FSCO gives stakeholders FAQ document on DB funding reform
On March 8, 2019, the Financial Services Commission of Ontario (FSCO) released a Frequently Asked Question (FAQ) document summarizing key points on the new funding rules for single employer defined benefit (DB) pension plans registered in Ontario, which came into effect on May 1, 2018. The FAQ document discusses the new requirements for an asset allocation table in Statements of Investment Policies and Procedures (SIPPs), rules for calculating the provision for adverse deviation (PfAD), and other rules relating to plan text amendments and disclosure to members.
Required amendments to SIPPs
As discussed in the November 2018 News & Views, a SIPP must be amended to include the plan’s target asset allocation for the investment categories listed in subsection 76(12) of the regulations under the Pension Benefits Act (the Regulations).
The SIPP amendment requirements are consistent with the SIPP amendment requirements previously summarized in News & Views. However, FSCO has clarified the treatment of pooled funds in the target asset allocation. Despite pooled funds being listed as an investment category in the Regulations, the target asset allocation must “look through” to the underlying investments held in the pooled fund in order to permit the PfAD to be calculated. It is not necessary to include a target asset allocation that lists pooled funds as an investment category.
The FAQ document also provides guidance on a number of investment categories, such as Real Estate Income Trusts (REITs), private equity, commodities and infrastructure investments and how they are to be categorized in the target asset allocation.
FSCO expects SIPPs to be brought into compliance “as soon as is practical”, but the SIPP will have to contain the required information by the valuation date of the first valuation report in which the PfAD is calculated based on the target asset allocation. It should be noted that, for valuation reports with a valuation date before December 31, 2019, the PfAD can be calculated using transition rules that permit the PfAD to be based on the pension plan’s actual asset allocations in the financial statements rather than the target asset allocation.
Guidance on PfAD calculations
The FAQ document also provides some guidance on calculation of the PfAD.
A SIPP is effective as of the date it is approved or the date it is amended by the administrator. If a SIPP calls for changes in the asset mix after the valuation date, such as a de-risking glide path, those future changes should not be reflected in the calculation of the PfAD until that future date. Furthermore, the target asset allocation of the SIPP in effect at the valuation date of the valuation report should be used to determine the PfAD in that report.
Additionally, for the purpose of going concern valuations, the PfAD should be applied to any provisions for plan expenses payable from the pension fund, including any explicit allowance for expenses.
Other new rules
As discussed in the November 2018 News & Views, a DB pension plan registered in Ontario must be amended to comply with the new funding rules. Such amendments must be made within 12 months of filing a valuation report with a valuation date on or after December 31, 2017, whether or not the report used the new funding rules.
Contribution holidays must be disclosed to plan members, former members, retired members, trade unions, and an advisory committee, if any, in the first six months of any plan year where the employer is taking a contribution holiday. The notice of contribution holiday may be included in the annual or biannual statement to members, former members and retired members as long as the deadline for providing such notice is met.
Plan administrators must disclose the plan’s estimated transfer ratio as at the end of the statement period (whether annual or biennial) in statements issued on and after January 1, 2019.
The FAQs relating to SIPPs provide useful and necessary guidance on the preparation of the target asset allocation in a SIPP for an Ontario DB pension plan. With the release of the FAQ document, plan administrators should have sufficient information to amend and update the DB SIPP.
The FAQ document also provides firm guidance on certain calculation issues relating to the PfAD.
The statements provided to Ontario DB plan active and inactive members, and for members of Ontario-registered DB plans in jurisdictions that have signed the multi-jurisdictional pension plans agreement must now reflect the estimated transfer ratio as of the effective date of the statement period. Administrators and sponsors of Ontario-registered DB plans should also be aware of the deadlines applicable to them in relation to SIPP and plan text amendments.