To improve the regulatory process and make the most effective use of its resources, the Financial Services Commission of Ontario (FSCO) is committed to adopting a risk-based approach for the supervision of pension plans. The goal is to reduce the risk that members of a pension plan will not receive the benefits promised. As an initial step, FSCO developed and implemented a risk-based monitoring program in 2000 that focussed on the funding of defined benefit pension plans.

The equity market downturn between 2000 and 2002 and the decline in long term interest rates have raised concerns about the financial health of employment-based pension plans and the security of retirement savings in general. Besides pension plan contributions, pension fund investment returns can have a significant impact on the funded status of pension plans. Accordingly, FSCO believes it should extend its risk-based approach and complement its existing monitoring of pension plan funding with the monitoring of pension fund investment activity.

In November 2002, FSCO established a project team to develop a risk-based pension investment monitoring program. The primary objective of this program would be to promote strong governance with respect to pension fund investments so as to enhance the benefit security for pension plan members.

In July 2004, FSCO released a consultation paper entitled A Proposed Risk-Based Investment Monitoring Model For Supervising Defined Benefit Pension Plans for review and comment by pension stakeholders. FSCO received over 20 submissions from a broad range of pension industry stakeholders on the proposed monitoring model and Investment Information Summary (IIS) form set out in the consultation paper. The comments received were extremely useful and FSCO thanks those pension stakeholders who participated in the consultation.

As a result of suggestions received during the consultation, FSCO will be taking the following approach to the implementation of a revised pension investment monitoring model and IIS form:

• FSCO will test a revised investment monitoring model using a random sampling of 300 defined benefit pension plans registered with FSCO that have December 31, 2004, fiscal year ends. In spring 2005, the administrators of the selected plans will be contacted by FSCO and asked to submit a revised IIS form with the financial statements that are required to be filed by those plans by June 30, 2005. No other pension plans registered with FSCO will be asked to file IIS forms for the time being.

• The IIS form as initially proposed has been revised to make it shorter, easier to complete and more consistent with the information required to be filed in the plan's financial statements under section 76 of Regulation 909. In addition, only the plan administrator will be required to certify the accuracy and completeness of the information contained in the IIS form, and no certification from the plan auditor or any other third party will be required.
  
  Click here for a copy of the revised IIS form.

• The point scoring system originally proposed for identifying plans which would be subject to review will be replaced with predefined risk indicators. These risk indicators were developed from the plan information filed with FSCO through the IIS form and in other filings. For example, plans with solvency concerns (as described under Regulation 909), with a high degree of mismatch between assets and liabilities or that have not complied with specific requirements of the federal investment regulations will be flagged for review.
  
  It should be noted that simply because a plan has been flagged for review under the revised screening methodology, this would not in itself be a judgment on FSCO's part as to whether the plan's assets are being invested prudently or imprudently or how well the pension fund is governed. Flagged plans will have simply been identified through the automated screening methodology as those that FSCO should review to some extent (and which in many cases may result in no action being taken by FSCO).
  
  In addition, where non-compliance with specific legislative requirements is identified through IIS filings, FSCO will follow up with the plan in the same manner that would occur if FSCO became aware of the non-compliance through other means.

After testing the revised investment monitoring model and IIS form on the 300 randomly selected pension plans, FSCO intends to finalize the monitoring model and IIS form and fully implement the investment monitoring program by spring 2006.

For further information about FSCO's risk-based pension investment monitoring program, please contact Mr. Mathew Ou of FSCO at:

Mr. Mathew Ou
Pension Division
Financial Services Commission of Ontario
5160 Yonge Street, Box 85
Toronto ON M2N 6L9

Phone: 416-226-7772
Fax: 416-226-7777
Email: MOu@fsco.gov.on.ca