Changes to the Federal Investment Regulations affecting Ontario Pension Plans

​Background

 
On March 25, 2015 the federal government published amendments to the Pension Benefits Standards Regulations, 1985 (PBSR) made under the Pension Benefits Standards Act, 1985 (Canada).  These amendments include changes to sections of the PBSR which are known under Regulation 909 to the Pension Benefits Act (Regulation) as the federal investment regulations (FIR).  The FIR are defined in section 66 of the Regulation to include sections 6, 7, 7.1 and 7.2 and Schedule III of the PBSR, as amended from time to time, and have been incorporated by reference into the  Regulations under sections  78 and 79.  Accordingly, the amendments to the FIR affect Ontario pension plans.  
 
Most of the amendments to the FIR become effective on July 1, 2016, although some amendments became effective on April 1, 2015.  The amendments can be obtained from the Canada Gazette, Part II [New Window] (Vol. 149, No. 6 — March 25, 2015).  Information contained in this communique is based in part on the Regulatory Impact Analysis Statement issued by the Department of Finance.
 

Changes to Defined Terms

 
The amendments to the FIR update several investment related definitions.   The definition of the term “public exchange” was outdated as it included exchanges that no longer exist. As such, the term “public exchange” is replaced with “marketplace”, to reflect that pension plan investments may be bought and sold on a public exchange as well as a quotation and trade-reporting system, or other platforms that are maintained to bring together the buyers of securities or derivatives. The definitions of “mutual fund” and “pooled fund” are also repealed and replaced with the term “investment fund” to capture both these types of funds as well as clarify that these funds could be established by a corporation, limited partnership or trust.
 
The new term “member choice account” is defined as “an account in relation to which a member, former member, survivor or former spouse or former common-law partner of the member or former member is permitted to make investment choices… ”.  A member choice account is essentially an account under a defined contribution (DC) plan or DC component of a combined or hybrid plan for which the member or other beneficiary is permitted to direct the investment choices under the plan terms.
 
These changes to the defined terms came into force on April 1, 2015 except for the repeal of the mutual fund and pooled fund definitions which come into force on July 1, 2016.
 

Statement of Investment Policies and Procedures (SIPP)

 
Under the amendments to section 7.1 of the PBSR, which came into force on April 1, 2015, the SIPP established for a federally registered pension plan would not need to address the assets of a member choice account, as defined in the PBSR.    The Federal Government has instead introduced a series of disclosure requirements concerning investment options offered under member choice accounts.  These new disclosure requirements, however, will not apply to Ontario pension plans as they are not part of the FIR incorporated by reference into the PBA. 
 
The Ontario requirement for the establishment of a SIPP is not contained in the FIR but directly in section 78 of the Regulation; therefore, member directed DC plans are still required to establish a SIPP and the SIPP for other plans with member directed accounts must still address the investment of such accounts.  However, the content requirements set out in subsection 7.1(1) and (2) of the PBSR no longer apply with respect to the investment of member directed accounts.  With respect to such accounts, the SIPP must be consistent with the applicable portions of the FIR and, effective January 1, 2016, include the environmental, social and governance (ESG) disclosures set out in section 78(3) of the Regulation.  In the coming months, FSCO will issue further guidance on the information it expects to be included in a SIPP for these types of plans.
 

Changes to the 10 Percent Rule

 
The FIR prohibit plan administrators from investing or lending more than 10 percent of the total value of the plan’s assets in a single entity. The amendments to the PBSR amend a number of aspects of this concentration limit. The amendments modify the 10 percent limit so that it is based on the current value or “market value” of a pension plan’s assets rather than the “book value”. The book value can be outdated as it reflects the original purchase price. The amendments also clarify that the 10 percent limit applies only when investments or loans are made (i.e., a “purchase” test) and applies to the aggregate value of debt and equity in an entity.  The 10 percent rule applies at the member account level for a plan that allows a member to make investment choices (e.g., member directed DC plan). In addition, there is a carve-out to the 10 percent rule for investment fund and segregated fund holdings related to member choice accounts. This is intended to be consistent with the exemption to the 10 percent rule for the Pooled Registered Pension Plan (PRPP) investment holdings.  These changes take effect on July 1, 2016.
 

Related party transactions

 
The FIR prohibit plan administrators from investing in a related party to the plan, such as an employer who participates in the plan, subject to specific exemptions. One exemption permitted the administrator to purchase securities of a related party if those securities were acquired at a public exchange. The amendments remove the public exchange exemption and instead allow the administrator to indirectly invest in the securities of a related party if the securities are held in an investment fund or segregated fund in which investors other than the administrator and its affiliates may invest and that complies with certain quantitative limits.  
 
The ability of an administrator to enter into a transaction with a related party on behalf of the plan if the value of the transaction is nominal or the transaction is immaterial is retained.
 
The amendments also clarify that the administrator may enter into a transaction with a related party for the administration of the plan, if the transaction is under terms and conditions that are not less favourable to the plan than market terms and conditions and the transaction does not involve the making of loans to, or investments in, the related party. Other exemptions to the related party rules are set out in section 17 of Schedule III to the PBSR.
 
Administrators may need to re-evaluate their plans’ current holdings and liquidate positions that are not permitted under the new related party rules.  In doing so, they will have five years from July 1, 2016 (i.e., the day the regulation comes into force) to bring their fund into compliance, i.e., July 1, 2021.
 

Frequently Asked Questions

 
Q1:  Given the change to s. 7.1 of the PBSR which came into force on April 1, 2015, does the requirement to establish a SIPP still apply to Ontario member directed defined contribution (DC) plans?   
 
A1:  Yes.  The Ontario requirement for the establishment of a SIPP is not contained in the FIR but directly in section 78 of the Regulation; therefore, member directed DC plans are still required to establish a SIPP and the SIPP for other plans with member directed accounts must still address the investment of such accounts.  However, the content requirements set out in subsection 7.1(1) and (2) of the PBSR no longer apply with respect to the investment of member directed accounts. 
 
With respect to such accounts, the SIPP must be consistent with the applicable portions of the FIR and, effective January 1, 2016, include the environmental, social and governance (ESG) disclosures set out in section 78(3) of the Regulation.  In the coming months, FSCO will issue further guidance on the information it expects to be included in a SIPP for these types of accounts.  -04/2015
 
Q2:  Will the administrator still be required to file the SIPP for a member directed DC plan in 2016?
 
A2:  Yes.  Administrators will need to file a SIPP for a member directed DC plan, in accordance with the timelines set out in section 78 of the PBA Regulation.  For existing plans, the SIPP will need to be filed by March 1, 2016.  -04/2015
 
Q3:  When do the changes to the PBSR take effect?
 
A3:  The changes to the investment restrictions and related party rules as set out in Schedule III of the PBSR come into force on July 1, 2016 while other changes to the FIR are effective on April 1, 2015.  The Plan administrator has until July 1, 2021 to bring their fund into compliance with the new related party rules.  -04/2015
 
Q4:  Does the new 10% rule require constant monitoring for compliance due to fluctuations in the value of an investment, a loan, or the pension fund?
 
A4:  No.  Under the amendments, the 10% rule is a purchase test only; i.e., the test need only be applied at the time when an investment or loan is made, based on the market value of the investments at that time. -04/2015
 
Q5:  What issues should an administrator consider given the changes to the Related Party Rules?
 
A5:  Administrators may need to re-evaluate their plans’ current holdings and liquidate positions that are not permitted under the new related party rules.  In doing so, they will have until July 1, 2021 to bring their fund into compliance (i.e., five years from July 1, 2016, the day on which the regulation comes into force).
 
Administrators will also want to review their transactions with related parties that provide for the operation and administration of the plan, to ensure that they continue to be offered on terms that are not less favourable than market terms and conditions.  -04/2015

 
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