Annual Report 2015-2016

Table of contents

 

Financial Statements

Pension Benefits Guarantee Fund

For the Year Ended March 31, 2016

 

Government of Ontario crest

Financial Services Commission of Ontario

 

Deputy Superintendent Pensions Division

5160 Yonge Street
Box 85, 8th Floor
Toronto ON M2N 6L9

Telephone: (416) 226-7784
Facsimile: (416) 226-7787

 

Commission des services financiers de l’Ontario

 

Surintendent adjoint Division des régimes de retraite

5160, rue Yonge
boîte 85, 8e étage
Toronto ON M2N 6L9

Téléphone : (416) 226-7784
Télécopieur : (416) 226-7787

 

June 28, 2016

 

Pension Benefits Guarantee Fund
Management’s Responsibility for Financial Information

 

The CEO and Superintendent of Financial Services of the Financial Services Commission of Ontario (“FSCO”) pursuant to the Financial Services Commission of Ontario Act, 1997 and specifically, subsection 82(2) of the Pension Benefits Act, is responsible for the administration of the Pension Benefits Guarantee Fund.

 

Under the direction of the Superintendent, FSCO Management (Management) is responsible for the integrity and fair presentation of all information in the financial statements and notes. The financial statements have been prepared by Management in accordance with Canadian Public Sector Accounting Standards. The preparation of financial statements involves the use of Management’s judgement and best estimates particularly when transactions affecting the current period cannot be determined with certainty until future periods.

 

In the administration of the Pension Benefits Guarantee Fund, Management is dedicated to the highest standards of integrity in provision of its services and has developed and maintains financial controls, information systems and practices to provide reasonable assurances on the reliability of financial information and safeguarding of its assets.

 

The financial statements have been audited by the Office of the Auditor General of Ontario. The Auditor’s responsibility is to express an opinion on whether the financial statements are fairly presented in accordance with Canadian Public Sector Accounting Standards For Government Not-For-Profit organizations. They have been approved by the Commission’s Audit & Risk Committee. The Auditor’s report follows.

 


Signature of Lester J. Wong, Deputy Superintendent, Pensions

Lester J. Wong
Deputy Superintendent,
Pensions


Signature of Kwan Lee, Chief Accountant

Kwan Lee
Chief Accountant

 

Office of the Auditor General of Ontario logo

Office of the Auditor General of Ontario
Box 105, 15th Floor
20 Dundas Street West
Toronto, Ontario
M5G 2C2
416-327-2381
fax 416-327-9862
tty: 416-327-6129

 

Bureau du vérificateur general de l’Ontario
B.P. 105, 15e étage
20, rue Dundas ouest
Toronto (Ontario)
M5G 2C2
416-327-2381
télécopieur 416-327-9862
ats 416-327-6129

www.auditor.on.ca [New Window]

 

Independent Auditor’s Report

 

To the Financial Services Commission of Ontario and to the Minister of Finance

 

I have audited the accompanying financial statements of the Pension Benefits Guarantee Fund of the Financial Services Commission of Ontario, which comprise the statement of financial position as at March 31, 2016, and the statements of operations and fund surplus, cash flows and re-measurement gains and losses for the year then ended, and a summary of significant accounting policies and other explanatory information.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting, standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

 

Opinion

 

In my opinion, these financial statements present fairly, in all material respects, the financial position of the Commission’s Pension Benefits Guarantee Fund as at March 31, 2016, and the results of its operations, its cash flows and its re-measurement gains and losses for the year then ended in accordance with Canadian public sector accounting standards.

 

Toronto, Ontario
June 28, 2016


Signature of Bonnie Lysyk, MBA, CPA, CA, LPA, Auditor General

Bonnie Lysyk, MBA, CPA, CA, LPA
Auditor General

 

 

Pension Benefits Guarantee Fund
Statement of Financial Position

As at March 31, 2016

 March 31, 2016
($ '000)
March 31, 2015
($ '000)
ASSETS
Current  
Cash (overdraft)(123)
Accounts receivable72,243 62,014
Investments (Note 4)528,116 480,768
 600,359 542,659
LIABILITIES AND FUND SURPLUS
Current  
Accounts payable and accrued liabilities5,9404,449
Current portion of loan payable (Note 5)11,00011,000
Claims payable24,47633,840
 41,41649,289
Loan payable (Note 5)117,216121,540
 158,632170,829
Fund surplus from operation442,671371,687
Accumulated remeasurement gains (losses)(944)143
Fund surplus441,727371,830
 600,359542,659

See accompanying notes to financial statements

Approved by:

Signature of Brian Mills, Chief Executive Officer and Superintendent of Financial Services, Financial Services Commission of Ontario


 

 

Brian Mills
Chief Executive Officer and Superintendent of Financial Services
Financial Services Commission of Ontario

 

Pension Benefits Guarantee Fund
Statement of Operations and Fund Surplus

For the year ended March 31, 2016

 March 31, 2016
($ '000)
March 31, 2015
($ '000)
Revenue
Premium revenue 70,944(536)
Pension plan recoveries (Note 7)16,5346,463
Investment income (Note 4)4,8815,283
 92,35911,210
Expenses
Claims8,4913,960
Amortization of loan discount (Note 5)6,6766,883
Pension consulting services (Note 8)5,4463,756
Administration fee (Note 9)597485
Investment management fees (Note 9)165155
 21,37515,239
Excess (deficit) of revenue over expenses70,984(4,029)
Fund surplus, beginning of year371,687375,717
Fund surplus, end of year442,671371,687

 

  See accompanying notes to financial statements

 

 

Pension Benefits Guarantee Fund
Statement of Cash Flows

For the year ended March 31, 2016

 March 31, 2016
($ '000)
March 31, 2015
($ '000)
Net inflow (outflow) of cash related to the
following activities
Cash flows from operating activities
Excess (deficit) of revenue over expenses70,984(4,029)
Items not affecting cash:  
Amortization of loan discount (Note 5)6,6766,883
Loss on disposal of investments333492
 77,9933,346
Changes in non cash working capital  
Accounts receivable(10,229)62,074
Claims payable(9,364)(17,076)
Accounts payable and accrued liabilities1,491(6,595)
 59,89141,749
Cash flows from investing activities
Purchases of investments(2,973,205)(3,258,352)
Proceeds from sale of investments2,924,4373,227,479
 (48,768)(30,873)
Cash flows from financing activities
Loan repayments(11,000)(11,000)
 (11,000)(11,000)
Change in cash position123(124)
Cash position, beginning of year(123)1
Cash (overdraft) position, end of year(123)

 

 

 

Pension Benefits Guarantee Fund
Statement of Re-measurement Gains and Losses

For the year ended March 31, 2016

 March 31, 2016
($ '000)
March 31, 2015
($ '000)
Accumulated re-measurement gains (losses), beginning of year143(8)
Unrealized gains attributed to portfolio investments(1,420)(341)
Realized losses reclassified to the statement of operations333492
Accumulated re-measurement gains (losses), end of year(944)143

 

  See accompanying notes to financial statements.

 

 

Notes to Financial Statements

 

1. STATUTORY AUTHORITY

 

The Pension Benefits Guarantee Fund (the “Fund” or “PBGF”) is continued under the Pension Benefits Act, R.S.O. 1990, c. P.8 (the “Act”).

 

2. FUND OPERATIONS

 

The purpose of the Fund is to guarantee payment of pension benefits of certain defined benefit pension plans that are wound up under conditions specified in the Act and regulations thereto. The regulations also prescribe an assessment payable into the Fund by plan registrants.

 

The Act provides that if the assets of the Fund are insufficient to meet payments for claims, the Lieutenant Governor in Council may authorize the Minister of Finance of Ontario to make loans or grants on such terms and conditions as the Lieutenant Governor in Council directs. The total liability of the Fund to guarantee pension benefits is limited to the assets of the Fund including any loans or grants received from the Province.

 

The CEO and Superintendent of Financial Services of the Financial Services Commission of Ontario (“FSCO”) pursuant to the Financial Services Commission of Ontario Act, 1997 and specifically, subsection 82(2) of the Pension Benefits Act, is responsible for the administration of the Fund, and the Fund reimburses FSCO for the costs of the services provided to the Fund. The investments of the Fund are managed by the Ontario Financing Authority, on a feefor- service basis which is paid by the Fund.

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

The financial statements of the Fund have been prepared by the management of FSCO in accordance with Public Sector Accounting Standards for Government Not-For- Profit organizations (PSA-GNFPO) as issued by the Public Sector Accounting Board (PSAB). Accordingly, management has used the following significant accounting policies in their preparation.

 

(a) Financial Instruments

The Fund follows PSA-GNFPO accounting standards relating to financial instruments. Under these standards, all financial instruments are included on the balance sheet and are measured either at fair value or at cost or amortized cost as follows:

 

  • Cash and investments are recorded at fair value, with changes in fair value during the period recognized in the statement of re-measurement gains and losses until realized. Fair value is determined from quoted prices for similar investments.
  • Accounts receivable, account payable and accrued liabilities are valued at cost which approximate fair value given their short-term maturities.
  • The non-interest bearing loan payable is reflected at amortized cost using the effective interest rate method due to the concessionary nature of the loan. The initial valuation was determined by discounting future cash flows using the provincial cost of borrowing. The resulting benefit (the difference between the face value of the loan and the net present value) was accounted for as a grant in the year received and is amortized to loan discount expense over the term of the loan.

(b) Claims Payable

Claims payable are estimates of the liabilities in respect of those defined benefit pension plans prescribed by the Act that are wound up or in the process of being ordered wound up under conditions specified in the Act, and the claim amounts can be reasonably estimated. Liabilities are also recognized when there is a high probability that a company will not emerge from creditor protection and the pension plan will be wound up on a specified date and the claim can be reasonably estimated. Claims payable are based on information provided by appointed pension plan administrators from estimates provided by actuarial consultants. These estimates represent the present value of future payments to settle claims for benefits and expenses by pension plans.

 

Differences in the liabilities, if any, between the amounts recognized based on estimates and the actual claims made, will be charged or credited to claims expense in the year when the actual amounts are determined.

 

(c) Premium Revenue

An estimate of the premium revenue due from defined benefit pension plans at rates prescribed by the Act is recorded until receipt of the annual assessment certificate nine months after the plan’s fiscal year end.

 

Differences in premium revenue, if any, between the estimated amounts recognized and the actual revenues due are charged or credited to premium revenue in the year.

 

The negative revenue for fiscal 2015 is due to an overestimation of premium revenue made during fiscal 2014. Better than estimated plan funding positions of these plans resulted in an overestimation of premium revenue.

 

 2016
($ '000)
2015
($ '000)
Estimated revenue61,30059,500
Actual revenue related to current and prior years received in current year69,14461,364
Less: prior year’s estimated revenue(59,500)(121,400)
 70,944(536)

 

(d) Use of Estimates

The preparation of financial statements in accordance with PSA-GNFPO accounting standards requires that FSCO’s management make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities as at the date of the financial statements and the reported amounts of revenue and expenses for the period. Estimates and assumptions may change over time as new information is obtained or subsequent developments occur. Actual results could differ from these estimates and the differences could be material. Areas where significant estimates must be made include premium revenue and claims payable.

 

 

4. INVESTMENTS

 

As the administrator investing the assets of the Fund, FSCO has established a Pension Benefits Guarantee Fund Management Committee. The Committee has developed a Statement of Investment Policies and Guidelines which is reviewed regularly and provides operational objectives, investment principles, policies and guidelines for the management of the investments.

 

Investments consist of:

 2016
($'000)
2015
($'000)
Fair ValueCostFair ValueCost
 
Discounted notes291,607291,607273,097273,097
Government bonds236,509237,453207,671207,528
 528,116529,060480,768480,625

 

Investment income includes interest earned from interest bearing securities and realized gains and losses from the sale of securities.

 

The Fund's investment portfolio is exposed to various risks, which are mitigated by the type of investment and therefore risk is low.

 

The market value sensitivity of the Money Market Portfolio at the end of the last quarter was $0.81M for a 1.00% change in rates. The market value sensitivity of the Government Bond Laddered Portfolio at the end of the last quarter was $0.83M for a 1.00% change in rates.

 

Discounted notes with maturities between April 2016 and June 2016 have yields in the range of 0.462% to 0.830% (2015 – maturities between April 2015 and July 2015 had yields in the range of 0.528% to 1.230%).

 

The government bonds maturing between April 2016 and December 2018 have yields in the range of 0.884 to 1.433% (2015 – maturing between December 2015 and December 2017 have yields in the range of 1.084 to 1.492%).

 

5. LOAN PAYABLE

 

Non-interest Bearing Loan

On March 31, 2004, the Fund obtained a $330M loan from the Province, a related party. The loan is non-interest bearing and repayable to the Province in thirty equal annual installments of $11M. The loan agreement provides for the Minister of Finance to advance any installment payment date depending on the cash position of the Fund. Repayments over the next five years total $55M.

 

The face value of this non-interest bearing loan has been discounted at an effective interest rate of 5.0368% to reflect its amortized cost outstanding as of March 31, 2016 as follows:

 

 2016
($'000)
2015
($'000)
Face Value198,000209,000
Less: Discount(69,784)(76,460)
Amortized Cost128,216132,540
Classified as:
Current Portion11,00011,000
Long Term Portion117,216121,540
Balance128,216132,540

 

 

The discount of $69.78M is amortized to loan discount expense over the remaining term of the loan, based on the effective interest rate method. The amortization schedule for the subsequent five fiscal years is as follows:

 

Fiscal Year($'000)
20176,458
20186,229
20195,989
20205,737
20215,471

 

 

6. FINANCIAL INSTRUMENTS

 

The main risks that the Fund's financial instruments are exposed to are credit risk, liquidity risk and market risk.

 

Credit risk

Credit risk is the risk that the counterparty to a financial instrument may fail to discharge an obligation or commitment that it has entered into. The Fund is exposed to credit risk relating to the collection of receivables. The Fund considers this risk to be low.

 

The Fund’s accounts receivable consists of premium revenue receivable of $71.2M, investment income receivable of $0.8M and the HST receivable of $0.2M.

 

The premium revenue receivable recorded is based on an assessment formula set out in section 37 of Regulation 909 of the Act and is calculated as follows:

 

  • Base assessment of $5 per Ontario plan beneficiary plus specified percentages of the plans PBGF assessment base.
  • Maximum assessment of $300 per Ontario plan beneficiary and
  • Minimum assessment of $250 for each plan

The probability for a pension plan to become insolvent and not pay the premium within a year is very low. In addition, in the event that a pension plan would become insolvent within a year, there are legal options for the Fund that can be exercised to collect the premiums. Historically, the Fund has been able to collect the amounts estimated as premium receivable.

 

The risk of not collecting the investment income and the HST receivable is considered to be minimal.

 

Liquidity Risk

Liquidity risk is the risk that the Fund will not be able to meet its cash flow obligations as they fall due. The Fund’s exposure to liquidity risk is minimal as the Fund has sufficient funds in its investment portfolio to settle all current liabilities and the Fund’s exposure is limited to the assets of the Fund including any loans or grants received from the Province. As at March 31, 2016, the Fund has an investment balance of $528M (2015 - 481M) to settle current liabilities of $41M (2015 - $49M). In addition, the Fund has the ability to meet sudden and unexpected claims by converting the investment holdings to cash without delay or significant transaction costs.

 

Market risk

Market risk arises from the possibility that changes in market prices will affect the value of the financial instruments of the Fund. Short-term financial instruments (receivables, accounts payable) are not subject to significant market risk. The Fund manages its market risk by investing assets in low-risk and liquid securities. The Fund’s market risk is considered to be low.

 

7. PENSION PLAN RECOVERIES

 

Following the settlement of all benefits, payment of expenses and the submission of the final wind up report, any remaining funds are recovered by the Fund. During fiscal 2016, the Fund had $16.5M (2015 – $6.5M) in recoveries. Approximately $5.3M in recoveries is expected in the fiscal year 2017.

 

8. PENSION CONSULTING SERVICES

 

The Fund periodically engages the services of external experts to represent the Fund’s interests in insolvency proceedings respecting employers who are unable to meet their funding obligations under the Pension Benefits Act. For fiscal 2016, $5.4M was paid to such external experts (2015 - $3.8M paid).

 

9. RELATED PARTY TRANSACTIONS

 

For fiscal 2016, an administration fee of $0.6M (2015 - $0.5M) was incurred and has been paid to FSCO for management salaries and benefits, accounting, information technology, legal, pension and other services.

 

The Fund and FSCO are related parties.

 

Investment Management fees consist mainly of fees paid to the Ontario Financing Authority, a related party.

 

The costs of processing premium revenue transactions are absorbed by FSCO without charge to the Fund.

 

Other related party transactions during the year have been disclosed in note 5.

 

10. CONTINGENT LIABILITIES

 

There is currently a company operating under Companies’ Creditors Arrangement Act protection whose pension plans could make significant claims on the Fund. As these potential claims remain at an early stage, an estimate of the claims which might be incurred, if any, cannot be determined.

 

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