The Office of the Superintendent of Financial Institutions Canada (OSFI) recently released a draft policy advisory intended to provide guidance to administrators of federally regulated pension plans that are considering entering into an insurance or swap contract for the purpose of hedging longevity risk.
The draft policy advisory, beyond discussing the types of longevity risk hedging contracts and the risks to be considered when contemplating entering into such contracts, also sets out OSFI's expectations for plan administrators that decide to employ such hedging strategies.
Specifically, the advisory states that OSFI would expect that prior to entering into a longevity risk hedging contract, plan administrators would: (i) understand the impact of longevity risk on their pension plans; (ii) determine whether entering into such a hedging contract is in the best interests of beneficiaries; (iii) determine whether the hedging contract offers value for cost; (iv) consider the associated risk; (v) ensure that privacy laws are followed; (vi) develop adequate controls and oversight to manage risks; and (vii) understand the terms, costs, collateral, and other components of the hedging contract.
OSFI would also expect that plan administrators ensure that individuals with appropriate knowledge be involved in the decision-making process or that advice is received from individuals with experience in this market, that the contract is monitored and reviewed on a regular basis and that the above items are well documented.
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