Amendments to the Pension Benefits Standards Regulations, 1985

On March 25, 2015, the final amendments to the Pension Benefits Standards Regulations, 1985 (the “Regulations”) were published in the Canada Gazette.

The main objectives of these amendments are to improve the framework for defined contribution plans, enhance the disclosure of information and the protection of pension benefits for all plans, and modernize investment rules. The majority of the amendments detailed below will come into force on July 1, 2016. The other amendments take effect on April 1, 2015.

These amendments are the third and final set of measures announced in 2009 by the federal government to strengthen the legislative and regulatory framework applicable to federally regulated private pension plans. These amendments follow a series of amendments already introduced to the Pension Benefits Standards Act, 1985 (the “Act”) and the Regulations.

Since April 1, 2015, plans can offer members and former members (i.e. retirees, deferred members and members whose benefits have not been paid) of defined contribution pension plans to receive annual variable benefits paid directly by the plan (“variable benefits”).

The amendments to the Regulations specify the maximum variable benefit amount for members aged 55 and over. The minimum amount is prescribed by the Income Tax Regulations. Starting at age 90, no maximum amount applies. The formula used is similar to that used for life income funds. Payment of variable benefits requires the spouse’s prior consent, which is obtained through a form designed for this purpose.

The Regulations require plan administrators to provide annual statements to members who have a defined contribution plan that offers investment choices (“member choice account”). This statement must include a description of each of the investment options offered that indicates:

• its investment objective;
• the type of investment and degree of risk associated with it;
• its 10 largest asset holdings based on market value, each expressed as a percentage of the total assets;
• its performance history;
• that its past performance is not necessarily an indication of its future performance;
• the benchmark that best reflects its composition;
• the fees, levies and other charges associated with it that reduce return on investment expressed as a percentage or a fixed amount; and
• its target asset allocation.

The Regulations also require the communication of a description of how the funds are currently invested and any timing requirements that apply to investment choices.

An annual statement must now be sent to former members (i.e. retirees, deferred members and members whose benefits have not been paid) and to their spouses or common-law partners.

The Regulations provide for new disclosure requirements for all annual statements.

For defined benefit pension plans, plan administrators must disclose:

• the valuation date and the date of the next valuation;
• the value and the description of the solvency ratio;
• the total value of the plan’s solvency assets and liabilities on the valuation date; and
• the total employer payments made to the plan for the plan year.

As regards to defined benefit plans and the portion of assets that do not constitute a member choice account of defined contribution plans, the following information must be communicated:

• a list of the 10 largest asset holdings based on market value, each expressed as a percentage of the total assets; and
• the target asset allocation expressed as a percentage of the total assets.

Some additional disclosure requirements apply in relation to participants who opted to receive variable benefits.

The Act expressly states that administrators have the option of providing the required information in electronic form (via electronic communications) with the addressee’s consent. The Regulations stipulate that this consent and its revocation can be given in writing, in paper or electronic form, or orally. Before the addressee gives his or her consent, the administrator must notify the addressee of the effective date of the consent and its revocable nature.

If the electronic documents are available on a generally accessible information system, such as a website, the administrator must provide to the addressee a written notice indicating the availability and location of the documents, and must also allow the addressee to keep these documents for future reference. The administrator must also ensure that the electronic document was received by the addressee. In case of doubt, the administrator must mail a paper version of the document to the addressee.

It should be noted that if electronic statements are currently used, the administrator must ensure compliance with these new rules.

For pension plans that allow for the transfer of pension benefit credits to a prescribed retirement savings plan (e.g.: a locked-in RRSP), once the individual is eligible for retirement, his or her spouse must provide consent for this transfer using the form designed for this purpose and included in a schedule of the Regulations.

Schedule III of the Regulations (permitted investments) sets out the rules applicable to investments for federally regulated pension plans. Please note that these rules also apply to plans in Ontario, British Columbia, Alberta, Saskatchewan and Manitoba, because these provinces have integrated the federal rules into their legislation.

This rule prohibits administrators from investing or lending more than 10% of the “total book value” of the plan’s assets in or to a single entity. The 10% limit is now based on the “total market value”. In light of the clarifications made to the final amendments of the Regulations, we understand that this 10% limit must be respected when the transaction is completed, regardless of subsequent fluctuations in the market value of the investments targeted by the transaction. This limit does not require the administrator to divest itself of the investments targeted by the transaction if the market value exceeds the 10% limit once the transaction is complete.

In many cases, these amendments will require a revision of the Statement of Investment Policies and Procedures (SIPP).

For defined contribution plans, the administrator must ensure that the 10% limit is respected for member choice accounts.

Under certain conditions, the administrator is permitted to invest in the securities of a related party if the securities are held in an investment fund. “Related party” refers to a group of legal or natural persons who are linked to the pension plan (primarily the employer participating in the plan). The definition of investment fund was introduced in the Regulations to replace the definition of pooled funds and mutual funds, which are repealed.

These amendments repeal the exemption permitting the acquisition of the securities of a related party if the securities were acquired at a public exchange. They also prevent the administrator from investing plan assets directly or indirectly in the employer’s securities. This new rule does not apply to administrators that retain the services of a related party for plan administration purposes, for example, by hiring a related party to act as a broker. Pension plan administrators that fail to satisfy the provisions concerning related parties will be given five years to comply with the related party rules.

By using July 1, 2016, as the effective date for most of the amendments to the Regulations, the federal government is giving pension plan administrators time to implement these new requirements. Some work can, however, be started now to align plan administration processes with the new rules before these rules take effect.

Please note that there are other amendments impacting the waiting period for the distribution of surplus assets, statements to be sent in the event of plan termination, negotiated contribution plans and pooled registered pension plans.

Please feel free to contact us for additional information.