Archived - Regulatory Impact Analysis Statement
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(This statement is not part of the Regulations.)
In October 2009, the Minister of Finance announced a series of measures to strengthen the legislative and regulatory framework for federally regulated private pension plans (http://www.fin.gc.ca/n08/09-103-eng.asp). A number of amendments to the Pension Benefits Standards Act, 1985 (PBSA) were made in the Jobs and Economic Growth Act, which received Royal Assent in July 2010, and in the Sustaining Canada’s Economic Recovery Act, which received Royal Assent in December 2010. To implement many of these measures, amendments to the Pension Benefits Standards Regulations, 1985 (PBSR) were made in June 2010 and March 2011. The proposed amendments to the PBSR are the third tranche of amendments forming part of the measures announced in 2009.
As of December 14, 2012 the federal Pooled Registered Pension Plan Act (PRPP Act) and Pooled Registered Pension Plan Regulations (PRPP Regulations) are in force. Some technical amendments are proposed to the PRPP Regulations to ensure consistency with the PBSR and the proposed amendments to the PBSR.
In March 2010, the Standing Joint Committee for the Scrutiny of Regulations (SJCSR) identified inconsistencies between the English and French versions of the Solvency Funding Relief Regulations and Solvency Funding Relief Regulations, 2009. In September 2013, the SJCSR also identified inconsistencies between the English and French versions of the Canadian Press Pension Plan Solvency Deficiency Funding Regulations, 2010. Amendments are proposed to address these inconsistencies.
Under the PBSA, the federal government regulates private pension plans covering areas of employment under federal jurisdiction, such as telecommunications, banking and inter-provincial transportation. Under the PRPP Act, the federal government regulates PRPPs offered to employers and employees in industries that are federally-regulated, as well as PRPPs offered to employers, employees, and the self-employed in the Yukon, Northwest Territories and Nunavut. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of private pension plans and PRPPs that are within federal jurisdiction.
The PBSA and PRPP Act set out minimum standards for registered pension plans and PRPPs respectively. These minimum standards apply to issues such as the investment of funds, membership eligibility, locking-in requirements, portability of benefits, death benefits, and rights to information. For defined benefit pension plans, the PBSA requires that promised benefits be funded in accordance with the standards provided for under the PBSR.
The proposed regulatory amendments to the PBSR, Solvency Funding Relief Regulations, Solvency Funding Relief Regulations, 2009 and Canadian Press Pension Plan Solvency Deficiency Funding Regulations, 2010 fall under the statutory authority of the PBSA. The proposed regulatory amendments to the PRPP Regulations fall under the statutory authority of the PRPP Act.
The proposed amendments to the PBSR seek to achieve three main objectives: 1) improve the regulatory framework for defined contribution plans; 2) modernize the pension fund investment rules; and 3) enhance disclosure and protect plan members’ and former members’ pension benefits.
The proposed amendments to the PRPP Regulations would ensure consistency with corresponding provisions in the PBSR.
The proposed amendments to the Solvency Funding Relief Regulations, Solvency Funding Relief Regulations, 2009 and Canadian Press Pension Plan Solvency Deficiency Funding Regulations, 2010 would address inconsistencies between the English and French versions and make other technical changes.
Improving the regulatory framework for defined contribution pension plans
Currently, upon retirement, members of a defined contribution pension plan must opt for either a life annuity purchased for them by the pension plan administrator or they may transfer their pension benefit credit into a prescribed savings vehicle such as a locked-in registered retirement savings plan (locked-in RRSP) or a life income fund. In 2010, the PBSA was amended to allow defined contribution plans to offer members and former members who are eligible to transfer their funds out of a pension plan (e.g., individuals who have reached retirement age) the option to receive variable annual payments (“variable benefits”) directly from the plan. The annual variable payment amount must be within a minimum amount determined by the Income Tax Act, and a maximum amount prescribed by the proposed amendments. The maximum annual payment for individuals between 55 and 90 years of age would depend on the individual’s account balance, age, and the yield on Government of Canada marketable bonds for the first 15 years in which an individual receives variable payments, and 6% thereafter. After 90 years of age, there would be no maximum on the variable payment amount that can be withdrawn. The payment amount would be calculated using a formula which is consistent with the formula used for calculating payment amounts from life income funds under the PBSR. If a member does not choose a payment amount for a year, the minimum amount, as determined under the Income Tax Act, would apply.
In order for a former member to receive variable payments, the PBSA requires consent from the former member’s spouse or common-law partner. The proposed amendments would prescribe a form for obtaining the required consent by signature from the spouse or common-law partner. The form would indicate the minimum and maximum annual withdrawal limits from the pension plan. The form would also indicate that if the maximum amount is withdrawn each year and if the investment performance of the fund is poor, the amount of pension income or survivor benefit available to a spouse or common-law partner in later years may be significantly reduced.
The proposed amendments to the PBSR would clarify the responsibilities of plan parties involved in DC pension plans that offer investment choices to members or former members and their beneficiaries with a defined contribution account or an account maintained for additional voluntary contributions. In particular, the proposed amendments would require plan administrators who offer investment choices to provide members or former members with a written notice that includes any timing restrictions that apply to making an investment choice and a description of each investment choice that includes the choice’s investment objective, performance history, and fees. In order to minimize duplication, the existing requirement for plan administrators to establish a written statement of investment policies and procedures would not be required for the assets of a pension plan that are held in respect of a member choice account, since the choices would be subject to their own disclosure requirements as noted above.
Modernizing the investment rules
The PBSA provides for a prudent portfolio standard supplemented by the PBSR investment rules. As part of the proposed amendments to the PBSR, definitions applicable to the investment rules would be updated. The current definition of the term “public exchange” is outdated as it includes listed exchanges that no longer exist. As such, the term “public exchange” would be replaced with “marketplace”, to reflect that pension plan investments may be bought and sold on a public exchange as well as a quotation and trade-reporting system, or other platforms that are maintained to bring together the buyers of securities or derivatives. The definitions of “mutual fund” and “pooled fund” would also be repealed and replaced with the term “investment fund” to capture both these types of funds as well as clarify that these funds could be established by a corporation, limited partnership or trust.
The current PBSR investment rules prohibit plan administrators from investing or lending more than 10 percent of the total book value of the plan’s assets in a single entity. The proposed amendments to the PBSR would amend a number of aspects of this concentration limit. The modified 10 percent limit would be based on the current value or “market value” of a pension plan’s assets rather than the “book value”. The book value can be outdated as it reflects the original purchase price. The proposed amendments also clarify that the 10 percent limit applies to the aggregate value of debt and equity in an entity. The 10 percent rule would apply at the member level for a plan that allows a member to make investment choices. In addition, there would be a carve-out to the 10 percent rule for investment fund and segregated fund holdings related to member choices. This is intended to be consistent with the exemption to the 10 percent rule for the PRPP investment holdings.
The current PBSR investment rules prohibit plan administrators from investing in a related party to the plan, such as an employer who participates in the plan, subject to specific exemptions. One current exemption permits the administrator to enter into a transaction with a related party if the value of the transaction is nominal or immaterial. The PBSR does not define nominal or immaterial. The proposed amendments would remove the nominal or immaterial exemption and instead allow new exemptions such as allowing the administrator to invest in the securities of a related party if the securities are held in an investment fund. An administrator would no longer be allowed to invest plan assets directly or indirectly in the securities of the employer (i.e., prohibition on self-investment). However, the proposed amendments clarify that the administrator may engage the services of a related party for the administration of the plan, such as hiring a related party to act as a broker dealer. Administrators of pension plans that currently hold securities of related parties would be given five years to divest of these securities in order to comply with the proposed related party rules.
Improving protection for plan members and beneficiaries
When a member leaves employment, they may transfer their accumulated pension benefit credit to a prescribed retirement savings plan such as a locked-in RRSP or a life income fund. The 2010 legislative amendments to the PBSA require the member to obtain the consent of their spouse or common-law partner before being eligible to transfer their pension benefit credit to a prescribed retirement savings vehicle. The proposed amendments would prescribe a form for obtaining the required consent by signature from the spouse or common-law partner. The form would indicate that if the pension benefit credit is transferred to a prescribed retirement savings vehicle, there may be minimum and maximum withdrawal limits. The form would also indicate that if the maximum amount is withdrawn each year and if the investment performance of the fund is poor, the amount of pension income or survivor benefit available to a spouse or common-law partner in later years may be significantly reduced.
The PBSA includes provisions that allow, under certain conditions, for the refund of all or part of a surplus. The proposed amendments to the PBSR would extend the waiting period on surplus distributions from 14 to 40 days following consent by the Superintendent. This would ensure that the surplus is not distributed until plan members, former members and any other person who is entitled to a pension benefit under the terms of the plan have had the opportunity to submit to the Federal Court a request for judicial review of the Superintendent’s decision.
Pension plan administrators are required under the PBSA to provide members with an annual statement that includes prescribed information such as the member’s pensionable age, name of their spouse or common-law partner, the plan member’s required contributions to the plan for the year, and for defined benefit pension plans, the plan’s funded status. The proposed amendments would expand the annual statement requirements to include: the plan’s top 10 investment holdings and asset allocation, and for defined benefit plans, the valuation date and the solvency ratio reported in the most recent actuarial report, the total value of solvency assets and liabilities on the valuation date, and the employer’s total payments made to the plan for the plan year.
The proposed amendments to the PBSR would require that administrators provide former members (i.e. retirees and other former members) with an annual statement similar to the annual statement sent to active members, including the proposed amendments to the annual statement for members.
Negotiated contribution plans are multi-employer defined benefit pension plans under which the employer’s contributions are negotiated and limited by agreement. Under these arrangements, pension benefits or pension benefit credits may be reduced in situations where negotiated contributions are insufficient to meet the prescribed solvency standards. The administrator may amend the plan to reduce pension benefits or pension benefit credits, subject to the Superintendent’s authorization. Plan administrators under the PBSA are currently required to provide members and former members of negotiated contribution plans with the same annual statement that they provide to all defined benefit plan members and former members. The annual statement requirements for negotiated contribution plans would be expanded to include a description of the funding arrangement. Similar disclosure requirements would be required for the written explanation of the pension plan’s terms and conditions which are provided to employees who are eligible to join the plan.
For members and former members who elect to receive variable benefits, the proposed amendments to the PBSR would require that the annual statement include the date of birth used to determine minimum payments, the permitted minimum and maximum annual payments permitted, the payment frequency over the year, an indication of how the recipient may change the amount they receive and how they can change the investments from which the payments are coming from, and the transfer options available to them, such as to an annuity, locked-in RRSP and life income fund.
Legislative amendments to the PBSA made in 2010 allow information to be provided in electronic form, such as the annual statement provided to members. The proposed amendments set out that the addressee (i.e. member, former member, spouse or common-low partner) may consent in writing, in paper or electronic form, or orally to receive information electronically, and that the addressee has the right to revoke their consent at any time. If electronic documents are available on a generally accessible information system, such as a website, the proposed amendments require that the administrator provide addressees with notice of the document’s availability and its location.
The 2010 legislative amendmentsrequire pension plan administrators to provide notification to beneficiaries (members or former members and their spouse or common-law partner) following a plan termination. This includes providing beneficiaries with a written statement within 30 days of termination or any longer period permitted by the Superintendent, indicating that the plan has terminated; and providing beneficiaries with a written statement within 120 days of termination or any longer period permitted by the Superintendent, informing them of their pension benefits payable. The proposed amendments to the PBSR prescribe the form for these two statements and the information that would be contained in them. The statement provided to beneficiaries within 30 days of termination would include the termination date, the member or former member’s name and date of birth, designated beneficiary, and the rights of beneficiaries to examine plan documents filed with the Superintendent. The statement provided to beneficiaries within 120 days would include information such as the credited pensionable service, pensionable age, member and employer contributions, pension benefit payable, survivor benefit payable, the plan’s funded status and the beneficiaries’ portability options.
Additional technical regulatory amendments
To ensure pension savings are available throughout retirement, an individual’s funds accumulated in a pension plan or PRPP can generally not be accessed until retirement (i.e. funds are “locked-in”) and payments are subject to a maximum annual payment based on the fund holder’s age. The maximum annual variable payments and maximum life income fund payments under the PRPP Act are intended to be the same as the maximum payments from life income funds under the PBSR. Amendments are proposed to the PRPP Regulations that would adjust the current maximum variable payment and life income fund payment formulas to clarify that the permitted maximums are the same as what applies to life income funds under the PBSR.
Currently, the PRPP Regulations allow individuals to transfer their funds directly from a PRPP to a restricted locked-in savings plan, which is a locked-in RRSP that does not permit a one-time unlocking of up to 50% of the funds in the account at the age of 55 or older. Individuals that are 55 or older are only permitted to unlock up to 50% of their holdings from a restricted life income fund. Funds in the life income fund that are from a restricted locked-in savings plan may not be included in the amount that can be unlocked from a life income fund. Under the current PRPP Regulations there may be circumstances where a member or former member transfers their PRPP funds to a restricted locked-in savings plan which may unintentionally restrict the individual’s ability to use the one-time 50% unlocking provision. In order to ensure that individuals have a one-time opportunity to exercise the 50% unlocking provision and for consistency with the PBSR, the proposed amendments would remove the provision in the PRPP Regulations that allows funds to be transferred directly from a PRPP to a restricted locked-in savings plan.
The proposed amendments to the PBSR would also remove the regulatory provisions related to Simplified Pension Plans, a form of defined contribution plan administered by a financial institution. Those provisions were rendered invalid when their enabling legislative provisions in the PBSA were repealed. Simplified Pension Plans are similar in nature to PRPPs and are therefore no longer needed as a result of the coming into force of the PRPP Act and its associated regulations. Existing simplified pension plans would be able to continue to operate.
The proposed amendments to the Solvency Funding Relief Regulations, Solvency Funding Relief Regulations 2009, and Canadian Press Pension Plan Solvency Deficiency Funding Regulations, 2010 would also address inconsistencies between the English and French versions and make other technical changes.
The “One-for-One” Rule does not apply, as the proposed amendments do not affect administrative costs to business.
Small business lens
The small business lens does not apply, as the proposed amendments do not impose costs on small business.
On January 9, 2009, the Government released a discussion paper entitled “Strengthening the Legislative and Regulatory Framework for Private Pension Plans Subject to the Pension Benefits Standards Act, 1985.” This was followed by a series of public meetings, led by Mr. Ted Menzies, the former Parliamentary Secretary to the Minister of Finance, in Ottawa, Halifax, Montreal, Toronto, Vancouver, Whitehorse, Edmonton and Winnipeg. Concerned stakeholders were afforded the opportunity to make their views known to the Government by speaking at one of the public meetings or by making a written submission. Although the deadline for written submissions was initially March 16, 2009, this was extended to May 31, 2009 based on the level of interest and stakeholder engagement.
The Government received a wide range of views during the consultation. Over 200 submissions were made on behalf of a range of stakeholders, including plan sponsors, industry associations, pension actuaries, members of the legal profession, labour unions, pensioner organisations and plan members. In addition, dozens of individuals made their views known at the various public meetings. Stakeholders were supportive of permitting variable payments and member choices to improve the framework for defined contribution plans. However, many of the technical details in the proposed Regulations to implement these options were beyond the scope of the consultation. Stakeholders were generally supportive of the proposed enhanced disclosure requirements; however some stakeholders were concerned that requiring an annual statement for former members (i.e. retirees) could be difficult to administer. Stakeholders were supportive of amendments that permit information to be provided electronically, such as the annual statement, which could reduce costs. In addition, stakeholders were generally supportive of modernizing the pension investment rules; however, concerns were raised regarding repealing the exemption to the related party rule for nominal and immaterial transactions. In particular, some stakeholders were concerned that there may be situations where investing in a related party is in the best interest of the plan. To deal with this concern, administrators would have five years to comply with the rule.
The regulatory amendments are proposed with a view to ensuring the rights and interests of pension plan members, retirees and their beneficiaries are protected. In this regard, the proposed amendments to the PBSR contain the details relating to a number of amendments made to the PBSA through the Jobs and Economic Growth Act and to the Sustaining Canada’s Economic Recovery Act. In particular, the proposed amendments include the details required to permit variable benefits and member choices in order to improve the framework for defined contribution plans. The proposed enhancements to disclosure (e.g., annual statements to former members; new disclosure requirements for negotiated contribution plans; additional details in annual statements) would improve member awareness and understanding of their pension benefits and will facilitate informed discussions on these matters between plan members, and sponsors. Requiring spousal consent for transfers out of a pension plan, and extending the waiting period for surplus distributions would provide greater protections for members and former members. Permitting electronic dissemination of information would enhance disclosure to members and former members, while also reducing plan costs. The proposed enhancements to the terminology in the investment rules are intended to modernize the rules based on common practices and provide greater clarity on the rules to protect plan members’ and former members’ benefits.
The intent of the proposed amendments to the PRPP Regulations is to ensure consistency with the portability options and locking-in provisions under the PBSR.
The proposed amendments to the Solvency Funding Relief Regulations, Solvency Funding Relief Regulations, 2009 and Canadian Press Pension Plan Solvency Deficiency Funding Regulations, 2010 would address inconsistencies between the English and French versions.
Implementation, enforcement and service standards
OSFI is responsible for the control and supervision of the administration of the PBSA and the PRPP Act. As a result, the Superintendent would be responsible for enforcing the proposed Regulations.
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