Ontario Proposes Significant Pension Regulation Reforms
Date: April 29, 2014
On April 25, 2014, the Ontario government released four proposals (the “Proposals” or the “Proposal”) in respect of proposed amendments to Regulation 909 (the “Regulations”) under the Pension Benefits Act (“PBA”) and is seeking comments from interested stakeholders. The Proposals relate to PBA reforms introduced or announced by the Ontario government over the past four years. The Proposals include:
- requiring periodic statements to be provided to former members and retired members;
- new rules regarding statements of investment policies and procedures (“SIP&P”);
- permitting variable benefits to be paid directly from defined contribution (“DC”) pension plans; and
- updating references to accounting standards in the Regulations.
This FTR Now discusses each of the Proposals as released. The Proposals, and any regulatory amendments that are ultimately adopted, may be changed as a result of the current consultation process.
STATEMENTS FOR FORMER MEMBERS AND RETIRED MEMBERS
In May 2010, the Ontario government passed Bill 236, which added section 27(2) to the PBA. New section 27(2) of the PBA, when in force, will require plan administrators to provide periodic statements to former members (i.e. deferred vested members) and retired members. Section 27(2) provides that the content and frequency of these statements are to be set out in supporting Regulations. The first Proposal sets out the proposed content of these supporting Regulations.
Generally, the Proposal provides that the content of the new statements for former members and retired members will be very similar to annual statements which must now be provided to active plan members pursuant to section 27 of the PBA and section 40 of the Regulations.
The Proposal provides that statements for former members and retired members will be required to include member-specific information such as the date on which the member terminated or retired, as applicable, and the annual amount payable on the normal retirement date, or the pension currently being received in the case of a retired member. In addition, the Proposal indicates that the statements must include an explanation of any plan amendments affecting former members or retired members, as applicable, that were made during the covered period if a written explanation of the amendments has not previously been provided.
The Proposal will also require the statements to include plan-specific information such as, in the case of a defined benefit plan, the transfer ratio of the plan as at the most recent valuation date and an explanation of how the transfer ratio relates to the level of funding of former members’ and retired members’ benefits. Where applicable, the statements must identify that special payments are being made to liquidate any liability. Under the Proposal, statements for DC plans shall include an estimate of the accumulated amount of contributions, including credited interest, to the end of the period covered by the statement.
Additional information must be included in statements provided to former members and retired members of multi-employer pension plans and certain jointly sponsored pension plans explaining the unique funded nature of those plans, e.g. a statement that benefits may be reduced on the wind-up of the plan if there are insufficient assets.
While the content of the statements, as proposed, is similar to that which is required to be included in annual statements for active members, the Proposal contemplates a less frequent distribution requirement. The Proposal indicates that these statements need only be provided once every three years or within six months of the filing date of the last valuation report, whichever is sooner. However, plan administrators will not be precluded from providing these statements on an annual basis at the same time that statements are provided to active members. The Proposal does not set out a specific effective date for these changes, but does state that plan administrators will be required to provide the first of these statements to former members and retired members within 12 months of the proclamation of section 27(2) of the PBA.
As part of the Proposal, the government has specifically asked stakeholders whether statements for former members and retired members should indicate whether the deferred pension benefit or the pension, as applicable, is subject to division in the event of a marriage breakdown. The Proposal also asks if the statements should provide detailed information about any pending marriage breakdown division and its impact on the former member or retired member’s entitlements, and whether providing this type of information would involve significant administrative resources.
NEW REQUIREMENTS FOR SIP&PS
In accordance with commitments made in the 2011 Budget, the second Proposal requires plan administrators to file SIP&Ps with the Financial Services Commission of Ontario (“FSCO”). Currently, plan administrators are required to establish SIP&Ps and review them on an annual basis, but there is no requirement to file them with FSCO.
Under the Proposal, SIP&Ps will be required to be filed with FSCO within 90 days after the proposed coming into force date of January 1, 2015. This means that all administrators of Ontario registered pension plans will be required to file their then-current SIP&Ps with FSCO by April 1, 2015. The Proposal also requires that any amendment to a SIP&P must be filed with FSCO within 90 days after the amendment is made.
The Proposal will also add SIP&Ps to the list of documents available for inspection by prescribed persons (e.g. members and their spouses, and trade unions) at FSCO, and require the Superintendent to make the SIP&Ps available upon request to prescribed persons, by mail or electronically.
The Proposal will also require that annual member statements identify whether or not the SIP&P addresses environment, social or governance factors (“ESG factors”). Interestingly, the new proposed statements for former members and retired members discussed above do not require that ESG factors be included. No definition of ESG factors has been provided in the Proposal. If adopted, these amendments to the Regulations will make Ontario the first jurisdiction in Canada to require plan administrators to expressly disclose this information. While such disclosure does not necessarily dictate a different approach to investments, it will likely encourage plan administrators to give more specific consideration to ESG factors.
THE PAYMENT OF VARIABLE BENEFITS FROM DC PLANS
In December 2010, the Ontario government passed Bill 120, adding new section 39.1 to the PBA. Section 39.1, when in force, will permit DC pension plans to pay pensions directly from a plan, as now authorized by the Income Tax Act (“ITA”), rather than requiring members to use their DC account balance to purchase an annuity or other prescribed retirement vehicle outside of the pension plan.
The Proposal will allow retired members to keep their DC accounts in a “variable benefit account” held in the DC plan and receive income directly from this account. The intention is that permitting retired members to retain their accounts in a DC plan will give them access to the investment expertise of the applicable plan managers, and provide cost efficiencies.
DC plan sponsors are not required to offer variable benefit accounts. This will be an optional plan design feature and participation will also be optional for members if variable benefit accounts are made available under a plan. If a plan sponsor decides to offer the variable benefit account option to members, the DC plan will need to be amended to incorporate this feature.
Subject to the terms of the applicable DC plan, the entire amount contained in the member’s DC account will be transferred to the variable benefit account that will operate the same as a retail Life Income Fund (“LIF”). Plan members will be required to notify the plan administrator of the amount of their annual withdrawals after retirement. There will be annual minimum and maximum withdrawals. The maximum withdrawal amounts will mirror those applicable to LIFs. The minimum withdrawal amount must not be less than the minimum applicable to a registered retirement income fund (“RRIF”) under the ITA.
If the member has a spouse, from whom he or she is not living separate and apart, the written consent of the spouse, waiving entitlement to a joint and survivor pension, will be required in order to establish the variable benefit account. Upon the death of a member who is receiving variable benefits from the DC plan, the spouse who is not living separate and apart from the member, or if there is no spouse or the spouse has waived his/her entitlements, the person’s beneficiary or estate, as applicable, will be entitled to receive a benefit equal to the then-current balance of the account. The determination of whether the member has a spouse for the purposes of the death benefit payment will be made on the date of death.
The Proposal indicates that a contract will be required to establish the variable benefit account. The contract must address issues such as the member’s powers, if any, respecting the investment of the account assets and the method for determining the value of the assets in the account. Money available in a variable benefit account will not be able to be commuted, withdrawn or surrendered and will be subject to the restrictions on assignments, except as required in relation to a marriage breakdown. A variable benefit account will, however, be accessible in whole or in part in the event of the shortened life expectancy of the member, if the plan allows for a withdrawal in these circumstances.
The Proposal states that plan administrators must provide an annual statement containing prescribed information to members at the beginning of each fiscal year of the variable benefit account.
In the Proposal, the government specifically invites stakeholders to comment on whether:
- variable benefit accounts should be permitted to receive transfers from other locked-in sources (and why or why not);
- participants should be able to transfer funds from variable benefit accounts to other retirement income vehicles, e.g. a LIF or annuity (and why or why not);
- participants should be permitted to unlock up to 50% of funds initially available in variable benefit accounts (and why or why not); and
- providing any of the above options will involve significant administrative resources.
The Proposal does not identify an effective date for the changes to the Regulations or when section 39.1 of the PBA may be proclaimed into force.
UPDATED REFERENCES TO ACCOUNTING STANDARDS
The final Proposal would amend the Regulations to reflect current accounting requirements.
Specifically, the Proposal provides that the Regulations will be updated to change references to the “Canadian Institute of Chartered Accountants (CICA) Handbook” to the “Chartered Professional Accountant (CPA) Canada Handbook” (“CPA Handbook”).
In conjunction with amendments referring to the CPA Handbook, the Proposal indicates that the Regulations will be updated to change references to “fair value” from the current term “market value” in relation to the reporting of assets and liability in financial statements. Under section 76(13)(a) of the Regulations related party transactions must be disclosed. The Proposal also provides that the term “related party” refers to both the definition in the CPA Handbook and the definition in the investment regulations of the federal Pension Benefits Standards Act (otherwise referred to as the “federal investment rules”).
In addition, the Proposal will expand the information required to be disclosed in financial statements in respect of investment assets and investment liabilities newly listed in the CPA Handbook. Section 76(13)(b) of the Regulations currently requires financial statements to disclose certain information about investments where either the market value or book value exceeds 1% of the book value or market value of the pension fund. The Proposal expands the disclosure of information under section 76(13)(b) of the Regulations in relation to security purchased under agreements to resell and cash collateral, real estate mortgages, repurchase agreements and debt issued by the pension plan or fund.
The Proposal also contemplates that various provisions of the Regulations be revoked because equivalent requirements are included in the CPA Handbook.
The government has invited interested stakeholders to provide comments on the Proposals by June 16, 2014.
If adopted, these changes to the Regulations, and corresponding proclamations under the PBA, will impact the ongoing administration of Ontario registered pension plans. We will continue to monitor the development of the Proposals and will report on any changes resulting from the consultation process.
In the interim, if you have any questions with respect to any of the Proposals or are interested in submitting comments to the government, please contact Natasha Monkman or any member of our Pension, Benefits and Executive Compensation practice group.
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