FSRA supervisory approach for actively monitored single employer defined benefit pension plans
On January 13, 2020, the Financial Services Regulatory Authority of Ontario (FSRA) released a guidance document (Guidance) which outlines its proposed supervisory approach for actively monitored (i.e., higher risk) single employer defined benefit pension plans (DBPPs), in recognition of the existing and emerging challenges involved in regulating such plans.
FSRA’s supervisory approach is premised on two components, namely protecting:
- pension benefit security for beneficiaries of single employer DBPPs
- reducing/eliminating threats to the long-term sustainability of the Pension Benefits Guarantee Fund (PBGF)
Identifying at-risk pension plans
FSRA states that it will be risk-based, in order to guide the implementation of its proposed approach. This means that risks will be assessed by their nature, size, complexity and potential impact on all pension plan stakeholders. Thereafter, regulatory resources will be focused on those pension plans determined to have the greatest risk to benefit security or which pose a threat to the sustainability of the PBGF.
In order to identify at-risk single employer DBPPs, FSRA will undertake a risk assessment of all single employer DBPPs each quarter. The assessment may include consideration of:
- investment risk and funding risk
- plan governance and satisfaction of fiduciary duties
- challenges faced by the plan sponsor, including recognition of the health of the plan sponsor
- challenges faced by the industry/industry risks (e.g., financial losses, corporate transactions)
Notably, FSRA indicates that it will use its “judgement” in its assessment of risk. Also, the status of being an actively monitored plan would be confidential but would be disclosed to the plan administrator.
Promoting the fiduciary duty of the administrator
FSRA will require plan administrators of actively monitored plans to demonstrate that it understands the scope of its fiduciary obligations (e.g., through fiduciary training or engaging appropriate advisors). FSRA will also consider the plan administrator’s decisions with respect to its standard of care (e.g., the plan’s ability to absorb future fluctuations in funding costs).
FSRA will also review the governance framework of such plans to ensure that the administrator’s fiduciary obligations are being satisfied.
Assessing risk management
Once the pension plans at greatest risk have been identified, FSRA’s approach would be to consider whether the plan sponsors have taken appropriate measures to address such risks. Following this assessment, FSRA notes that it will deploy regulatory tools and powers in a “reasonable and proportionate way,” and will encourage appropriate risk management measures for mitigation purposes.
Potential outcomes once identified as an at-risk plan
Following FSRA’s engagement with the administrator and plan sponsor, FSRA has established certain outcomes that may arise, however, they are not limited to the following:
- Removal of “actively monitored plan” status
- Requiring additional reporting or continued monitoring
- Requiring the development of a risk management plan that remediates or mitigates the risks identified
- Development of strategic solutions to improve outcomes for pension plan beneficiaries
The Guidance describes FSRA’s internal principles, processes and practices for supervisory action and application of CEO discretion for higher risk Ontario defined benefit (DB) pension plans. Although it does not create new compliance obligations, the Guidance sets out FSRA’s expectations for DB pension plans it considers to be higher risk. Such plans will be expected to demonstrate strong governance practices, including the possible adoption of a funding policy, as well as explaining their approach to risk management.