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Pension Plan Management
A Regulator’s Perspective
Presentation by Karen Badgerow-Croteau & Paul Rozon To Bell Pensioners’ Group October 23, 2006
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Pension Plan Management A Regulators Perspective Presentation by - - PowerPoint PPT Presentation
Pension Plan Management A Regulators Perspective Presentation by - - PowerPoint PPT Presentation
Pension Plan Management A Regulators Perspective Presentation by Karen Badgerow-Croteau & Paul Rozon To Bell Pensioners Group October 23, 2006 Agenda 1. General overview of pensions 2. Defined Benefit vs. Defined Contribution 3.
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Pensions by Numbers
- Private pension plans have existed since the
1880s
- OSFI regulates about 1300 plans or 10% of
registered plans in Canada
- Less than 50% of Canadians participate in
registered pension plans
- Represent over $116 billion in assets
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Defined Benefit vs. Defined Contribution
- Defined Benefit plans (DB) are designed to
provide a specified amount of pension at retirement
- DB plans are based on a defined benefit
formula
- e.g. 2% x FAE5 x years of service
- Should there be a shortfall, employers
typically have 5 years to fund that shortfall
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Defined Benefit vs. Defined Contribution
- In a Defined Contribution plans (DC):
- a specified amount of money is contributed annually
- it may include employer and employee contributions
to a member’s account in the pension fund
- contributions accumulate with investment earnings
until retirement
- retirement pension is based on amount accumulated
- members may purchase annuity
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OSFI’s Mandate
OSFI’s mission is to safeguard policyholders, depositors and pension plan members from undue loss. OSFI supervises and regulates all banks, and all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and pension plans.
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OSFI’s Role as Pension Regulator
- Protects rights and interests of plan members
based on the plan text and the Act.
- Recognizes that administrators are responsible
for plan.
- Balances needs for rules and supervision
versus acknowledging voluntary nature of pension plans.
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How do we do this?
- Supervise pension plans to determine if they
meet minimum funding requirements and comply with the PBSA
- Advise pension plan administrators promptly
- f non-compliance matters
- Ensure corrective measures are taken
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Supervision must Strike a Balance
- Rules & Supervision
VS
- Responsibilities &
Incentives
- Compliance and
Regulation costs
VS
- Voluntary Nature of
Pension Plans
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How do we Strike a Balance?
- In choosing our supervisory strategies or
approaches:
– Reliance-based – Risk-based
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Reliance-Based Supervision
- Considerations result in a “reliance-based”
approach to regulation and supervision
- Reliance on pension administrators
– Expect prudent management within the rules
- Legislation
- Regulations and Directives
- Guidelines and Instructions
- Reliance on actuaries, auditors, and others
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Risk-Based Supervision
- Purpose….
- Identify plans that exhibit prudential concerns or risks to
members’ benefits
- Assess plan administrators’ action plans to address
specific risks and concerns
- Allocate OSFI resources in an efficient manner
- Take action where required
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What Information do we rely on?
- Actuarial Reports
- Normally filed every 3 years
- Sets out the funding requirements for the plan
- Annual Information Return
- Filed once a year
- Basic information about membership
- Certified Financial Statements
- Filed once a year
- Other information as requested
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Risk-Based OSFI Supervision Tools
- CAMERA
- On-site examinations
- Semi-annual solvency testing (estimate)
- Focused governance reviews
- Monitoring of media reports
- Portfolio specialties
- “Watchlist”
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Current Challenges for Pensions
- Solvency deficiencies
- Industries under stress
- Increased attention
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Solvency Testing
- Estimated solvency ratios are used to identify
plans at risk
– Solvency deficiencies – Industries under stress – Contributions holidays
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OSFI’s ESR Intervention Strategies
- Early filing of valuation reports
- Disclosure to members
- Cease contribution holidays
- Consider adding plan to Watchlist
NOTE: OSFI validates results with sponsor prior to taking action
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Plan Governance and the Link to Safety and Soundness
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Plan Governance
- Establish appropriate control mechanisms to
encourage:
– Sound decision-making – Proper and timely execution – Regular review and assessment – Compliance with legislation
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Plan Governance
- Needs a set of processes and procedures
– What is the procedure, what needs to be done? – Who is charged with the responsibility? – When and how often? How is it evidenced? – Who checks and how often? KEY: Fiduciary responsibility to plan members
- degree of care in dealing with property of another
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Role of Plan Administrator
- The plan administrator has the fiduciary
responsibility
- Who is the plan administrator?
– often the company or “Board of Directors” is ultimately responsible
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Proper Oversight by the Board
- Board will delegate tasks to pension
committee, to management and to external service providers
- Responsibility is not delegated
- Board members need knowledge and skills
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Current Challenges for Plan Sponsors
- Increased financial commitment to pension
plans due to lower solvency ratios
- Increased regulatory oversight
- Increased need to communicate with plan
members
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Symptoms of “Plans at Risk”
- Compliance problems
- Indication of poor governance and/or
administration
- Quality of communication to members
- Solvency concerns
- Assets or liability considerations
- Mix of assets, Asset/Liability mismatch,
maturity of plan, etc.
- Quality of financial or valuation reporting
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Industry’s Response
- Pro-active funding
- Reduction of benefits
- Movement from defined benefit to defined
contribution plans
- Wind-up
- Overall increased focus on the corporate liability of
pension plans
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Future Regulatory Environment
- Regulatory change – industry consultation paper
published end of May 2005
- Pre-published in Canada Gazette on June 10, 2006
- Comments currently under consideration by Finance
- Increased intervention
- Increased communication
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What to Find on Pensions
- www.osfi-bsif.gc.ca
- Acts, Regulations & Directives
- Guidance
- Reports, Speeches, Newsletters & Notices
- Application & Approval Guides
- Filing Instructions & Returns
- Pension Links
- Common FAQs
- OSFI toll-free number 1-800-385-8647
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Thank you
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