This publication 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 govern. You should obtain appropriate legal and actuarial advice on how the Act, regulations and directives affect your pension plan.
Table of Contents
1. Benefit Reduction Instruction Guide
2. Solvency Funding Relief
2.1 OSFI Expectations Regarding Actuarial Reports
3. Estimated Solvency Ratios: Industry Summary
3.1 OSFI’s Intervention Activities Based on Solvency Testing Results
3.2 Resuming Contributions for Plans with Excess Surplus
4. Collateral for Securities Lending
5. Adjustments to Member Pension Benefit Credits
6. New Operational Structure for the Private Pension Plans Division (PPPD)
7. Reporting Defined Contribution Assets in Actuarial Reports for Combination Plans
8. Unlocking for Non-Residents: Correction of an Item in Update 12
9. Waiving Survivor Benefits
10. Reminder re: Notification of Plan Termination or Wind-Up
1. Benefit Reduction Instruction Guide
On April 11, 2006, the Office of the Superintendent of Financial Institutions (OSFI) released its Instruction Guide for Authorization of Amendments Reducing Benefits in Defined Benefit Pension Plans .
http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/pension/guides/bnft_rdc_e.pdf
The instruction guide sets out the general principles and requirements that OSFI will generally expect to be satisfied regarding an application for authorization, under paragraph 10.1(2)(a) of the Pension Benefits Standards Act, 1985 (PBSA), of an amendment that reduces pension benefits accrued before the date of the amendment.
We thank the industry experts who provided valuable comments during the preparation of this guide.
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2. Solvency Funding Relief
In May 2005, the Department of Finance Canada released the consultation paper, Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985, seeking comments on means to enhance benefit security and the viability of defined benefit pension plans.
Following the consultation period, the May 2006 federal budget proposed four temporary measures to provide solvency funding relief in response to the difficult circumstances facing defined benefit pension plans. The proposed temporary measures provide options for easing the minimum funding for federally regulated defined benefit pension plans while providing safeguards for promised pension benefits. The temporary funding relief would be available only to plan sponsors whose funding payments are up-to-date and only for the first valuation report filed with OSFI before 2008. The temporary relief options proposed in the May 2006 federal budget include the following.
- Consolidate solvency payment schedules: Plan administrators would be permitted to consolidate solvency payment schedules and amortize the entire existing solvency deficit over a single, new, five-year period. This option would equalize outstanding solvency payment obligations through five equal payments over the next five years.
- Extend the solvency funding payment to 10 years with buy-in: Plan administrators would be permitted to extend the period for making solvency funding payments to 10 years from five years, if at least two-thirds of plan members and at least two-thirds of retirees buy into the idea. Plan administrators would have to show that:
- they have fully informed plan members,
- that no more than one-third of current plan members object to the change, and
- that no more than one-third of retirees and other beneficiaries object to the change.
Slightly different conditions would apply to multi-employer plans.
- Extend the solvency funding payment to 10 years with letters of credit: Plan administrators would be permitted to extend the period for making solvency funding payments to 10 years when the difference between the five-year and 10-year level of payments is secured by a letter of credit.
- Extend the solvency funding payment period to 10 years for agent federal Crown corporations: Agent federal Crown corporations would be permitted to extend the period for making solvency funding payments to 10 years, subject to terms and conditions that will ensure a level playing field.
Details of the proposed funding relief measures are set out in draft regulations that were pre-published for comment on June 10, 2006, in Part I of the Canada Gazette.
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2.1 OSFI Expectations Regarding Actuarial Reports
In light of the proposed solvency funding relief regulations described above, OSFI communicated its expectations regarding the filing of actuarial reports for defined benefit pension plans in a letter to plan administrators dated June 2, 2006. http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/pension/pen_file_req_e.pdf
In brief, actuarial reports of federally registered pension plans are to be prepared in accordance with the current filing rules and plans are to be funded in accordance with the current funding regulations. Plan administrators are expected to comply with the normal filing deadlines, which require that actuarial reports be filed with OSFI within six months of the valuation date.
If the regulations come into force before the end of 2006, administrators may file a revised actuarial report to obtain funding relief for the 2006 plan year under the terms and conditions contained in the final regulations.
For more detailed information on obtaining funding relief at the time of the next scheduled actuarial report or on filing a revised actuarial report, please refer to the letter of June 2, 2006 (link provided above).
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3. Estimated Solvency Ratios: Industry Summary
OSFI estimates solvency ratios for all federally registered defined benefit pension plans to foster early identification of solvency issues that could jeopardize the security of the promised pension benefits. OSFI most recently reviewed the estimated solvency position of defined benefit plans in March 2006, for the period ending December 31, 2005.
OSFI tests solvency using the most recent actuarial and financial information filed with OSFI for each plan before the analysis date. It then projects the information, based on either an actual rate of return provided on the Solvency Information Return (SIR) or an assumed rate of return for the plan and a projection of solvency liabilities. An estimated solvency ratio (ESR), based on the assumed market value of the fund, is then calculated for each plan.
The following summary tables indicate a continuing deterioration of solvency ratios towards 0.90 and below. In effect, OSFI estimates that 78% of all OSFI-registered defined benefit plans were under-funded, on a solvency basis, on December 31, 2005.
The ESR for any particular plan is an estimate only. The actual solvency ratio of a plan can differ from the ESR for a number of reasons.
ESRs of OSFI-registered defined benefit plans, as at December 31, 2005
Weighted average of ESRs for plans over OSFI’s solvency testing period
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3.1 OSFI’s Intervention Activities Based on Solvency Testing Results
If the plan administrator does not provide OSFI with any additional information concerning the solvency position of the plan, OSFI assumes that the ESR accurately reflects the plan’s solvency position at that date. OSFI will contact administrators of plans with an ESR below 1.05 that are taking a contribution holiday, and administrators of plans with an ESR below 0.9, to discuss the estimated solvency position and future funding requirements of the plans. The level of intervention will be based on the ESR for that plan and any other relevant information. Some of the actions OSFI may request include the following:
- the preparation of an actuarial valuation report before the next regular report is due;
- the resumption of contributions related to the normal cost for the plan, if the plan is currently taking a contribution holiday; or
- if the plan does not resume contributions related to the normal cost for the plan, provision of documentation showing that the plan administrator has made a deliberate decision to continue taking the current contribution holiday; OSFI may also request that the plan administrator inform members, deferred vested members, retirees and other beneficiaries of the current ESR level and its decision to continue contribution holidays.
If plan administrators have not heard from OSFI but know that the plan’s solvency ratio is below 1.0, they are expected to resume contributions to the fund.
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3.2 Resuming Contributions for Plans with Excess Surplus
As mentioned above, if a plan with an ESR below 1.05 is currently taking a contribution holiday, the plan administrator and the employer may be asked to resume current service contributions to the pension fund.
If the last actuarial valuation report filed for a plan indicates that the plan had excess surplus, contributions made to the plan may not qualify as prescribed contributions under subsection 8516(2) or (3) of the Income Tax Regulations. These subsections deal with contributions made to a plan on a termination basis or as required by pension benefits legislation. To determine the requirements of the Canada Revenue Agency in those circumstances, please contact the Registered Plans Directorate of the Canada Revenue Agency. OSFI expects plan administrators to make reasonable efforts to ensure that required contributions are made to the plan.
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4. Collateral for Securities Lending
OSFI’s 1992 Guideline, Securities Lending: Pension Plans, requires that lenders “hold adequate collateral to protect themselves against the risks associated with securities lending.” The guideline states that the amount of such collateral “should reflect best practices in local markets. In Canada, the current market practice is to obtain collateral of at least 105% of the market value of the securities lent.” OSFI has recently looked into current practice regarding required collateral and concludes that
- collateral of 102% of the market value of securities lent corresponds to current market practice; and
- higher limits are appropriate where there is a higher level of risk to the pension plan that is lending its assets or where established best practice standards for particular types of transactions use more than 102% collateralization.
Therefore, given current market practice, it is acceptable at this time for pension plans to obtain collateral of at least 102% of the market value of the securities lent. It is incumbent on the administrators of plans that lend securities to monitor current practices related to this activity and to increase the collateral, if appropriate.
This interpretation of our guideline is consistent with National Instrument 81-102 (NI 81-102), which governs mutual funds in Canada that offer or have offered securities under a simplified prospectus for as long as they have been reporting issuers.
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5. Adjustments to Member Pension Benefit Credits
OSFI has recently received some enquiries regarding delayed termination benefits paid from a pension plan. OSFI expects that interest will be paid on member pension benefit credits until the beginning of the month in which the pension benefit credit is paid out, at the rate of interest used to determine the pension benefit credit.
Alternatively, if the terms of the plan require a period during which the calculated pension benefit credit remains valid, the pension benefit credit will be recalculated if it is paid after that period expires. If it is recalculated, interest credited since the initial calculation date is not required.
If recalculation is a possibility, the member statement must inform members that if interest rates increase, there is a risk that the commuted value will be lower than the amount quoted in the statement if it is paid after a certain date.
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6. New Operational Structure for the Private Pension Plans Division (PPPD)
OSFI’s Private Pension Plans Division (PPPD) has grown over the past year. The division has now been split into two operational lines reporting to Karen Badgerow-Croteau, the Managing Director of the PPPD.
Supervision: Henri Boudreau, Director
Using a risk-based approach, this section monitors the operations and financial situation of the approximately 1,300 private pension plans subject to the PBSA.
Actuarial, Policy and Approvals: Jean-Claude Primeau, Director
This section provides actuarial advice to the Supervision group, establishes operational policy, and makes recommendations on transactions submitted for approval or authorization under the PBSA.
Plan administrators’ main contact with OSFI remains the Relationship Manager (RM).
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7. Reporting Defined Contribution Assets in Actuarial Reports for Combination Plans
This is a reminder to administrators of combination pension plans (plans with both a defined benefit and defined contribution component). When filing actuarial reports for these plans, they must report the total market value of the defined contribution assets separately from the defined benefit assets of the pension fund.
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8. Unlocking for Non-Residents: Correction of an Item in Update 12
Section 28.4 of the Pension Benefits Standards Regulations, 1985 (PBSR), was introduced to exempt plan members and former members who cease to be Canadian residents from the application of the locking-in requirements of section 18 of the PBSA.
Update 12 indicated that a pension plan text must include this provision if the administrator wished to offer it to members or former members of its pension plan and that it was not available in relation to benefits already transferred to a locked-in RRSP.
OSFI has recently reviewed this policy and has concluded that
- there is no requirement that the plan text specifically provide for the provision set out in subsection 28.4(1) of the PBSR; and
- this provision can be added to an existing locked-in RRSP or LIF so that where the requirements of section 28.4 of the PBSR (non-residency conditions) are met, the pension benefit credit held in that RRSP or LIF can be unlocked.
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9. Waiving Survivor Benefits
OSFI receives a number of enquiries regarding survivors’ right to waive benefits to which they are entitled under a pension plan.
Section 22 of the PBSA (post-retirement death benefits) provides that survivors can waive all or a portion of their survivor benefits by completing the prescribed spousal waiver form. This form must be completed and deposited with the plan administrator before the member’s retirement. When the retired member dies, any death benefit will be paid in accordance with this waiver and the pension option the member chose at retirement. The spousal waiver form is Form 4 of Schedule II to the PBSR: http://laws.justice.gc.ca/en/p-7.01/sor-87-19/162010.html
Should the member die before retirement, the death benefit must be paid in accordance with section 23 of the PBSA (pre-retirement death benefits). Any spousal waiver form on file does not apply if the member dies before retirement.
Subsection 23(5) of the PBSA provides that benefits payable to a survivor after the death of a member or former member may be surrendered (not waived), in writing, and that a survivor may designate a beneficiary who is a dependant within the meaning of section 8500(1) of the Income Tax Regulations.
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10. Reminder re: Notification of Plan Termination or Wind-Up
Subsection 29(5) of the PBSA requires a plan administrator who intends to partially or fully terminate a plan, or to wind up a plan, to notify the Superintendent in writing of that intention at least 60 days before the date of the intended termination or winding up.
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