Financial Institutions (OSFI) has recently reissued the Application for Registration of a Pension Plan -OSFI 48 (04-2007) and the accompanying Instruction Guide. These documents are available on the Pension Plans area of the OSFI Web site. The revised Application for Registration form replaces OSFI 48 (10-2001) and must be used for new pension plans seeking registration under the Pension Benefits Standards Act, 1985 (PBSA). Revisions to the form include:

• additional questions on the specifics of the pension plan seeking registration
• an incorporated declaration of compliance which now includes:
  • information on the Statement of Investment Policies and Procedures and
  • a paragraph for plans that include members under provincial jurisdiction
• an information section of the annual filing requirements for the different types of pension plans and
• format type changes

The Application (including all prescribed documents) must be submitted to OSFI within 60 days after the pension plan is established.

2. Filing Plan Amendments

Plan administrators are reminded of the requirement of subsection 10.1(1) of the PBSA to file any plan amendment within 60 days of making that amendment. This requirement also applies to an amendment to any other document that creates or supports the plan. The amendment must be accompanied by the Declaration of Compliance (OSFI 522) and the Addendum (OSFI 521).

Plan administrators are also encouraged to file consolidated plan texts with OSFI if the plan has been amended numerous times and records of exact provisions have become confusing. OSFI expects plan administrators to ensure that the plan provisions are clear and available to all the plan stakeholders, including day-to-day administrators, consultants, members and regulators.

3. Vested Benefits Payable to Terminating Members

OSFI has found that some plan administrators are not providing deferred vested members with their full benefit entitlements in accordance with the PBSA.

Paragraph 17(1)(a) of the PBSA requires vesting of deferred pension benefits payable at pensionable age. A “pension benefit” is defined in the PBSA as a periodic amount to which a member is or may become entitled. “Pensionable age” is the earliest age at which an unreduced pension benefit is payable to a member under the terms of the pension plan without the consent of the administrator. Pensionable age varies from plan to plan and can be expressed as a specific age or a number of years of service or a combination of both.

If a pension benefit is payable under the terms of the plan upon reaching pensionable age, and if a vested terminating member has met the years of service requirement (if any), then the benefit must be provided to that terminating member. If there is no service component in the plan’s pensionable age, then all terminating vested members are entitled to any benefit payable at pensionable age in accordance with paragraph 17(1)(a) of the PBSA. All members are assumed to grow into any minimum age requirement.

OSFI considers indexing and bridge benefits payable at pensionable age to be part of the member’s periodic amount and, therefore, payable to a member or former member at pensionable age in accordance with paragraph 17(1)(a) of the PBSA.

Plan administrators are also reminded that subsection 16(2) of the PBSA provides that members and former members are eligible to receive early retirement benefits ten years before pensionable age.

4. Eligibility Requirements for Few or Single Member Plans

Subsection 14(l) of the PBSA requires that all employees of a class for which a pension plan is established must be eligible to participate in the plan. The plan text for all pension plans (including pension plans with one or a few members) must include the criteria applicable in determining the class of employees entitled to join the plan.

For example, a pension plan established for the president of XYZ Company would satisfy this requirement; whereas a pension plan established for Jane Smith of XYZ Company would not. Similarly, an acceptable eligibility criterion would be “senior executives of ABC Company; but not “designated senior executives of ABC Company”. If the pension plan is established for a specific position but will not necessarily be offered to the next person in that position, the name of the person in that position along with the title of the position may be included in the eligibility criteria for the pension plan.

The name of the pension plan should reflect the class of employees eligible to join the pension plan.

5. Estimated Solvency Ratios (ESRs): Industry Summary

OSFI estimates solvency ratios for all federally registered defined benefit pension plans to assist with the early identification of solvency issues that could jeopardize the security of promised pension benefits. OSFI most recently reviewed the estimated solvency position of defined benefit plans in March 2007, for the period ending December 31, 2006. Please see Update 26 for an explanation of how OSFI calculates ESRs and how the results are used.

The following summary tables indicate improved overall solvency ratios largely due to improved investment returns. OSFI estimates that 51% of all OSFI-registered defined benefit plans were under-funded, on a solvency basis, on December 31, 2006. This is compared to 78% on December 31, 2005. The weighted average ESR for these pension plans was 1.06 as at December 31, 2006.

ESRs of OSFI-registered defined benefit plans, as at December 31, 2006

Weighted average of ESRs for plans over OSFI’s solvency testing period

6. Addressing Approvals as a Priority

Results of the OSFI Pension Industry Consultation in 2005 indicated that OSFI’s timeliness in processing regulatory approvals, pursuant to the PBSA, warranted improvement. Feedback from the survey was appreciated and OSFI has been making changes to address the concerns identified.

At the time of the survey, we had already created a small group dedicated to processing approval cases. Since that time, we have been tracking approval-related activity and addressing areas where we believe that delays occur, both internally to OSFI and externally in pension plans. Key facts related to these regulatory approvals include:

• OSFI received 105 new approval requests in 2006/07, and processed 96 in the same timeframe.
• Roughly half of the approvals received were new plan registrations.
• Slightly more than half of the approvals received (and processed) are for defined contribution plans – these tend to be less complex.
• Each approval case is assigned a priority based on the potential impact on member benefits as well as the time the approval has been with OSFI.
• A majority of the packages that we receive from pension plans are incomplete. This adds greatly to the time and effort involved in processing an approval. (Please see the article below regarding major plan transactions requiring OSFI approval.) Addressing this challenge will be a major focus for us going forward.

We are continuing to review and improve our regulatory approval process to address the concerns of all pension plan stakeholders.

7. Plan Transactions Requiring OSFI Approval or Authorization

When a plan administrator is contemplating a significant pension plan amendment or transaction requiring approval or authorization by OSFI, the plan administrator is encouraged to contact the appropriate Relationship Manager in the Private Pension Plans Division of OSFI early in the process (before filing the amendment or valuation report) to discuss the proposal. This should help speed up the approval time by ensuring that correct documentation is prepared and filed.

OSFI has prepared Instruction Guides for:

• Asset Transfers under subsection 10.2 of the PBSA
• Conversions of Pension Plans from Defined Benefit to Defined Contribution
• Amendments Reducing Accrued Benefits under subsection 10.1(2) of the PBSA
• Refunds of Surplus and
• Termination Reports for Defined Contribution Plans (the Instruction Guide for Termination Reports for Defined Benefit plans is currently being updated).

Administrators are reminded that submissions for such transactions must be completed in accordance with these Instructions Guides.

8. Beneficiaries who cannot be Located

When a plan is terminating and the fund is in the process of winding up, plan administrators may be unable to locate everyone who has benefits payable from the fund.

Plan administrators could publish notices in local and national newspapers, a union central publication, such as a newsletter or post notices in local union halls. There are a number of private search agencies and databanks that may be able to assist in locating former members or beneficiaries. Some government departments such as the Canada Revenue Agency, Human Resources and Social Development Canada or Provincial motor vehicle registries may also be able to assist by searching their databases for recent records.

As the plan administrator cannot complete the plan wind-up if assets and liabilities remain for beneficiaries who could not be located, the three options available to the plan administrator are:

• pay the funds into Court and/or
• apply to the Court for its opinion, advice or direction or
• maintain the plan’s fund and continue to file financial statements and valuation reports (if applicable).

9. Legislative Changes

LIF Changes

In September 2006, the Pension Benefits Standards Regulations, 1985 were amended to remove the requirement to purchase an annuity at age 80 from a federally regulated Life Income Fund. Further information on LIF payment schedules is available on the OSFI Web site. Life Income Fund

Funding Relief

In November 2006, regulations providing temporary solvency funding relief for federally regulated private pension plans became effective. Please see Update 26 for an explanation of these regulations and OSFI’s expectations regarding actuarial reports filed.

Phased-in Retirement

The Federal Budget 2007 included proposals to permit an employer to simultaneously pay a partial pension to an employee and provide further pension benefit accruals to the employee. The measure will apply only to employees aged 55 years and over who are entitled to an unreduced pension. These changes will come into effect beginning in 2008. It is expected that changes to governing pension legislation will be required to implement this budget announcement.

10. Electronic/Diskette Filing

As pension plan administrators are quickly becoming aware, beginning in 2007, Annual Information Returns (AIR or OSFI-49) and Certified Financial Statements (CFS or OSFI-60) must be filed electronically for pension plans registered with OSFI.

The following should address some of the questions plan administrators or service providers may have about Electronic / Diskette Filing.

Why is electronic filing required?

OSFI has introduced electronic filing for pension plans to reduce data errors and improve data integrity. OSFI supervises over 1,300 pension plans and receives returns (AIRs and CFSs) annually from each of these plans. We also have a Memorandum of Understanding with the Canada Revenue Agency (CRA) whereby we collect information on CRA’s behalf. OSFI relies on these returns to allow us to carry out our risk-based supervisory approach for pension plans. To date, all pension plan returns submitted to OSFI have been in paper format.

When is electronic filing required?

For all plan year-ends after October 1, 2006, pension plans must file their annual returns electronically. Plans must still file their annual returns by the usual dates (June 30 for most plans).

How do I file my returns electronically?

• Go to the Pension Plans Diskette Filing area of the OSFI Web site under / list of diskette filing software vendors.
• Choose a vendor and sign up to use their software.
• Follow the vendor instructions in filling out the forms electronically and in putting together the complete package to be sent to OSFI.
• The complete package should include the following:
  • correctly labelled diskette or CD,
  • Diskette Transmittal Form for each return. The Diskette Transmittal Form provides certification that the filed diskette or CD was generated using software that has been tested, approved and produced in accordance with OSFI specifications.
  • Certification Forms for each return (AIR and CFS). An authorized officer of the plan administrator must sign the Certification Forms. The plan administrator is certifying that information provided is true, correct and complete. This certification applies to both the OSFI and CRA information.

Error Handling : It is important that all data be free of errors before the diskette/CD is filed; otherwise the diskette/CD will be returned for correction and the filing requirement will not be considered to be met until an error-free diskette/CD is received.

Note : The diskette filing of the CFS does not affect the filing requirements for an Auditor’s Report. Pension plans that are required to file an Auditor’s Report must continue to do so (see the Guide to the Certified Financial Statements on our Pensions web site).

What does it cost?

OSFI did not set the pricing for the electronic filing software, so it is up to each pension plan administrator to check vendors’ prices. Prices may vary depending on the size of the plan, both in terms of assets and membership.

Why CDs or diskettes – why can’t the returns be e-mailed to OSFI?

Some of the information provided is of a sensitive nature, and according to government policy, cannot be sent by unsecured means. OSFI also requires physical signatures on the certifications that go along with the electronically filed returns.

Why only the AIR and CFS – what about the other returns that must be filed with OSFI?

Over time, OSFI intends to make all of our returns electronic. The AIR and CFS are the first step. They are also the highest volume returns received by OSFI. Most other forms are generally ad-hoc or specific to a smaller group of pension plans.

Who do I call if I have a question?

Any questions should be addressed to Bruce Martin, Regulatory Information Division at (613) 990-8160 or Bruce.Martin@osfi-bsif.gc.ca.

Are there any exceptions?

If your plan is a new plan (i.e. no OSFI registration number yet), then you will have to file paper returns. Please contact Bruce Martin (613) 990-8160 if this is the case.

11. OSFI Input in Correcting Administrative Errors

Occasionally OSFI is requested to approve or provide input on an action to correct an administrative error that had occurred in a pension fund. OSFI expects the plan administrator and the custodian to have the proper governance structure in place to deal with such matters. OSFI does not play a role in correcting or authorizing the correction of such administrative errors. OSFI does, however, expect custodians or administrators to inform OSFI in writing of the actions taken to rectify the error.

12. Staff News

Judy Cameron is the new Managing Director of the Private Pension Plans Division (PPPD) of OSFI. She joined OSFI in 1999 and had been Director of Legislation and Policy Initiatives for the past four years. Prior to this, she had worked in the Financial Sector Policy Branch of the Department of Finance, and in the control and financial planning area at the head office of the Royal Bank.

The following three Divisions report to the Managing Director of the PPPD:

Supervision

• Henri Boudreau – Director
• Linda Maher – Manager
• Philippe Morisset – Manager

Actuarial, Policy and Approvals

• Jean-Claude Primeau – Director
• Pirjo Davitt – Manager
• Gavan Power – Manager

Legislation and Policy Initiatives

• John Grace

PPPD’s former Managing Director, Karen Badgerow-Croteau, has been promoted to Senior Director of OSFI’s Financial Institutions Group.

More information on the organizational chart for OSFI and the PPPD is available on the OSFI Web site.

The PBSA Update is for general communication purposes only and does not contain definitive statements on the law, the Pension Benefits Standards Act, 1985, its regulations and directives take precedence. Plan administrators should obtain appropriate legal and actuarial advice on how the Act, regulations and directives affect your pension plan.

If you have any questions on the issues covered in the PBSA Update, please contact Sylvia Bartlett at (613) 990-7856 or sylvia.bartlett@osfi-bsif.gc.ca.