Last week, FSCO announced that effective January 1, 2013 all of  these filings must be filed electronically, as plan administrators will no longer have the option of submitting these filings in paper format.

To file electronically, plan administrators and/or their agents must first activate their unique PSP accounts. FSCO has posted instructions on how to activate a PSP account, as well as a series of FAQs providing more information.

In response to these “letter of credit amendments”, which came into force on April 1, 2011, the Office of the Superintendent of Financial Institutions recently updated its frequently asked questions on the changes to the DB funding rules to include new FAQs on letters of credit.

These FAQs consider issues such as:

• the treatment and application of letters of credit obtained under the Solvency Funding Relief Regulations and how they interplay with the “new” letter of credit regime;
• the treatment of a letter of credit that is included in solvency assets when calculating a plan’s average solvency ratio; and
• when a letter of credit that is used in lieu of solvency special payments must be provided to the trustee and what must be its effective and expiry dates.

This guidance should be of assistance to sponsors of federal pension plans seeking to use letters of credit in the future.

The Investment Guideline is intended to help plan administrators meet their duty to act prudently in the investment of the pension plan’s assets. This Guideline puts a great deal of emphasis on the process to be followed by plan administrators in relation to their investment activities. In other words, CAPSA believes that prudence must be assessed mainly by the methods followed by a plan administrator rather than simply on the results achieved.

Given the limited judicial guidance on the standard of care that applies to plan administrators in connection with their investment activities (pension investment cases are generally settled out of court – see for example the Jeffrey Mine case), the Investment Guideline could become a benchmark against which the courts will judge plan administrators in the future.

As such, plan administrators will want to pay close attention to the “best practices” set out in the Investment Guideline, and will want to ensure they are able to show these practices were followed.

Draft Pension Plan Funding Policy Guideline

The Funding Guideline is intended to provide guidance on the development and adoption of funding policies by plan sponsors. CAPSA considers that funding decisions should not be made on an ad hoc basis, but should rather be made based on a pre-established decision-making framework. This Guideline outlines the elements that should be included in a funding policy, including among others funding objectives, key risks, tolerance to volatility, funding targets, cost sharing mechanisms and permitted uses of surplus.

It remains to be seen whether the idea of a funding policy will find traction among plan sponsors. Plan sponsors need flexibility in the funding of their plans and will not necessarily want to be bound or limited by the terms of a funding policy. It is to be expected that those who do adopt a formal funding policy will include broad statements rather than detailed rules and objectives.

Guideline on Fund Holder Arrangements

I also note in passing that CAPSA has now published its final Guideline on Fund Holder Arrangements (Guideline No. 5). This Guideline highlights good governance practices related to fund holder arrangements.

The Guide describes the level of intervention associated with the varying risk levels as follows:

• Low Risk Rating: OSFI has determined that the plan is financially sound, and considers it to be at “Stage 0”. At this stage, the plan is subject to “normal” monitoring. Normal monitoring generally includes a review of required filings and actuarial reports, periodic on-site examinations, in-depth risk assessments and estimated solvency ratio exercises.
• Moderate to Above Average Risk Rating: OSFI has identified deficiencies in the plan’s financial position, policies or procedures that could evolve into more serious issues. The plan moves to “Stage 1”, which requires increased monitoring. For example, OSFI may obtain and review the plan’s Statement of Investment Policy & Procedures and list of assets, as well as information on the fund’s market returns. The regulator may also recommend that the plan administrator file a revised or early actuarial report and/or provide “appropriate” disclosure to plan members.
• Above Average to High Risk Rating: Where OSFI has identified problems that pose a threat to the security of members’ benefits, the plan moves to “Stage 2”. At this stage, specific interventions may be pursued. For example, OSFI may require the plan administrator to file a revised or early actuarial report, provide “appropriate” disclosure to plan members and/or hold a meeting with plan members or other relevant parties.  Plans with this rating may eventually move to “Stage 3” if OSFI identifies “material and immediate threats to members’ benefits”. At Stage 3 OSFI escalates its interventions and plan termination is a strong possibility. 
• Permanent Insolvency: At Stage 4 there is no possibility of the employer(s) fully funding the plan, and the plan is in the process of wind-up or has been wound up with a loss to members’ benefits.

By providing this Guide, OSFI has given federally regulated plan administrators some welcome insight into the steps that they may be required to take depending upon the funded status of their plans.

In addition to providing information already contained in the Pension Benefits Act (Ontario) (PBA) and other FSCO policies regarding the administrator’s responsibility to manage and administer the pension plan and the duty of care it owes to plan beneficiaries, the Policy provides some suggestions on how to effectively communicate with plan beneficiaries and provide timely responses to their inquiries and complaints.

• the name of a contact person;
• how to submit complaints and inquiries; 
• the administrator’s expected timeframe for providing a response to inquiries and complaints (FSCO recommends 30 days);
• information relating to the administrator’s internal dispute resolution process (if one exists); and
• the beneficiaries’ right to make a submission to FSCO in cases where a complaint cannot be resolved by the administrator.

FSCO also recommends that administrators develop a written policy on managing inquiries and complaints in accordance with its "Guideline for Developing a Written Policy on Managing Inquiries and Complaints from Plan Beneficiaries".

FSCO acknowledges that, in some instances, service providers will deal directly with inquiries and complaints. It therefore recommends that all agreements between the administrator and the service provider address privacy concerns and provide instructions on how inquiries and complaints are to be processed on behalf of the administrator.

FSCO is seeking comments from interested parties on the Policy and the related guideline by February 11, 2011.

Administrators would be wise to review the recommendations made by FSCO contained in the Policy. Although most administrators may already have a procedure in place to deal with inquiries and complaints, the Policy may be a useful checklist from a “best practice” perspective. In addition, administrators may want to check with their service providers which handle beneficiary inquiries and complaints directly to ensure that they have procedures in place which comply with applicable legislation.

The Policy is important reading for pension plan administrators as it imposes a new requirement to create a document management and retention policy. It also contains requirements impacting other documents such as pension plan services agreements and even purchase and sale agreements. The Policy applies to all plans, big and small, defined benefit and defined contribution, single employer and multi-employer, etc.

The importance of prudent document management and retention practices is not new. As the Policy notes, prudent record keeping practices are crucial to fulfilling the plan administrator’s fiduciary duty and meeting its primary obligation to pay benefits in accordance with the terms of the pension plan. As well, as the Policy notes, the Canadian Association of Pension Supervisory Authorities recommends in its Guideline No. 3 (Guidelines for Capital Accumulation Plans) and Guideline No. 4 (Pension Plan Governance Guidelines and Self-Assessment Questionnaire) that pension plan administrators adopt a document retention policy.

That said, the “recommendations” incorporated into the Policy achieve new levels of importance from a compliance perspective since they reflect FSCO’s view of prudent practices and, though not legally binding, are effectively mandatory requirements for Ontario administrators. As well, the Policy goes into a level of detail beyond what’s contained in these other publications. (Of course, the Bill 236-related regulatory requirements will be legally binding once enacted.)

While good pension plan governance arguably dictates that all pension plans should have a document management and retention policy, it’s now essentially a requirement of the regulator. Given FSCO’s position, I recommend that any plans without a document management and retention policy make it a priority to establish one. Plans that already have a policy in place should review them to ensure that they meet the requirements of the Policy and, when enacted, the new regulatory requirements.
 

• 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 respect to defined benefit (DB) plan funding, implementing a new standard for establishing minimum funding requirements on a solvency basis that will use average – rather than current – solvency ratios, and permitting past funding deficiencies to be consolidated annually for the purpose of establishing solvency special payments;
• restricting contribution holidays to plans with a solvency margin (in excess of full funding) of 5% of the plan’s solvency liabilities; and 
• eliminating the 5%, 15% and 25% quantitative investment limits in respect of resource and real property investments.

While the new DB funding rules and the contribution holiday restrictions apply only to federally regulated plans, the changes to the federal investment rules may apply to plans in other jurisdictions as most provincial jurisdictions have adopted these investment rules. However, not all jurisdictions adopted the federal rules as amended from time to time. The new rules will not apply automatically in Ontario, for example, as Ontario adopted the investment rules as they read on December 31, 1999. Ontario will still have to amend its pension legislation for the rules to apply to Ontario-registered plans.

OSFI has taken certain steps in response to the changes to the DB plan funding provisions.

OSFI has amended the “Directives of the Superintendent Pursuant to the Pension Benefits Standards Act, 1985” to reflect the requirement for annual valuation reports. Specifically, the new Directive states that annual valuations will generally be required, but there will be certain exemptions for plans that meet the definition of a designated pension plan under section 8515 of the Income Tax Regulations and plans with solvency ratios equal to or greater than one as at certain dates. The amended Directive also requires the filing of actuarial valuations as at the effective date of an amendment to a pension plan which alters the cost of benefits under the plan.

OSFI has also extended the deadline for filing actuarial reports that were required to be filed for plan year-end dates between December 31, 2009 and February 28, 2010 to September 15, 2010. In addition, OSFI indicates that while plans that file their actuarial reports prior to July 1, 2010 will not be required to re-file the report, plans that wish to use the modified funding rules may re-file the report.

The paper proposes several solutions to address problems inherent in processing DB applications:

• Incomplete applications: FSCO will create more standardized applications, and a specific process will be followed by FSCO to address non-compliant or incomplete applications. This is a welcome reform, in that FSCO is proposing that meetings or conference calls would be held to discuss incomplete applications. Currently, incomplete applications are often dealt with through an exchange of written correspondence between FSCO and the applicant, which can continue over months or even years.
• Resolution of prior transactions: FSCO will not delay processing a more recent application if a prior pending transaction does not significantly affect the subsequent application. This is also a welcome reform, since FSCO’s current practice is to delay processing an application if a prior application affecting the same pension plan is pending. If the pending application would have no direct bearing on the subsequent application, it makes sense for FSCO to process the subsequent application without delay.

The proposed solutions outlined by FSCO are a step in the right direction, and if implemented should help DB applications to be processed in a more timely manner. As FSCO correctly points out, however, the only way to truly streamline the regulatory process is through legislative reform. Bill 236 is a first step in this direction (see our December 10, 2009 and January 7, 2010 posts discussing pension reform in Ontario).

FSCO is inviting stakeholders to submit comments on the consultation paper, by February 10, 2010.

Why should you be concerned?

Because the consultation policy imposes new obligations on plan administrators that will affect the day-to-day operations of all pension plans in Ontario. These measures are framed as “recommendations” but since they embody what FSCO considers to be the prudent approach to records retention they are, in effect, requirements. The consultation paper does not differentiate between big and small employers. The expectation seems to be that all plan administrators will comply with the policy.

The key recommendation is a requirement to establish a written record management and retention policy, which must address a prescribed list of items. These items include: the types of plan documents that must be retained and their retention period, where the documents will be stored, how the documents can be accessed, treatment of private and confidential documents, the process for maintaining a back up of the documents, the process for monitoring the documents and many other matters. These issues are also supposed to be addressed in any agreements with custodians and third party administrators.

FSCO’s consultation policy also addresses retention periods. FSCO recommends keeping copies of “general plan records” indefinitely, even after a plan is wound up because there is always a risk that an error was made in the wind up report. FSCO also specifies the information administrators are expected to retain in respect of terminated plan members, and recommends that employers take steps to educate plan members on the need to keep their personal records up to date and to maintain the flow of communication with terminated members.

FSCO is looking for comments on the consultation policy. If you have concerns, comments or questions, you should let FSCO know – FSCO wants to hear from all stakeholders.

The deadline for comments is February 26, 2010.

Emphasis on Funding and Investment Procedures

The paper places tremendous importance on the process to be followed by pension plan sponsors and administrators in relation to their pension plan funding and investment activities. A key element of this process is the "prudent person rule", which serves as the guiding principle for all investment decisions, and essentially requires that a pension plan administrator exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person. In other words, the focus is on the methods followed by the administrator, and not simply on the result achieved.

According to the paper, it is essential that plan sponsors and administrators document their funding and investment procedures, as part of overall good governance, and in order to be able to satisfy the regulator in the event of a regulatory review. Evidence of the processes followed by the sponsor and administrator would also assist in putting forward a strong defence, should there be litigation over the pension plan’s funded status or the employer’s level of contributions.

Sponsor vs. Administrator Role: Which Activities Attract Fiduciary Duties?

The paper provides helpful insight into the regulators’ view regarding which aspects of pension funding and investment attract fiduciary duties and which do not. Activities that are required to be carried out by the plan sponsor in its capacity as such do not attract fiduciary duties, and decisions may be made based on the business’ best interests, subject to the obligations of good faith. On the other hand, activities that are required to be carried out by the plan administrator do attract fiduciary duties, and decisions must be made in the best interests of the plan and its members.

Generally, in single-employer pension plans, the employer has a dual role of plan sponsor and plan administrator, and the paper therefore describes which activities are to be performed by the sponsor (e.g., making necessary contributions to the fund) and which are to be performed by the plan administrator (e.g., investing the assets of the fund).

Interestingly, according to CAPSA’s paper, the establishment of a funding policy is a sponsor task. For example, a funding policy might set out the circumstances in which the sponsor will contribute amounts to the pension fund in excess of the minimum recommended by the actuary in the valuation. Prior to the publication of this paper, it was not always clear whether the regulators viewed that function as being part of the sponsor’s duties or the administrator’s duties. I note however that one of the specific issues on which CAPSA has asked for comments is the role of the plan administrator regarding the funding policy.

While not legally binding, the CAPSA paper provides a good summary of the regulators’ views on best practices in the area of pension funding and investment, as part of an overall pension governance strategy. After the consultation process, CAPSA plans to prepare three guidelines: 

• best practices for funding policies;
• best practices for investment policies; and 
• examinations by pension regulators of funding and investment processes.

Comments on the consultation paper will be accepted by CAPSA until January 29, 2010.

The implications of the CAPSA paper will be discussed further at our upcoming pensions seminar on Wednesday, December 9th. 

These changes sparked some confusion in the industry as to how it would apply in practice, the mechanics of the approval process and the kind of information that plan administrators would be expected to provide.

In response, the Financial Services Commission of Ontario (FSCO) published Policy T800-402 (PDF) to provide guidance on how to approach these limitations on commuted value transfers as well as a new request for approval form (PDF).

Most recently, FSCO posted additional questions and answers on commuted value transfers under the new regulations.  In particular, these Qs & As consider issues relating to:

• multi-jurisdictional plans;
• commuted value transfers under the pre-retirement death benefit, marital breakdown and lump sum small benefit provisions;
• excess transfer values; and
• processing requests for approval.

Given the continued instability of the financial markets, transfer ratios may continue to decline and, as a result, many plan administrators will have to consider these new requirements before paying commuted values out of the plan.