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Pension Plans: Managing Risk
Ontario’s registered pension plans hold more than $612 billion in assets to provide for the pension benefits of more than four million beneficiaries, including retirees. To protect their rights and benefits, FSCO proactively monitors and enforces compliance with required pension legislation and regulations.
This year, FSCO continued to take important steps to enhance its holistic approach to monitoring and assessing pension plans through its risk-based regulation framework.
“Our risk-based regulation framework lays a strong foundation to enable FSCO to focus its efforts in areas that pose the highest risk to the health of Ontario’s pension plans. That helps us better protect plan beneficiaries.”
Lester Wong, Deputy Superintendent of Pensions
TRENDS IN THE PENSION SECTOR
Pension Plans in Ontario
While the number of pension plans in Ontario rose slightly in 2016-17, FSCO has seen an overall downward trend over the last 10 years.
Mergers and acquisitions among entities offering pension plans, as well as plan wind-ups, contributed to this change. During this 10-year period, FSCO wound up more defined benefit (DB) plans than defined contribution (DC) plans, and registered more DC plans than DB plans.
Total Number of Ontario Pension Plans 2008-2017, as at March 31
Description of Total number of Ontario pension plans image
PENSION PLAN MEMBERSHIP
Despite a slight drop in pension plan membership this year, total membership rose over the last 10 years primarily due to increases in DC plans and public sector DB plans.
As a result of the creation of a new category of DB plans, called jointly sponsored pension plans (JSPPs), a few large plans were reclassified from being multi-employer plans to JSPPs between 2010 and 2011. JSPP membership rose slightly this year, following the upward trend for this type of plan. In single employer and multi-employer plans, 2016-17 saw slight membership increases, while the 10-year trend demonstrates a moderate membership drop in these types of plans.
Among DC pension plans, membership increased slightly in single employer plans this year, but fell in multi-employer plans. The drop was due to the transfer of regulatory jurisdiction for a large plan this year.
Ontario Pension Plan Membership 2008-2017, as at March 31
Description of Ontario pension plan membership image
PENSION PLAN TERMINOLOGY
Defined benefit pension plan (DB): provides a pre-set amount of pension during retirement based on a formula defined in the pension plan terms.
Defined contribution pension plan (DC): defines the amount of contributions, including plan member contributions, if any, and provides benefit payments based on the amount of pension that can be purchased with the accumulated contributions, plus investment returns.
Hybrid pension plan: combines defined benefit and defined contribution provisions, or provide the greater of a defined benefit or defined contribution provision.
Multi-employer pension plan: allows two or more unrelated employers to contribute to a single pension fund and recognize a member’s service with all participating employers when determining benefits. These plans are usually established in industries or trades where workers change employers frequently, such as carpenters or painters, and are most commonly created through collective agreements.
Jointly sponsored pension plan: the employer (or employers) and members jointly share responsibility for the plan, including plan governance and funding for any deficits as they arise. Most are large public sector plans, such as those for teachers or municipal workers.
Defined Benefit (DB) plans – Membership by Plan Type 2008-2017, as at March 31
Description of Defined Benefit (DB) plans – membership by plan type image
Defined Contribution (DC) Plans – Membership by Plan Type 2008-2017, as at March 31
Description of Defined Contribution (DC) plans – membership by plan type image
ONTARIO-REGISTERED PENSION PLAN ASSETS
The overall value of pension plan assets in Ontario-registered plans increased from last year, with the largest portion of the increase coming from jointly sponsored pension plans.
Plan Type ||
Market Value of Assets at March 31, 2017 ||
Market Value of Assets at March 31, 2016 |
$ Billions ||
Single-Employer Pensions Plans|
| Defined Benefits || 215.28 ||35.2%||206.00||35.8% |
|Defined Contribution ||18.42 ||3.0% ||18.31 ||3.2% |
Jointly Sponsored |
| Defined Benefits ||345.77||56.5%||318.71||55.6%|
Multi- Employer Pension Plans |
| Defined Benefits ||30.98||5.1%||28.73||5.0%|
*Totals may not add due to rounding
PENSION PLAN TRANSACTIONS
Under the Pension Benefits Act, the Superintendent of Financial Services makes regulatory decisions on various pension plan transactions, from initial registration to full wind-up.
FSCO registered 384 plans in fiscal 2016-17 (277 DB plans and 107 DC plans), up significantly from 61 plans the previous year. FSCO processed a backlog of registrations that resulted from a legal issue that arose in fiscal 2015-16 related to custodial agreements for individual pension plans (IPPs). FSCO also wound up 243 plans (181 DB plans and 62 DC plans), down from 361 total plan wind-ups a year earlier. Among DB plans wound up, 109 were IPPs – partially due to increased IPP compliance activity by FSCO.
FSCO processed eight surplus refunds to employers on full wind-up this year, higher than last year’s one surplus refund, and approved one surplus refund on partial wind-up.
Plan merger and asset transfer application approvals fell 45 per cent to 61 in fiscal 2016-17 from 110 a year earlier. FSCO processed a large number of these applications following the implementation of new rules governing merger and asset transfer applications in January 2014.
FSCO regularly reviews and examines pension plans across Ontario, helping them proactively manage risk to protect the financial future of their members. FSCO undertook 58 on-site pension plan examinations in 2016-17 – its largest number of examinations ever. This year, it also created a new, dedicated team to conduct “Tier 1” desk reviews – holistic pension plan risk assessments – following a successful pilot in 2015-16.
FSCO uses a Risk Indicator Tool, which uses data from pension plan filings as well as external industry information and trend data, to assess which pension plans potentially have higher risks and prioritizes them for review based on the perceived level of risk. Based on this prioritization, plans are selected for Tier 1 desk reviews. Each review assesses a plan’s key risk issues and recommends regulatory follow-up appropriate to the assessed risks. Follow-up actions can range from education, where risks are lower, to monitoring, proactive supervision (including on-site examinations), or even intervention as risk levels increase. The team completed 57 reviews in 2016-17.
FSCO has also strengthened its ability to collect market data on key monitoring factors such as plan solvency and investment policies. Changes to forms on the online portal serving pension plan administrators have made it easier for them to provide FSCO with correct data more quickly.
“Tier 1 desk reviews allow us to help plans improve challenging situations before they become big issues. They also help FSCO identify trends so we can educate the industry – all in the interest of protecting plan members.”
John Graham, Technical Consultant, Pension Compliance and Tier 1 desk review team leader
Finding Solutions to Protect Plan Member Interests
FSCO’s extensive experience with and understanding of the pension sector puts it in a good position to help at-risk pension plans and those with structural or governance challenges. FSCO often works closely with the stakeholders of pension plans to find innovative solutions that protect the interests of plan beneficiaries.
In 2016-17, FSCO worked with key stakeholders to reach the end of a multi-year journey to the wind up of the Nortel Networks pension plans following the company’s bankruptcy. It also worked directly with stakeholders to complete the transfer of a single employer pension plan to a jointly sponsored pension plan – a first in Ontario.
“We really appreciate how FSCO applied resources and worked hard to review and ultimately approve the first transfer from a single employer pension plan to a jointly sponsored pension plan under Ontario’s new and innovative transfer regulations. It was a great example of how collaboration and innovation can improve Ontario’s pension landscape for the benefit of all.”
Derek Dobson, CEO of the Colleges of Applied Arts and Technology Pension Plan
Providing Input on Pension Policy
Through relationships with pension industry stakeholders, FSCO is in a unique position to provide balanced and informed input on policy and regulations that address member interests and keep the pension industry healthy.
FSCO works in partnership with the Ministry of Finance, undertaking research and analysis to provide recommendations to the Ontario government on policies in development. In fiscal 2016-17, key areas of focus included the review of the solvency funding framework, pension issues related to family law, and administration challenges with respect to plan beneficiaries who can’t be located.
Responding to the Need for Change
FSCO continued to make progress this year on commitments to strengthen its regulatory oversight in response to recommendations in the 2014 Annual Report of the Office of the Auditor General of Ontario (OAGO).
FSCO worked with the Ontario government to develop legislative and regulatory changes that allow the Superintendent of Financial Services to intervene as early as possible when a pension plan is facing challenging circumstances, to help reduce the risk of loss for pension plan beneficiaries.
In September 2016, the Ontario government proposed regulatory amendments allowing the Superintendent to appoint or act as the administrator of a pension plan in prescribed circumstances.
FSCO also undertook a research study to understand the key drivers affecting the funded status of Ontario’s defined benefit pension plans. The review, the first of its kind in the world, looked at Ontario pension plan data from 1992 to 2014, which confirmed long-held industry assumptions that interest rates and investment returns are the most important drivers of pension plan solvency.
Complaints to FSCO related to pension plan administration fell significantly from last year. This year’s drop can be attributed in part due to fewer instances where multiple complaints are made about the same issue. The overall downward trend in complaints over the last five years has been influenced by the 2014 transfer of financial hardship unlocking of pension plans to financial institutions, strengthened member and administrator communications, and fewer duplicate complaints by plan members.
Pension Complaints 2012-13 to 2016-17
Description of Pension complaints image
PENSION BENEFITS GUARANTEE FUND
Established under the Pension Benefits Act, the Pension Benefits Guarantee Fund (PBGF) protects a minimum level of benefits for Ontario members and beneficiaries of most single employer defined benefit pension plans, should the plan sponsor become insolvent.
The PBGF is unique in Canada – Ontario is the only province that provides any type of financial guarantee for defined benefit pension plan members in the case of a plan sponsor’s insolvency. Ontario pension plans with guaranteed benefits pay an assessment into the PBGF. The fund’s total liability is limited to its assets, including any loans or grants received from the province.
Pension Benefits Guarantee Fund Claims Paid by FSCO
|Number of Pension Plan Claims || 10 || 17 |
|Total Amount Paid || $30,522,000 || $17,855,000 |
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