Office of the Superintendent of Financial Institutions
The purpose of this guidance note is to assist the Relationship Manager (RM) in the risk assessment process and the completion of a Risk Assessment Summary (RAS). An overview of this process can be found in the Risk Assessment Framework for Federally Regulated Private Pension Plans document.
Before assessing the risks associated with a pension plan, it is important to have a sound knowledge of the plan. An in depth knowledge of the plan provides the basis for identifying the activities that are significant to the plan meeting its obligations, and a foundation for rating the risks associated with the plan.
This guidance note assists an RM in gathering the relevant information to be familiar with prior to undertaking the risk assessment process. The following sections expand on the key information that must be understood in order to rate individual items within a risk assessment. Rating risks associated with significant activities, the effect of the employer, and other factors of the risk assessment process are covered in separate guidance notes.
The type of work, undertaking or business in which members in a plan are employed determines the jurisdiction that applies to the plan. Pension plans associated with employment in connection with any work, undertaking or business that is subject to the legislative authority of Parliament, or located in the Yukon, Northwest Territories or Nunavut are regulated federally. This concept of "included employment" is contained in subsection 4(4) of the Pension Benefits Standards Act, 1985 (PBSA) and section 2 of the Pooled Registered Pension Plans Act (PRPPA). Subsection 4(5) of the PBSA defines "excepted employment". The RM should be aware of which category of included employment the plan belongs to.
At times, further explanation may be necessary to clarify why a plan is federally registered. Some pension plans cover employees in "included employment" and employees who are subject to provincial pension legislation. These plans are known as multi-jurisdictional pension plans. OSFI is the lead regulator when the plurality of members of the plan is in included employment. To eliminate the need to register a pension plan with each designated province under whose jurisdiction the employees fall, the federal Minister of Finance has entered into bilateral reciprocal agreements with all provincial pension authorities except for Newfoundland (Note: OSFI has a reciprocal agreement with Quebec only for plans established in the Northwest Territories and the Yukon). These agreements authorize OSFI to administer the province’s pension legislation on their behalf for those members subject to that province’s jurisdiction. An RM must be aware if OSFI is monitoring the plan on behalf of any provincial jurisdiction.
The plan administrator is the person or body legally responsible for administering the pension plan and its fund, as specified by section 7 of the PBSA and section 2 of the PRPPA. The administrator of a plan registered under the PBSA should be defined in the plan text, and may be the employer, a Board of Trustees, a Pension Committee, or another governing body. If it is a Board or similar type body, a description of the composition of the Board or body, such as Board members and their background, may be relevant. For a PRPP, the administrator is a corporation that holds a licence from the Superintendent of Financial Institutions authorizing it to be a PRPP administrator.
In addition, other parties who are usually involved in the administration of the plan and fund may include:
The overall characteristics of a plan dictate the risks and challenges that the plan may encounter. The RM should consider these characteristics when conducting a risk assessment. Plans may exhibit one or more of the following characteristics:
The provisions of a plan establish the eligibility criteria for plan members and determine the amount of employer and employee contributions as well as the benefits provided by the plan. There are several provisions that the RM should understand prior to conducting a risk assessment. Though the following are considered key provisions, the RM should note that other provisions may exist within plans that can also be important in the risk assessment process.
In a plan with defined benefit provisions, the benefit formula determines the benefit a member is accruing and will receive on retirement or termination, or that the survivor or beneficiary is entitled to upon the member’s death. Included in the benefit formula is whether or not the plan provides for indexation. The benefit formula may indicate other items that the RM should consider, such as ancillary benefits. Types of benefit formulas include:
Career Average Earnings (CAE);
e.g. 2% of the members’ total career average salary, per year of active service
Final or Best Average Earnings (FAE or BAE); and
e.g. 2% of the members’ average annual salary over their final (or best) five years of service, per year of active service
Flat Benefit (Flat).
e.g. $20 per month per year of active service
Variable payments may also be available to members of certain plans, as contemplated for example under section 48 of the PRPPA.
It is important to know whether the plan is contributory or non-contributory for members. The plan text or other supporting documentation will set the contribution rates.
The plan should be funded in accordance with the prescribed tests and standards for solvency.
In respect of a plan that is not a MEPP, the employer should pay into the fund all amounts required to meet the prescribed tests and standards for solvency.
In respect of a MEPP, each participating employer should pay into the fund all contributions that they are required to pay under an agreement between participating employers or a collective agreement, statute or regulation.
An employer and plan member representatives can negotiate a distressed pension plan workout scheme (DPPWS) in respect of a plan with defined benefit provisions where the employer does not anticipate being able to meet the minimum funding requirement of the PBSA. The scheme must meet the requirements set out in the PBSA, and be approved by the Minister of Finance. MEPPs are not eligible for workout schemes.
RMs should be aware of other benefits that may be available to members, such as:
Pensionable age is an important concept since it is unique to the federal pension legislation and is a key determinant in valuing pension benefits. Additional information on Pensionable Age is available in Pension Update No. 13 available at www.osfi-bsif.gc.ca.
Pensionable age is defined as 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. A plan could have multiple pensionable ages, based on age, age and service, or other criteria that the member must meet in order to receive an unreduced pension. Members’ benefits on termination, death or retirement are all payable at pensionable age. A plan that only provides capital accumulation accountsFootnote 1 will have a normal retirement age.
Additionally, the RM should check that the plan is compliant with the “R-10” rule found in subsection 16(2) of the PBSA, which states that members and former members of the plan shall be eligible, commencing ten years before pensionable age, to receive an immediate pension benefit based on the period of employment and salary up to the actual retirement date.
Some plans establish a hierarchy for the disbursement of benefits on plan termination, which may result in some members receiving a larger share of their benefits than other members if the plan is terminated while under-funded. These rules, referred to as “priority provisions”, stipulate the order in which plan funds are used to meet the pension obligations of specified groups of members (retirees, actives, deferred, etc). Not all plans have priority provisions, in which case all groups are generally treated in an equal manner (i.e. receive a pro-rata share of accrued benefits).
The RM should be aware of whether the plan administrator has the power to amend the Plan and whether that power restricts the plan administrator under the terms of the plan text, trust agreement or any other document that supports the plan text from making an amendment that would have the effect of reducing the accrued benefits of any members. The restriction on reducing accrued benefits limits the plan administrator’s options to address situations where minimum funding is not being met. As prescribed by the PBSA, the administrator of a negotiated contribution plan has the power to amend the plan to reduce accrued benefits regardless of the terms of the plan, subject to the Superintendent’s approval.
There may be other parties, such as a union or employer, who play a role in consenting to specific plan amendments, for example terminating the plan or reducing accrued benefits.
Every plan filing for registration must provide for the use of surplus on both a going concern and termination basis. The current documentation for plans registered prior to June 1998 may not clearly identify the use of surplus on a going-concern or termination basis. For these plans, a legal review of the plan documents such as plan texts, amendments, employee booklets, and trust agreements since the plan’s inception would generally be required to determine surplus ownership.
Contribution holidays (paying the plan’s normal cost from the lesser of the going-concern surplus and the portion of the solvency surplus that exceeds five percent of solvency liabilities) are permitted under the PBSA if the pension plan is fully funded with a margin of more than five percent of solvency liabilities. However, some plans may contain provisions which prohibit contribution holidays. Before using surplus to pay for normal costs, plan administrators should ensure that contribution holidays are permitted under the terms of the plan.
The plan text will set out the classes of members eligible to participate in the plan. The PBSA does not define what constitutes a class. The classes must relate to employment. Classes could be segregated by union/non-union status, employment positions, geographical location or other factors. A class may be closed to new entrants. Having numerous classes in a plan adds to the complexity of its administration.
The history of the plan will provide an understanding of how the plan administrator has performed. Past events, such as late filings or remittances, as well as the performance of the plan should be noted for potential impacts on the risk profile. The consideration of plan history should also include the effective date of the plan, any past mergers, transfers or significant plan amendments, and any prior intervention actions taken by OSFI.
The RM should understand the financial position of the plan in order to assess the plan’s risk profile. Factors to consider include:
Often, the acceptable risk parameters for a plan are determined by the demographics of a plan. Two plans with the same issue but different demographic factors may be assigned very different risk ratings. Demographic considerations of a plan include:
The financial and demographic information of a plan should be considered together in order to gain an accurate risk assessment of a plan.
The employer must contribute to the pension plan in accordance with the plan provisions and the PBSA’s minimum funding requirements or the PRPPA. Failure to do so could have serious repercussions on the future of the plan and on members receiving their promised benefits. As such, the financial health of an employer of a pension plan may have a significant effect on the risk profile of a pension plan. RMs should be aware of the general health and basic financial information of the employer in order to determine potential effects on the plan. Financial information may or may not be provided to OSFI if the employer is a private company. Similarly, the industry in which the employer operates could impact a plan’s risk rating. An industry that is growing might give the RM confidence while an industry on the decline may raise concerns. The information gleaned in this exercise will be used to determine the funding risk rating in the risk assessment process.
Information about the industry/employer may include:
Based on knowledge of the plan, the RM will be able to identify the extent to which each of the four significant activities applies to the plan and the key information required to assess the risk of each applicable significant activity. The significant activities that apply to plans are defined below.
The Administration activity focuses on the general administration and management of the plan. It includes items such as benefit calculations; benefit payments; payment of expenses; regulatory filings; record keeping; and collection and remittance of contributions to the custodian. Administration also covers plan design and amending the plan as necessary.
The Communications to Members activity requires that members understand the nature of the plan, its promised benefits, and who bears what risks. It involves ensuring the plan’s membership receives the prescribed information and is aware of all relevant plan decisions and the impact they might have on the members’ rights and benefits. In regards to a plan with capital accumulation accounts, member education and awareness is very important because members bear the investment risk. Information on investment options for these members is essential.
The Actuarial activity involves actuarial valuation of the plan assets and liabilities, as well as advice, analysis, testing and special reports provided at the request of the administrator, and compliance with professional standards and legislation. This activity is not applicable to plans with only capital accumulation accounts.
The Asset Management activity focuses on managing the plan’s funds, which encompasses the development of the investment strategy, including the establishment of a Statement of Investment Policies and Procedures (SIP&P) and asset/liability management, investment decisions, regulatory compliance with investment rules, and monitoring and reporting, including the preparation of special financial or risk management reports.
The factors discussed in this guidance note will be used in the determination and documentation of the risk profile of a plan.
It is important to note that information identified during the Knowledge of Plan process should be considered as a whole. Often, individual factors may not give an indication of the effect on risk until given perspective by other pieces of information identified through this exercise. When conducting a risk assessment, an RM is expected to analyze the risk while drawing connections between the items discussed in this guide.
References to plans with capital accumulation accounts cover plans with defined contribution provisions and Pooled Registered Pension Plans (PRPPs).
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