New FSCO Policy on Distribution of Partial Wind Up Benefits Remaining in Plan and not Annuitized
On December 2, 2009, the Ontario Financial Services Tribunal released its decision in Imperial Oil which held that pension administrators are not required to purchase annuities in respect of partial wind up benefits remaining in the plan following member portability elections. On June 30, 2010, FSCO posted a new policy (effective March 10, 2010) confirming the result in Imperial Oil, and outlining the procedure to be followed regarding the “distribution” of such benefits by transfer to the ongoing portion of the plan when the administrator chooses not to distribute by way of annuity purchase.
The policy provides guidance on:
- communicating with affected members regarding the impact of providing their partial wind up benefits from the ongoing plan, including a statement that any subsequent settlement of their benefits “will be subject to the terms of the plan and its funded status at that time”;
- revised statements to be provided to affected members where a partial wind up report has already been filed and the administrator had previously decided to purchase annuities;
- filing of a revised partial wind up report where the original report had indicated that annuities were to be purchased;
- the maintenance of the notional split between the partial wind up and the ongoing portions of the plan until all partial wind up assets have been settled (including any surplus distribution), although the policy also states that where there is a surplus at the partial wind up date, the transfer of partial wind up benefits to the ongoing portion of the plan “can occur prior to completion of the surplus distribution”;
- the basis upon which partial wind up benefits remaining in the plan are to be valued (estimated annuity purchase premium basis) for funding and surplus/deficit calculation purposes;
- requirements to track and report on partial wind up assets/liabilities separate and apart from those of the ongoing plan where there is a partial wind up deficit being amortized, until such deficit is fully funded;
- sponsor refunds of excess partial wind up assets remaining in situations where the sponsor was required to fund a partial wind up deficit; and
- sponsor contribution obligations where the partial wind up report identifies a surplus which shifts to a deficit after the partial wind up effective date.
With all the fuss and detailed requirements, I am curious to know how this is an improvement, if at all.
The result in Imperial Oil is an improvement because it avoids the cost concerns of many employers with respect to the mandatory purchase of annuities and also allows plan members affected by a partial wind up to remain part of the plan for reasons such as participation in future ad hoc indexing. The FSCO policy helps clarify the basis upon which partial wind up benefits remain in the plan and provide confirmation (hopefully the regs will be consistent) that the decision to annuitize or not annuitize is generally neutral to the quantum of PWU surplus.