OSFI releases guidance note: Administration of Negotiated Contribution Plans
On March 16, 2016, the federal Office of the Superintendent of Financial Institutions (OSFI) released a Guidance Note titled, “Administration of Negotiated Contribution Plans”. The Guidance Note sets out OSFI’s expectations respecting: (i) who can be an administrator of a negotiated contribution plan (NCP); (ii) how to manage the funding limitations of an NCP; and (iii) the enhanced disclosure requirements for an NCP.
This new document does not create new rules but explains how to apply the rules already specified under the Pension Benefit Standards Act, which applies to plans in industries that are subject to federal jurisdictions.
What is an NCP?
An NCP is a multi-employer, defined benefit pension plans that has the following attributes:
- participating employers’ contributions are limited to an amount that is determined by a participating employer agreement, a collective agreement, statute or regulation; and
- the amount of contributions is not linked to the pension plan’s solvency status (in other words, the contribution amount does not vary based on the plan’s financial situation).
Subject to the Superintendent’s authorization and overriding any plan terms, the Pension Benefits Standards Act (PBSA) permits an NCP administrator to amend the plan to reduce accrued pension benefits.
NCP guidance note
The Guidance Note reminds people who serve on the board of trustees or pension committee of an NCP that the board of trustees must administer the pension plan as a trustee for the employer, members, former members and any other plan beneficiary. A person is not permitted to accept an appointment to the body that administers an NCP if there would be a material conflict of interest between that person’s role as a member of that body and their role in any other capacity.
Managing funding risk
Given that NCPs have a limited ability to increase funding levels in response to changing circumstances, the Guidance Note states that it is especially important that NCP administrators closely monitor their plan’s solvency. The Guidance Note provides that NCP administrators should monitor and assess the risks facing the plan, and implement strategies to manage these risks, including stress testing.
The Guidance Note further states that actuarial reports for NCPs should address the adequacy of expected contributions for the plan, including whether the expected contributions are adequate to meet minimum funding requirements and, if they are not, outline the options considered to address the funding shortfall.
Enhanced member disclosure requirements for NCPs
Effective July 1, 2016, the PBSA will require that the plan booklet and annual statements to members and former members of an NCP must explain that:
- contributions to an NCP are limited and this may lead to reductions in benefits if the contributions are insufficient to meet minimum funding requirements; and
- the administrator may amend the plan to reduce pension benefits, subject to the Superintendent’s authorization.
The Guidance Note further reminds NCP administrators that these enhanced disclosure requirements apply to any documents due on or after July 1, 2016. This means that, for federally regulated plans with a year-end of December 31, the additional information is not required in annual statements for the plan year ending December 31, 2015 (since they are due on June 30, 2016), but are required for subsequent statements.