Disclosure Reforms and New Defined Contribution Payment Option for Federally Regulated Pension Plans
Date: October 8, 2014
On September 19, 2014, the federal government released proposed amendments to the Pension Benefits Standards Regulations, 1985 (“PBSR”). Proposals relating to the pension investment rules that apply more broadly – to federally regulated pension plans as well as pension plans that are regulated by the provincial pension legislation in Ontario, Alberta, British Columbia, Manitoba, Newfoundland and Labrador, or Saskatchewan – are reviewed in our FTR Now dated September 26, 2014.
The proposed changes reviewed in this FTR Now will apply only to registered pension plans that are federally regulated. The proposals enhance the administrator’s disclosure obligations under defined contribution (“DC”), defined benefit (“DB”) and negotiated contribution pension plans, focusing on risks associated with participation in these different types of plans. The proposals also introduce provisions to facilitate electronic communications between administrators and pension plan beneficiaries. Finally, the proposals include provisions that would, if a pension plan is so amended, allow members retiring from a DC component of a pension plan to maintain their investments in the plan and receive a retirement income directly from the plan.
ENHANCED DISCLOSURE REQUIREMENTS
DISCLOSURE FOR MEMBER-DIRECTED INVESTMENT ACCOUNTS
The proposed regulations make a number of changes respecting plans with DC or other provisions that allow for investment choice within individual member accounts (“member choice accounts”). Member choice accounts will include most DC accounts and may include DB flex accounts or additional voluntary contribution accounts if members, former spouses, or survivors are permitted to direct the investment of the assets held in the account.
There is no longer a requirement for a written Statement of Investment Policies and Procedures to address a plan’s investments relating to member choice accounts. Instead, administrators of plans which include member choice accounts will be required to provide a written statement to each person directing the investment of the account that describes each available investment option, including for each option:
- the investment objective;
- the type of investments and the degree of risk;
- its top 10 holdings by market value;
- its performance history and an indicator that past performance is not necessarily an indication of its future performance;
- the benchmark that best reflects its composition;
- the fees, levies and other charges associated with it that reduce return on investment expressed as a percentage or a fixed amount; and
- its target asset allocation.
The statement would also need to include a description of how the account is currently invested, and indicate any timing requirements that apply to investment elections.
In view of the above, it would seem that the statement is one that is intended to be provided or made available on a regular, ongoing basis, but the timing and frequency of delivery has not been specified in the proposals. 
The information currently made available about investment options under DC and other member choice accounts should be reviewed to ensure it is sufficiently detailed to meet the new member choice account investment disclosure requirements. For many DC plan administrators, this may require a thorough review of the fund sheets and other information available on record-keeper websites and ensuring that electronic communications posted on the website are made in accordance with the PBSR requirements for electronic communications.
DB ANNUAL STATEMENTS
The proposals expand the information that is required to be included in annual statements issued to DB pension plan members. In particular, the proposals require that annual statements contain the following additional information in respect of the DB component of a pension plan:
- a list of the 10 largest asset holdings based on market value;
- the 10 largest asset holdings and the asset allocation for the DB assets, expressed as a percentage of total assets;
- the total value of solvency assets and liabilities on the valuation date, and the employer’s total payments that were made to the plan in the year for which the statement is issued; and
- the valuation date and solvency ratio reported in the most recent actuarial report, and the date of the next valuation regardless of whether the plan is fully funded or less than fully funded on the valuation date.
FORMER MEMBERS AND THEIR SPOUSES
Under the proposed amendments, administrators will be required for the first time to provide annual statements to former members (i.e. deferred vested members and retirees) and their spouses or common-law partners. The information to be disclosed in the former member annual statement includes demographic information about the former member, the spouse and beneficiaries, as well as disclosures about the funded status of the plan, employer payments, solvency assets, solvency liabilities, and where applicable, the measures being taken to improve the funded status of the plan. In addition, the same information now required to be provided to active members relating to the investment of DB pension fund assets must also be included in the new annual statements issued to former members and their spouses. The annual statement must also describe the right of former members and their spouses to access filed documents and other listed documents in respect of the pension plan.
DISCLOSURE SPECIFIC TO NEGOTIATED CONTRIBUTION PLANS
Plan administrators are required to provide each member and employee who is eligible to participate in a pension plan, and the person’s spouse or common-law partner, a written explanation of the provisions of the plan. For negotiated contribution pension plans (including typical multi-employer pension plans where the level of contributions are collectively bargained), the proposed amendments to the PBSR require that the explanation include a description of the funding arrangement and indicate that the administrator may, subject to regulatory approval, amend the plan to reduce pension entitlements. Additionally, if the funding of a negotiated contribution plan fails to meet required standards for solvency, the actuarial report prepared in respect of the plan would also need to set out options to address any such funding deficiency.
Member and former member annual statements respecting negotiated contribution plans will need to set out the information described above, for DB plans. These annual statements will also need to provide a description of the funding arrangement for the plan including an indication that pension entitlements may be reduced if the negotiated level of contributions are insufficient and that the plan may be amended to reduce pension entitlements with the consent of the Superintendent.
NEW AND REVISED FORMS
The proposals include revisions to the prescribed retirement statement, as well as the termination of membership and death statements. In addition, the proposals include new statements to be issued on the termination of a pension plan, and spouse or common-law partner consent forms – respecting portability transfers and variable benefits. The new portability transfer and variable benefit payment consent forms include notifications to the spouse/common-law partner that the elections could impact the amount of the pension income available in future years, and that there could be a significant reduction to future pension income where the member makes withdrawals each year at the maximum permitted amount and/or where investment performance is poor.
The timeframe for these proposed new disclosure requirements has not yet been determined and will depend on when the amendments to the PBSR are finalized. Plan administrators will then need to revise existing annual statement templates to account for the changes, and ensure that new and revised forms are being adopted for day-to-day administration. Further, administrators of negotiated contribution plans and pension plans that provide member choice accounts will also need to prepare disclosures that include information specific to these types of arrangements.
Reforms to the Pension Benefits Standards Act, 1985 (“PBSA”) made in 2010, but which are not yet in force, would allow for information such as annual statements or notices of amendments to the pension plan to be provided to members electronically under certain conditions. The proposed PBSR amendments provide the framework that will allow these provisions to take effect. The interplay between the PBSR provisions and CAPSA Guideline No.2, Electronic Communication in the Pension Industry will require further consideration, and it is possible that the Office of the Superintendent of Financial Institutions will issue guidance in this regard.
The proposed PBSR amendments provide that individual consent to receive information electronically may be provided in writing, either in paper or electronic format, or orally, and that consent may be revoked at any time. Further, before a person can consent to receive information electronically, the plan administrator must notify the addressee of the date that consent will take effect, that the addressee is responsible for providing the administrator with changes to contact information provided for electronic communication, and that the addressee may revoke his or her consent at any time.
Finally, if the administrator intends to post information on a website (or other generally accessible information system), it is required to provide notice (either in writing or electronically) of the posting of any such documents and to indicate the location of the documents. If the plan administrator has reason to believe that a person has not received information electronically, the administrator is required to mail a paper copy of the document.
VARIABLE BENEFIT PAYMENT OPTION
At present, the retirement income options for DC benefits are limited to annuity purchases and transfers into prescribed vehicles (for example, life income funds). Pending amendments to the PBSA, which were introduced in 2010 but are not yet in effect, would allow for pension plans to be amended to provide a variable benefit option. If included in a pension plan, the option would allow a former member (or surviving spouse) to retain a DC account under the pension plan and have annual variable payments made directly from the pension plan. The former member (or surviving spouse) would also be permitted to, at least once per year, transfer the remaining amount to a prescribed plan, such as a life income fund or locked-in registered retirement savings plan, or to purchase a life annuity.
For each year of retirement, the amount of the annual variable payment must be within a specified range, within the minimum and maximum amounts payable determined by the Income Tax Regulations (“ITR”) and the PBSR, respectively. The ITR’s minimum variable payment amount is based on the value of the account balance and the age of the individual, similar to the methodology applicable to registered retirement income funds.
The proposed PBSR amendments set out the formula for determining the maximum payment amount. The formula applies between the ages of 55 and 90. The maximum payment amount is based on the DC account balance, the member’s (or, as applicable, the survivor’s) age, and an annuity purchase factor based on Government of Canada bond yields for payments made in the first 15 years, and 6% thereafter. The formula is similar to the PBSR formula used for calculating the annual maximum amounts that may be paid from life income funds and that will also apply to Pooled Registered Pension Plans. If no election is filed, the minimum amount is payable. For the first calendar year, a proportionate amount is payable based on the number of months remaining in the calendar year. Other restrictions apply if amounts are transferred into a variable benefit account from a life income fund.
The proposals also set out consent and disclosure requirements respecting the establishment of a variable benefit account. In particular, the proposed PBSR amendments provide that DC benefits cannot commence to be paid as a variable benefit where a member has a spouse or common-law partner unless the spouse or common-law partner consents in the prescribed form.
Under the proposals, in parallel to the requirement for annual statements required to be provided to former members entitled to DB pensions, individuals in receipt of DC variable benefit payments from the pension plan are also entitled to an annual statement. The annual statement will need to include the date of birth used for determining the minimum payment for the year, the date the variable benefit began to be paid, the permitted minimum and maximum annual payment amounts, the amount that is being paid, the investment option from which the variable benefit was paid, the payment frequency, and a description of how the payment amounts and investment account from which the payment is made may be changed. The statement must also include the transfer options available from the variable benefit account to other registered pension plans, pooled retirement pension plans, deferred or immediate annuities, or other retirement vehicles.
Administrators of plans that are voluntarily amended to provide the new variable benefit payment option will be subject to fiduciary obligations specific to offering member-directed investments during the decumulation or payout phase. For example, at implementation it will be necessary for administrators to evaluate the appropriateness of the investment options for the payout phase. Also, changes will need to be implemented in agreements with the plan’s trustee, insurance company, or third-party administrator to ensure variable benefit payment elections and cash flows are properly addressed, and that the disclosure requirements for variable benefit accounts are satisfied. Member communications (booklets and communications prior to retirement about retirement options) and educational materials will also need to be reviewed, and likely changed. On an ongoing basis, administrators of plans that provide this DC variable benefit payment option will have to continue to evaluate the appropriateness of plan communications, investment education, and investment option suitability. 
The proposals also address a number of technical matters. These include changes to the timing for making surplus payments out of a plan, and changes to the Pooled Registered Pension Plan Regulations to ensure consistency with corresponding provisions in the PBSR. In addition, changes are proposed to be made to the Solvency Funding Relief Regulations, Solvency Funding Relief Regulations, 2009 and Canadian Press Pension Plan Solvency Deficiency Funding Regulations, 2010, including changes that address inconsistencies between the English and French versions.
The proposed amendments are intended to come into force on the same day as the PBSA amendments in Bill C-47, Sustaining Canada’s Economic Recovery Act. A target implementation date has not yet been announced. A 30-day comment period will remain open until October 27, 2014.
If you have any questions regarding the proposed PBSR amendments, or wish to submit comments to the federal Department of Finance, please contact Jordan N. Fremont at 416.864.7228, or any other member of Hicks Morley’s Pension, Benefits and Executive Compensation group.
Federally regulated pension plans include those provided to employees in shipping, railway, air transportation, broadcasting, banking and other industries within the legislative authority of the Parliament of Canada.
 Sections 4 and 5 of Guideline No. 3, Guidelines for Capital Accumulation Plans, published by the Canadian Association of Pension Supervisory Authorities (“CAPSA”) indicate that much of this information should be made available when the plan is introduced to new members and at the request of members on an ongoing basis, if it is not included with members’ annual statements.
The member communication obligation is discussed in CAPSA’s Guideline No. 8, Defined Contribution Pension Plans Guideline.
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