FSRA sets out rules and procedures for approval of commuted value transfers
Effective May 22, 2020, the Financial Services Regulatory Authority of Ontario (FSRA) issued Approach No. PE0202APP (the Approach), which provides new guidance on commuted value transfers and annuity purchases for Ontario-registered defined benefit pension plans. The Approach sets out two processes for approval of commuted value payouts once plan administrators have determined that the restrictions on commuted value transfers apply, as well as FSRA’s expectations if the plan administrator chooses not to apply for permission to make such transfers. The Approach replaces the prior Policy T800-402 on transfer restrictions.
FSRA’s expectations if Form 10 is not filed
FSRA requests that it be notified if an administrator determines that its preferred course of action is not to apply for approval to continue making commuted value transfers until plan stability has improved. The administrator should explain the reasons for taking this approach and the factors that were considered. In addition, the administrator should indicate: (i) how long the cessation of commuted value transfers is expected to continue, (ii) what communication is being made to plan beneficiaries, and (iii) what steps are being taken to return to a situation where commuted value transfers can be made.
Expedited review process
Under its new approach, FSRA will consider applying an expedited review process for qualifying plans that wish to continue making commuted value transfers. FSRA will generally consider applications to continue making commuted value transfers on an expedited basis in the following circumstances:
- The full transfer deficiency with respect to each commuted value to be transferred has been remitted to the plan;
- The plan’s updated transfer ratio is at least 0.85 and the administrator proposes to transfer out full commuted values, so long as the aggregate of all transfer deficiencies since the last valuation date does not exceed 5% of the plan’s assets at that time; or
- The updated transfer ratio is less than 0.85 and the administrator proposes to transfer out only a portion of the commuted value at the updated transfer ratio.
FSRA will make the ultimate determination as to whether the expedited review process is appropriate, or whether an in-depth review is required. Under its expedited process, FSRA aims to respond to applicants within five business days of receiving a completed Form 10, provided no additional information is required.
In-depth review process
If FSRA determines that the expedited review process is not appropriate, its in-depth review process may take the following additional items into consideration:
- The plan’s financial position, including the plan’s funded level based on the most recent valuation, the estimated drop in the plan’s transfer ratio, and an estimate of the plan’s funded status (at year 5 from the date of application);
- Liquidity concerns (or lack thereof);
- The expected frequency of terminations and the average size of their commuted values;
- A description of the impact of transfer deficiencies on the plan’s assets and transfer ratio (i.e., the size of the transfer deficiencies relative to the plan’s assets), and the potential impact of transfers on the benefit security of remaining plan beneficiaries;
- The impact of continued market uncertainty and further events;
- Any concern over the plan’s investment portfolio;
- Any concern over the employer’s ability to absorb fluctuations in plan costs or to fund wind up deficiencies; and
- For multi-employer pension plans (MEPPs), existing benefit reduction practices and how they will be applied when there are temporary reductions to commuted values.
FSRA encourages administrators to include relevant information addressing the aforementioned considerations with their Form 10 applications. If FSRA determines that an in-depth review is required or additional information is to be provided, FSRA will strive to respond to an application within 15 to 20 business days, or longer in some cases.
Resuming unreduced commuted value transfers
An administrator that has filed a Form 10 and been approved only to make reduced commuted value transfers may resume making unreduced commuted value transfers once any of the following have taken place:
- A new valuation report is filed and the regular rules for making unreduced commuted value transfers have been met;
- The employer fully funds all commuted value transfer deficiencies; or
- In accordance with the approval granted by FSRA, a statement signed by the plan’s actuary is filed showing an estimated updated transfer ratio of at least 0.9.
FSRA has stipulated that, after an administrator has submitted a Form 10 and FSRA has approved the transfer of commuted values, if the plan’s transfer ratio declines by an additional 5% from the level identified in the original Form 10, the administrator must again cease transferring commuted values. In such a case, the administrator may decide to file another Form 10 reflecting the updated transfer ratio.
Option statements provided to eligible terminating and retiring beneficiaries should inform the recipients if all or a portion of the commuted values must remain in the plan, as well as the time frame within which the remainder is expected to be transferred out.
FSRA indicates it plans to revisit the Approach by December 31, 2020.
The new Approach sets out detailed expectations and processes for dealing with commuted value transfer requests. Ontario defined benefit pension plan administrators who have not yet reviewed their transfer ratios in light of recent market volatility should refer to the new Approach for guidance on how to do so. Plan administrators who have already made such applications should review their approval letters from FSRA for the precise conditions applicable to their situations.
Any transfer deficiencies that are not paid immediately must be paid within five years. FSRA may set out conditions for such payments in its approval letters.