PBSA Update - Issue 29

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Document Properties

• Type of Publication: Newsletter
• Date: June 2008
• No: 29

The PBSA Update includes descriptions of how the Office of the Superintendent of Financial Institutions (OSFI) applies selected provisions of the Pension Benefits Standards Act, 1985 (PBSA), its regulations and directives and OSFI guidelines. Plan administrators should obtain appropriate legal and actuarial advice on how the legislation and guidelines affect their pension plan.

1. Unlocking Changes - 2008 Federal Budget

The Federal Budget 2008 announced the government’s commitment to make regulatory changes to provide three new options for unlocking funds from federally-regulated Life Income Funds (LIFs) and Locked-in Registered Retirement Savings Plans (Locked-in RRSPs).

• Individuals, in the year they turn 55 or in any subsequent year, are permitted a one-time conversion of up to 50 per cent of their LIF holdings into an unlocked tax-deferred saving vehicle;
• Individuals, in the year they turn 55 or in any subsequent year, with small holdings in federally regulated locked-in funds (total holdings of LIFs and Locked-in RRSPs of not more than $22,450) may wind up their accounts, with the option to transfer the funds to an unlocked tax-deferred savings vehicle;
• All individuals facing financial hardship, determined on the basis of their expected income in the current year, or high disability-related or medical-related costs, will be allowed to unlock up to $22,450 in a given year from their LIFs or Locked-in RRSPs.

The regulations implementing these options took effect May 8, 2008. Individuals can take advantage of the new rules as soon as financial institutions are able to make the necessary adjustments to provide the new LIF and Locked-in RRSP contracts to clients.

The regulations include a six month transition period during which LIF and Locked-in RRSP contracts can be entered into under either the old or the new rules. After the six month transition period, new LIF and Locked-in RRSP contracts must contain the unlocking options.

Further information on these changes is available on the OSFI Web site.

2. Update on the Status of Phased Retirement Changes

The Federal Budget 2007 proposed changes to income tax rules to allow an employee to receive part of their pension benefits from a defined benefit pension plan and simultaneously accrue further benefits, subject to certain constraints. The Budget also indicated that changes would be made to the PBSA to accommodate phased retirement in federally regulated pension plans.

Amendments to the Income Tax Act and the PBSA to implement phased retirement were passed on December 13, 2007, as part of Bill C-28.

The amendments to the PBSA dealing with phased retirement are not yet in force. OSFI and the government are developing regulations respecting the information that plan administrators must provide to members who enter into a phased retirement arrangement. Once those regulations are made, it is expected that the PBSA changes will come into force by an order of the Governor in Council, and federal pension plans will be able to offer phased retirement arrangements consistent with the new tax and pension rules.

Please see Update 28 for further details of the phased retirement changes.

3. Draft Termination Filing and Reporting Requirements

Two Draft Instruction Guides were issued in March 2008 to inform the pension industry of OSFI’s filing and reporting requirements for defined benefit and defined contribution pension plans that have been terminated under the PBSA.

Comments on the draft Instruction Guides were requested by May 16, 2008.

4. OSFI Reminder Letters for Required Filings

In the past, OSFI’s practice has been to send letters to remind plan administrators 45 days in advance that certain documents are due to be filed within six months of the plan’s year end. Due to the administrative cost of mailing over 1000 of these letters annually, OSFI has eliminated this practice but will continue to send non-compliance letters to those administrators who do not file the required documents within the six month period.

The following charts set out OSFI’s periodic filing requirements that are generally applicable for Defined Benefit/Combination and Defined Contribution pension plans.

5. Estimated Solvency Ratios (ESRs) Industry Summary Results

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 for the period ending December 31, 2007. Please see Update 26 for an explanation of how OSFI calculates ESRs and how the results are used.

OSFI estimates that 56% of all OSFI-registered defined benefit plans were under-funded, on a solvency basis, on December 31, 2007. This is compared to 51% on December 31, 2006. The weighted average ESR for these pension plans was 1.05 as at December 31, 2007 (1.06 in 2006).

Average ESR Trend

6. Scenario Testing in Defined Benefit Pension Plans - A Good Practice

Changes in financial markets and economic conditions have the potential to adversely impact financial institutions and other financial system participants, including pension plans. Looking forward, the continuing market volatility and low discount rates highlight the need for pension plans to assess their risk exposure and tolerance, and for OSFI to continue to apply risk-based supervision.

OSFI has identified focus on the changing risk environment as its long-term business priority. In this regard, OSFI is taking steps to improve its ability to understand the changing risk environment and how it might affect financial institutions and pension plans, and is using that increased understanding to adjust its supervisory and regulatory expectations of financial institutions and pension plans.

Estimated Solvency Ratio (ESR) testing will continue as a part of OSFI's assessment of the effect of current market conditions on pension plans. This exercise assists OSFI in identifying plans that appear to be more at risk and intervening as appropriate.

While the ESR exercise is a valuable regulatory tool that helps to estimate the current financial position of pension plans, we believe that each plan administrator needs to have a clear understanding of their risk tolerances. We encourage plan administrators to undertake scenario testing to help identify potential exposures and impacts on their pension plans and their plan members and take initiatives to manage these risks prudently to safeguard pension benefits.

Whether it is investment returns, interest rates, or demographic shifts, scenario testing helps ensure that current approaches are robust enough to withstand a range of outcomes and that plan administrators and sponsors are prepared to respond.

7. Remittance of Contributions

Employer and employee contributions must be remitted to a pension fund in accordance with the time frames set out in subsection 9(14) of the Pension Benefits Standards Regulations, 1985 (PBSR). It has come to OSFI’s attention on a number of occasions that the late remittance of employer or employee contributions continues to be a problem in some pension plans.

Administrators and custodians both have a role in ensuring that contributions are remitted to the pension fund in accordance with the timeframes set out in the PBSR. Plan administrators and custodians are reminded that subsection 9.1(1) of the PBSA requires plan administrators to notify, in writing, the holder or custodian of the pension fund of all amounts that are to be remitted to the pension fund and the expected date of remittance. Paragraph 9.1(2)(b) of the PBSA also requires that the custodian or plan administrator notify the Superintendent immediately, in writing, if the payment to a pension fund is not remitted within 30 days after the expected date of remittance.

If required payments are not remitted to the fund, Section 10 of the PBSR provides that the administrator is liable for the outstanding payment and interest thereon.

8. The 50% Rule for Defined Benefit Plans - Section 21 of the PBSA

Section 21 of the PBSA sets out minimum pension benefits for contributory defined benefit pension plans including what is referred to as the 50% rule (for service after December 31, 1986). This rule requires that if a member’s post 1986 contributions exceed 50% of the member’s pension benefit credit for that period of service, the member’s pension benefit shall be increased by the amount that can be provided by that excess.

OSFI continues to receive questions on when this 50% rule must be applied. The additional benefit resulting from the application of the 50% rule is calculated only once and added to the member's pension benefit as of the date of the event (cessation of membership, death, plan termination or retirement) leading to the benefit determination. The benefit attributable to the 50% rule then becomes part of the pension benefit on which any calculation of a pension benefit credit is based.

9. Restriction on Transfer Values – Defined Benefit Plans

OSFI would like to remind plan administrators that transfer values for members are restricted if the solvency ratio of the plan is less than one (subsection 26(4) of the PBSA and section 19 of the PBSR). In accordance with section 9 of the Directives of the Superintendent, if the solvency ratio of a defined benefit plan is less than one, a member’s transfer value shall be calculated by multiplying the pension benefit credit by the solvency ratio of the plan. Any transfer deficiency of the pension benefit credit must be transferred with interest within five years of the initial transfer.

The full value of a member’s pension benefit credit may only be transferred where:

• the value of the transfer deficiency has been remitted to the fund or
• the transfer deficiency for any individual is less than 5% of the Year’s Maximum Pensionable Earnings for that year, provided that the aggregate value of all transfer deficiencies paid since the last valuation date does not exceed 5% of the assets of the plan at that time.

10. Included Employment – For the General Advantage of Canada

OSFI has recently received questions on whether or not certain feed mills or grain elevators are considered undertakings that have been declared by the Parliament of Canada to be “for the general advantage of Canada”. Employees of these undertakings would therefore be subject to the PBSA.

We would like to clarify that undertakings declared for the general advantage of Canada or for the advantage of two or more of the Provinces include atomic energy, uranium mining, all flour or feed mills, all seed cleaning mills and certain grain elevators.

Whether or not a grain elevator would be included depends on the geographic location of that grain elevator. Most grain elevators in western Canada and a small number along the Great Lakes Seaway have been declared for the general advantage of Canada. However, plan administrators who are uncertain whether or not their plan includes employees who are employed in a federal undertaking are encouraged to seek legal advice.

OSFI’s Application for Registration Instruction Guide has recently been updated to clarify which grain elevators and flour, feed or seed mills are considered undertakings declared to be for the general advantage of Canada.

11. Funding a Pension Plan Prior to Confirmation of Registration

In accordance with section 10 of the PBSA, an administrator of a pension plan that is subject to the requirements of the PBSA must, before administering the plan, file with the Superintendent, all documents that create and support that pension plan within 60 days after the plan is established. Plan administrators are reminded that the plan must be administered in accordance with the PBSA whether or not it has received confirmation of registration from OSFI. This includes the requirement to fund the pension plan.

12. Filing Plan Amendments

In PBSA Update 27 (June 2007), OSFI reminded plan administrators of the requirement of subsection 10.1(1) of the PBSA to file any amendment to the plan or any supporting document within 60 days of making that amendment. The amendment must also be accompanied by the Declaration of Compliance (OSFI 522) and the Addendum (OSFI 521). In some instances, plan administrators have delayed filing the amendment with OSFI for many months after the amendment was made to the plan.

OSFI considers a plan administrator to have made an amendment to a plan once the decision regarding an amendment to the plan is properly adopted by the plan administrator in accordance with the appropriate governance procedures for that plan such as a board resolution agreeing to the amendment. OSFI expects the amendment to be filed within 60 days of the date the plan administrator adopted the amendment.

13. Pension Plans and UN Suppression of Terrorism Regulations

On October 18^th, 2001, OSFI issued a letter to all federally regulated pension plans regarding their obligations under the United Nations Suppression of Terrorism Regulations. 2001 Letter to Plan Administrators

We would like to remind plan administrators of the obligations outlined in this letter and advise administrators that the list of individuals and entities covered by these regulations is updated regularly and is available on the OSFI Web site.

14. Staff News

Linda Maher has been appointed Director, Pension Plan Supervision within the Private Pension Plans Division of OSFI. Linda has been a member of OSFI’s Private Pension Plans Division for 17 years as a Manager in the Pension Plan Supervision section.