Vol. 133, No. 41 — October 9, 1999

Regulations Amending the Pension Benefits Standards Regulations, 1985

Statutory Authority

Pension Benefits Standards Act, 1985

Sponsoring Agency

Office of the Superintendent of Financial Institutions

REGULATORY IMPACT ANALYSIS STATEMENT

Mechanism for an employer to establish claims to surplus

Description

Under the the Pension Benefits Standards Act, 1985 (PBSA), the federal government, through the Office of the Superintendent of Financial Institutions (OSFI), supervises private pension plans covering federally regulated areas of employment. These federally regulated areas of employment include banks, airlines, interprovincial and international transportation, and telecommunications.

Bill S-3 (An Act to amend the Pension Benefits Standards Act, 1985 and the Office of the Superintendent of Financial Institutions Act), which received Royal Assent on June 11, 1998, offered well-considered measures to enhance the supervision of federally regulated private pension plans. The Bill followed the July 1996 discussion paper entitled Enhancing the Supervision of Pension Plans Under the Pension Benefits Standards Act, 1985.

There were several measures contained in Bill S-3 which require regulations to make them effective or to provide them with support. The proposed Regulations support new section 9.2 of the Act, as amended through Bill S-3, which specifies mechanisms for an employer to establish a claim to surplus.

Bill S-3 contained specific provisions in respect to the manner in which employers who sponsor pension plans with a substantial surplus (i.e. above a prudent estimate of what is needed to meet promised benefits) can withdraw a portion of that surplus. The new surplus provisions now state that, in cases where a pension plan has a surplus, the employer may propose a surplus withdrawal to members. If more than two-thirds of members consent, and the prescribed funding margins have been satisfied, the Superintendent of Financial Institutions may consent to the withdrawal. For ongoing plans, if fewer than two-thirds but more than one-half of members consent to the proposal, the legislation allows the issue to go to binding arbitration. In order to expedite the payout process for plans that are being wound up and for which the employer is in liquidation, arbitration is mandatory if the 50 percent threshold is met or within 18 months of plan termination.

The proposed Regulations are required or ancillary to the new surplus provisions of the amended PBSA.

Alternatives

The Government announced its intention to amend the surplus provisions of the PBSA as part of the July 1996 discussion paper entitled Enhancing the Supervision of Pension Plans Under the Pension Benefits Standards Act, 1985. Alternative approaches to handling surplus withdrawals from pension plans were considered during the preparation and passage of Bill S-3. The proposed regulatory amendments support Bill S-3 provisions relating to the mechanisms for an employer to establish claims to surplus. They follow the Government's stated intention to address the concerns raised by federally regulated pension plan administrators.

Benefits and Costs

The regulatory amendment will entail costs to the employer/ plan administrator who proposes a surplus withdrawal, given the requirement that they also notify spouses, persons entitled to pensions and annuitants. Other parties that may incur costs include unions, union members and other interested parties as a result of making representations. These costs are anticipated to be less than taking the surplus distribution to court, and are considered reasonable in surplus refund circumstances.

Consultation

Extensive consultations were conducted subsequent to the publication of the July 1996 discussion paper as well as during the drafting of the legislative amendments (i.e. Bill S-3). In January 1996, the Secretary of State (International Financial Institutions) issued a press release indicating that proposals for revision to the PBSA would be brought forward in early 1996. The discussion paper entitled Enhancing the Supervision of Pension Plans Under the Pension Benefits Standards Act, 1985 was approved by Cabinet, in June 1996, and released by the Secretary of State (International Financial Institutions) in July 1996.

The proposals contained in the discussion paper were developed by the Office of the Superintendent of Financial Institutions in close consultation with the Department of Finance. All appropriate departments were consulted and did not raise any objections to the release of the policy paper or to the proposals contained therein.

The discussion paper invited interested parties to comment on the range of proposals by September 27, 1996. One of the proposals in this paper was to clarify uncertainty about entitlements to surplus refunds, and interested parties were invited to comment. There were 2 100 copies of the discussion paper distributed to a wide variety of interested parties. Comments were received from 30 parties including individual pension plan administrators, consulting accountants, actuaries, lawyers and industry groups. The comments represented just over 50 percent of active members of plans administered under the PBSA and almost 60 percent of assets held in those plans. Few comments were received from individual plan members, retirees or other beneficiaries. Overall, the submissions were supportive of the thrust of the proposals.

Meetings were held with specific stakeholder groups (e.g. Canadian Bankers Association, CN Pensioners Association, Multi-Employer Benefit Plan Council of Canada, Canadian Labour Congress) and follow-up consultations were conducted with various industry groups (i.e. Canadian Institute of Actuaries, Association of Canadian Pension Management).

The pension industry had ample opportunities to provide comments prior to Royal Assent to Bill S-3. In addition, the proposed Regulations were posted on the OSFI Web site for public comments. Material suggestions that were consistent with overall government policy have been incorporated in the proposed Regulations.

Compliance and Enforcement

While the legislative surplus provisions, as amended through Bill S-3, will require adjustments in OSFI procedures and practices, compliance problems are not expected. OSFI will issue further guidance to pension plan administrators on the new requirements and procedures.

Amendment to the fee formula

Description

OSFI collects annual filing fees from the pension plans it regulates. The fees cover OSFI operating expenses for supervising pension plans. The fee for each year is set in advance, based on estimates for the year's expenses adjusted by the previous year's deficit or excess. Since 1991, when full cost recovery became effective, the minimum annual fee has fluctuated between $160 and $262 and the maximum fee between $80,000 and $131,000 per plan, depending on the number of plan members.

The proposed Regulations include a new averaging formula introduced for fee calculation purposes to avoid large fluctuations in annual filing fees. The Regulations currently require that any deficits and excesses in total annual fees exceeding incurred expenses, have to be reflected in the following year's fees. The new formula allows for any deficits or excesses to be averaged out over the following five years.

Alternatives

An alternative could be to average gains and losses in OSFI pension supervisory expenses over a period shorter or longer than the proposed five years. The five year limitation is considered adequate to cause a smoothing effect and short enough to maintain fiscal accountability for current supervisory activity.

Benefits and Costs

This adjustment to the fee formula should benefit both the plan administrators and OSFI, given that it will provide the ability to better anticipate forthcoming fees. No additional administrative costs will be incurred by OSFI, and there are no long term additional costs to pension plans as a result of the averaging formula.

Consultation

The proposed Regulations were posted on the OSFI Web site for public comments. No negative comments were received in response to the posted draft Regulations.

Compliance and Enforcement

This amendment to the fee formula will not require any changes in OSFI procedures. No compliance problems are expected.

Contact

Pirjo Davitt, Manager, Supervision and Policy, Private Pension Plans Division, Office of the Superintendent of Financial Institutions, Kent Square, 255 Albert Street, Ottawa, Ontario K1A 0H2, (613) 990-7867 (Telephone), (613) 990-7394 (Facsimile), penben @osfi-bsif.gc.ca (Electronic mail).

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to the definition "surplus"(see footnote a) in subsection 2(1), paragraph 9.2(3)(b),(see footnote b) subsection 9.2(7)(see footnote c) and paragraphs 39(b),(see footnote d) (h.1)(see footnote e) and (o) of the Pension Benefits Standards Act, 1985,(see footnote f) proposes to make the annexed Regulations Amending the Pension Benefits Standards Regulations, 1985.

Any interested persons may make representations concerning the proposed Regulations within 15 days after the date of publication of this notice. All such representations must be addressed to Mr. Charles P. Johnston, Regulations Officer, Legislation and Precedents Division, Office of the Superintendent of Financial Institutions, 255 Albert Street, Ottawa, Ontario K1A 0H2, and cite the Canada Gazette, Part I, and the date of this notice.

Ottawa, September 29, 1999

MARC O'SULLIVAN
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE PENSION BENEFITS STANDARDS REGULATIONS, 1985

AMENDMENTS

1. (1) The definition "going concern valuation" in subsection 2(1) of the Pension Benefits Standards Regulations, 1985(see footnote 1) is replaced by the following:

"going concern valuation" means a valuation of the assets and liabilities of a plan using actuarial assumptions and methods that are in accordance with accepted actuarial practice for the valuation of a plan that is not expected to be terminated or wound up; (évaluation sur une base de permanence)

(2) Subsection 2(1) of the Regulations is amended by adding the following in alphabetical order:

"accepted actuarial practice" means the standards of practice described in paragraph 9(2)(b) of the Act, taking into account any specification made by the Superintendent under that paragraph; (normes actuarielles reconnues)

"solvency valuation" means a valuation of the assets and liabilities of a plan using actuarial assumptions and methods that are in accordance with accepted actuarial practice for the valuation of a plan as if it had terminated; (évaluation de solvabilité)

2. Section 16 (see footnote 2) of the Regulations is replaced by the following:

16. (1) For the purpose of the definition "surplus" in subsection 2(1) of the Act, the amount by which the assets of a pension plan exceed its liabilities shall be determined by subtracting the liabilities of the plan from its assets, where those assets and liabilities are as shown in an actuarial report filed with the Superintendent under subsection 12(3) of the Act and prepared in accordance with accepted actuarial practice, and, in the case of a plan that has not been fully terminated, those assets and liabilities are valued in the report according to a going concern valuation.

(2) A refund of all or part of a surplus may be made if

(a) in respect of a plan that has not been fully terminated, the surplus exceeds the greater of the following amounts that are attributable to the defined benefit provisions of the plan:

(b) in respect of a plan that has been fully terminated, provision has been made for the payment of all accrued or payable benefits in accordance with subsection 29(7) of the Act;

(c) the administrator of the plan has given notice in writing to the plan members, former members and any other person who is entitled to a pension benefit under the terms of the plan that the employer intends to withdraw all or part of the surplus and that they may make any comments in writing to the Superintendent concerning the refund of all or part of the surplus;

(d) 30 days have gone by after the day on which the administrator gave notice under paragraph (c);

(e) the Superintendent has consented to the refund of all or part of the surplus and has given notice of that consent, in writing, to the persons referred to in paragraph (c) who made comments in writing concerning the refund; and

(f) 14 days have gone by after the day on which the Superintendent gave notice under paragraph (e).

(3) For the purpose of this section, liabilities accrued under defined contribution provisions of a plan as the result of a conversion of defined benefit provisions to defined contribution provisions of the plan are deemed not to be attributable to the defined benefit provisions of the plan.

(4) In respect of a plan that has not been fully terminated, the surplus or part of it that may be refunded may be no greater than the amount by which the surplus exceeds the greater of the following amounts that are attributable to the defined benefit provisions of the plan:

(a) two times the employer's contribution to the normal cost of the plan, and

(b) 25% of the liabilities of the plan, determined according to a solvency valuation.

(5) The following classes of persons are prescribed for the purpose of paragraph 9.2(3)(b) of the Act:

(a) any persons who are entitled to pension benefits payable from the plan, but not including plan members;

(b) spouses and former spouses of members or former members who are entitled to pension benefits or pension benefit credits payable from the plan; and

(c) any persons for whom the administrator has purchased annuities, other than life annuities purchased under section 26 of the Act, but not including plan members.

Arbitration Relating to Refund of Surplus

16.1 (1) An arbitration under subsection 9.2(4) of the Act shall include a procedure by which

(a) unionized members can make written representations to the executive of their union; and

(b) any person described in subsection 9.2(3) of the Act but not described in paragraph (a) can make written representations to the arbitrator.

(2) For the purpose of subsection 9.2(7) of the Act, the prescribed period is one year beginning on the day on which the employer issues the notifications under subsection 9.2(4) of the Act.

(3) The arbitrator shall publish a notice of the time and place at which the arbitration will begin.

(4) The notice must include

(a) the mailing address where a person in either of the categories referred to in subsection 9.2(3) of the Act can obtain a copy of the written procedures for the arbitration; and

(b) the mailing address where those persons may make written representations.

(5) The notice must be published once a week for two consecutive weeks in one or more newspapers in general circulation in each province in which persons in either of the categories referred to in subsection 9.2(3) of the Act reside.

(6) The last notice must be published not more than eight weeks and not less than four weeks before the date of the arbitration.

3. Subsections 25(5)(see footnote 3) and (6)(see footnote 4) of the Regulations are replaced by the following:

(5) The basic rate for an office year beginning on or after April 1, 1992 is the rate determined in accordance with the formula

(A + B) / C

where

A is the estimated total of expenses expected to be incurred during the office year for the registration of pension plans and the supervision, including inspection, of pension plans by the Superintendent;

B is 20% of the amount by which the total of expenses incurred for the registration of pension plans and the supervision, including inspection, of pension plans by the Superintendent in the second to the sixth preceding office years but not those years ending in or before 1998 exceeds the total of fees, revenues and expenses paid by pension plans under this section and subsection 34(3) of the Act in the second to the sixth preceding office years but not those years ending in or before 1998; and

C is the estimated total of the plan fee bases of all pension plans expected to be filed for registration under section 10 of the Act during the office year or for which an information return is expected to be filed during the office year under section 12 of the Act.

(6) Each time an information return is filed for a pension plan under section 12 of the Act, a fee shall be paid for the supervision, including inspection, of the plan by the Superintendent. The fee is the amount determined by multiplying the plan fee base in respect of the plan by the basic rate that is in effect six months after the last day of the plan year in respect of which the information return is filed.

COMING INTO FORCE

4. These Regulations come into force on the day on which they are registered.

[41-1-o]

Footnote a

S.C., 1998, c. 12, ss. 1(4)

Footnote b

S.C., 1998, c. 12, s. 9

Footnote c

S.C., 1998, c. 12, s. 9

Footnote d

S.C., 1998, c. 12, ss. 26(1)

Footnote e

S.C., 1998, c. 12, ss. 26(2)

Footnote f

R.S., c. 32 (2nd Supp.)

Footnote 1

SOR/87-19

Footnote 2

SOR/95-171

Footnote 3

SOR/91-228

Footnote 4

SOR/91-228

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