Pension Plan Management A Regulator’s 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. OSFI’s mandate and role 4. OSFI’s supervision tools 5. Governance – A Regulator’s Perspective 6. OSFI’s future outlook 7. Questions Presentation to Bell Pensioners' Group Page 2
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 Presentation to Bell Pensioners' Group Page 3
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 FAE 5 x years of service • Should there be a shortfall, employers typically have 5 years to fund that shortfall Presentation to Bell Pensioners' Group Page 4
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 Presentation to Bell Pensioners' Group Page 5
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. Presentation to Bell Pensioners' Group Page 6
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. Presentation to Bell Pensioners' Group Page 7
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 of non-compliance matters • Ensure corrective measures are taken Presentation to Bell Pensioners' Group Page 8
Supervision must Strike a Balance Rules & Supervision Compliance and • • Regulation costs VS VS Responsibilities & • Incentives Voluntary Nature of • Pension Plans Presentation to Bell Pensioners' Group Page 9
How do we Strike a Balance? • In choosing our supervisory strategies or approaches: – Reliance-based – Risk-based Presentation to Bell Pensioners' Group Page 10
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 Presentation to Bell Pensioners' Group Page 11
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 Presentation to Bell Pensioners' Group Page 12
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 Presentation to Bell Pensioners' Group Page 13
Risk-Based OSFI Supervision Tools • CAMERA • On-site examinations • Semi-annual solvency testing (estimate) • Focused governance reviews • Monitoring of media reports • Portfolio specialties • “Watchlist” Presentation to Bell Pensioners' Group Page 14
Current Challenges for Pensions • Solvency deficiencies • Industries under stress • Increased attention Presentation to Bell Pensioners' Group Page 15
Solvency Testing • Estimated solvency ratios are used to identify plans at risk – Solvency deficiencies – Industries under stress – Contributions holidays Presentation to Bell Pensioners' Group Page 16
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 Presentation to Bell Pensioners' Group Page 17
Plan Governance and the Link to Safety and Soundness Presentation to Bell Pensioners' Group Page 18
Plan Governance • Establish appropriate control mechanisms to encourage: – Sound decision-making – Proper and timely execution – Regular review and assessment – Compliance with legislation Presentation to Bell Pensioners' Group Page 19
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 Presentation to Bell Pensioners' Group Page 20
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 Presentation to Bell Pensioners' Group Page 21
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 Presentation to Bell Pensioners' Group Page 22
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 Presentation to Bell Pensioners' Group Page 23
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 Presentation to Bell Pensioners' Group Page 24
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 Presentation to Bell Pensioners' Group Page 25
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 Presentation to Bell Pensioners' Group Page 26
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 Presentation to Bell Pensioners' Group Page 27
Thank you 28
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