Note to our stakeholders
This issue of PBSA Update is incorporated into the OSFI Web site and replaces the previous practice of publishing and mailing copies to plan administrators, consultants and other interested parties. Click here to subscribe to the online PBSA Update.
Table of Contents
1. Asset Transfer Instruction Guide
2. Pension Consultation Paper - May 2005
3. CAPSA’s Guidelines for Capital Accumulation Plans
4. CAPSA’s Pension Plan Governance Guidelines & Self-Assessment Questionnaire
5. Change to the Actuarial Report Instructions
6. New CIA Standard of Practice for Determining Pension Commuted Values
7. Valuation Report Effective Dates
8. Excess Contribution Calculation Date
9. Custodial Transfers within a Pension Fund
10. Correction to Update 18 item 4 - Application of 50% Rule to Buy-back Arrangements
1. Asset Transfer Instruction Guide
On July 28, 2005, OSFI released its Instruction Guide for Asset Transfers Between Defined Benefit Pension Plans (Instruction Guide) registered under the Pension Benefits Standards Act, 1985. http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/pension/guides/pen_asset_e.pdf.
The Instruction Guide sets out the general principles as well as more detailed criteria and requirements that the Superintendent of Financial Institutions will generally expect to be satisfied before granting permission to transfer assets under Section 10.2 of the PBSA.
The criteria include acceptable methods to determine asset transfer values as well as requirements to ensure the protection of members’ rights and interests under the PBSA. The Instruction Guide also sets out OSFI’s approach to individual transfers as well as a description of the information that OSFI requires to be filed when making a request for permission to transfer assets.
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2. Pension Consultation Paper - May 2005
There is a broad range of challenges facing defined benefit pension plans in Canada. In this context, the Federal Department of Finance issued a consultation paper in May 2005, entitled Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985 (PBSA).
The consultation paper seeks the views of Canadians on how to amend the legislative and regulatory framework for defined benefit pension plans registered under the PBSA in order to improve the security of pension plan benefits and ensure the viability of defined benefit pension plans. The paper identifies a number of key questions related to these goals and how to balance the interests and incentives of plan sponsors and plan members in advancing them.
Submissions deadline was September 15, 2005. Subject to the consent of submitting parties, comments received are available on the Department of Finance’s Web site. http://www.fin.gc.ca/news05/05-037e.html.
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3. CAPSA’s Guidelines for Capital Accumulation Plans
In May 2004, the Canadian Association of Pension Supervisory Authorities (CAPSA) released its Guideline No.3 Guidelines for Capital Accumulation Plans (CAP Guidelines). http://www.capsa-acor.org/capsa-newhome.nsf/4a5938dfa169be3285256c1a00752c5d/bbe9515c561d349485256e91004f5e64?OpenDocument. These guidelines were developed by the Joint Forum of Financial Regulators of which CAPSA is a member along with the Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators (CCIR). Development of the CAP Guidelines included two national consultations and extensive work with an industry task force.
A CAP is defined as a tax-assisted investment or savings plan that permits members to make investment decisions among two or more options offered within the plan. Examples of CAPs include defined contribution pension plans, group RRSPs, deferred profit sharing plans and group registered educational savings plans. OSFI involvement with CAPs is limited to the defined contribution pension plans covered by these guidelines.
The CAP Guidelines reflect the expectations of regulators and industry best practices and outline the roles and responsibilities of plan sponsors, service providers and members to ensure that CAP members receive the information and the tools they need to make informed investment decisions. The CAP Guidelines are intended to support the improvements of industry practices in the operation of CAP.
OSFI believes that the CAP Guidelines, in conjunction with CAPSA’s Guideline No. 4 Pension Plan Governance Guidelines and Self-Assessment Questionnaire (see below), will promote good governance and administrative practices for plan administrators and expects defined contribution plan administrators to apply the recommendations of the CAP Guidelines.
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4. CAPSA’s Pension Plan Governance Guidelines & Self-Assessment Questionnaire
In October 2004, CAPSA released its Guideline No. 4 Pension Plan Governance Guidelines and Self-Assessment Questionnaire (CAPSA Governance Guidelines) http://www.capsa-acor.org/capsa-newhome.nsf/4a5938dfa169be3285256c1a00752c5d/c23e35f57379385a85256f62007038ab?OpenDocument. CAPSA has also developed a Frequently Asked Questions companion document that it released in June 2005. http://www.capsa-acor.org/capsa-newhome.nsf/4a5938dfa169be3285256c1a00752c5d/229829d69ecb856e8525701b005492e1?OpenDocument.
The CAPSA Governance Guidelines are intended to provide pension plan administrators across Canada with a broad, flexible outline of good governance principles and guidelines to assist them in establishing and maintaining good governance practices for their pension plans. They do not create additional rights or obligations for any party to a pension plan. Pension plan administrators are expected to take the measures necessary to follow the guidelines.
The Self-assessment Questionnaire is attached to the CAPSA Governance Guidelines in order to help pension plan administrators assess and enhance their governance practices. The questionnaire is intended for the internal use of the pension plan administrator and need not be submitted to the pension regulator.
The CAPSA Governance Guidelines also recommend that pension plan administrators of defined contribution pension plans in which members make investment decisions follow the CAPSA Guideline No. 3: Guidelines for Capital Accumulation Plans supplemented by the governance guidelines.
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5. Change to the Actuarial Report Instructions
OSFI’s Instructions for the Preparation of Actuarial Reports for Federally Regulated Defined Benefit Pension Plans were issued in June 2000 and provide guidance on the preparation of actuarial reports. We are hereby changing our policy on one aspect discussed in these Instructions.
Currently, Section 2.4.3 of the Instructions “Solvency Assumptions and Valuation Methods” indicates that for members who have a right to receive an immediate annuity or the commuted value of such an annuity upon termination, OSFI expects the actuary to value the option that creates the highest solvency liability. It has come to our attention that this requirement does not reflect actual experience in plan terminations and that it may result in an overstatement of the solvency liability.
Our revised policy is that OSFI expects the actuary to assume that at least 50% of members who have a right to receive an immediate annuity or a commuted value will choose the option that creates the highest solvency liability.
This policy is effective immediately and will be reflected in the next issue of the Instructions.
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6. New CIA Standard of Practice for Determining Pension Commuted Values
The adoption of an updated Standard of Practice for Determining Pension Commuted Values by the Canadian Institute of Actuaries (CIA) effective February 1, 2005, has led to a transition issue question: “If a commuted value was calculated under the old CIA standard and, because of delays in payment, a recalculation is required after February 1, 2005, should the recalculation be made under the new CIA standard or the old standard that was in effect at the time of the termination?”
Delays in payment may happen for a variety of reasons, including delays in producing required member documentation or in members communicating their chosen option to the administrator and, in the case of a plan termination, in receiving approval from OSFI. With respect to a plan termination, OSFI has required recalculation if former plan members cannot receive payment within four months of computation and if computation would be advantageous to them.
However, as a transition measure, OSFI will not require a recalculation using the new method and the calculation originally done under the old standard can stand until the date of payment, subject to interest credited at the rate used to determine the commuted value for the intervening period.
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7. Valuation Report Effective Dates
Under Section 12(3) of the PBSA, 1985, the Superintendent has directed that valuation reports must be filed at intervals not exceeding three years. Most plans have an established practice of preparing valuation reports at either the first day or the last day of the plan year (e.g. December 31, 2004 or January 1, 2005). OSFI accepts either practice as long as it is applied consistently from year to year. Changing the effective date of the valuation report between the first day and the last day of the plan year can have an impact on the funding requirements for the plan because of the different CIA recommended interest rates that apply to valuations calculated as at these dates.
A plan wishing to change its reporting date should advise OSFI in writing at least 60 days prior to the plan year-end and state the reason for the change. OSFI reserves the right to object to the change and may require the preparation of a new report using a date that is consistent with the prior filed report.
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8. Excess Contribution Calculation Date
OSFI has found that the 50% rule provisions of Section 21(2) of the PBSA, 1985 have been applied incorrectly by some plan sponsors and their advisors. Specifically, in the case of a deferred vested member, the 50% rule has been calculated at the time of the member's retirement date instead of the termination date.
Generally speaking, when the legislation lists a number of possible events that trigger the application of a provision of the Act, it is assumed that whichever event occurs first, determines the timing of the application of the provision of the Act. Therefore, in the event of a member termination prior to retirement, the member's pension benefit (including any pension attributable to excess contributions) is determined as at the member's termination date.
Form 2 of Schedule IV of the Pension Benefits Standards Regulations, 1985 prescribes the information that must be provided to a terminating vested member. To complete this form, the member's benefit attributable to the 50% rule must be calculated at the time of the member's termination as the member's pension benefit payable must be broken down into its various components including the benefit attributable to the 50% rule.
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9. Custodial Transfers within a Pension Fund
OSFI has found that some plan administrators have not informed OSFI when the holder or custodian of a pension fund has changed.
Although a custodial change within a pension fund is not considered an asset transfer under Section 10.2 of the PBSA, and therefore does not require the Superintendent’s permission, documentation supporting this custodial change must be filed with OSFI. The required documentation includes the new trust agreement or insurance contract and the new account number. In accordance with Subsection 9.1(1) of the PBSA, 1985, the plan administrator must also inform the new holder or custodian of the pension fund of all amounts that are to be remitted to the pension fund and the expected date of the remittance.
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10. Correction to Update 18 item 4 - Application of 50% Rule to Buy-back Arrangements
The PBSA Update 18 item 4 that described the application of the 50% rule to different types of buy-back of past service arrangements was incorrect in that it suggested that the 50% rule would not be applicable where the cost-sharing arrangement for a buy-back of past service is clearly specified in the plan document. The correct application of the rule is that where a benefit is clearly specified in the plan document, the 50% rule must be applied.
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