Canada: New Pension Investment And Disclosure Rules

Pension plan sponsors should take notice of recent changes to the rules respecting investment of plan assets and new member disclosure requirements. Most of the changes described in this bulletin will become operative in 2016, though some amendments took effect on April 1, 2015.

1.    New Federal Investment Rules ("FIR")

The FIR,1 apply to federally regulated pension plans as well as provincially regulated plans in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, and Newfoundland and Labrador, the provinces that have adopted the federal rules by reference.

  • 10% Diversification Rule

To ensure that pension funds are prudently diversified, the FIR have, since 1994, prohibited more than 10% concentration of investment in any one person or affiliated or associated group. The maximum concentration test has been based on the total book value of the plans assets. Effective July 1, 2016, the test will be based on the total market value of the plan's assets at the time an investment is made. These changes will be welcomed, as they remove the previous uncertainty as to whether the test was one that required an ongoing monitoring requirement.

For defined contribution ("DC") pension plans, the new FIR language makes it clear that the 10% diversification test is to be applied at the member account level, not on a total plan basis. This eliminates another area of ambiguity in the former language of Schedule III.

The 10% diversification rule continues to be subject to exceptions that allow for concentration of plan assets in investments that can be characterized as "less risky" such as government issued securities, CDIC and Assuris guaranteed investments and investment funds that are themselves compliant with the FIR limitations. A new exception to the diversification rule will permit a pension plan to have more than 10% of its market value invested in a derivative contract with a return based on the performance of a widely recognized index of a broad class of securities traded at a marketplace.

  • Related Party Rules

Generally, plan administrators are prohibited from investing in or entering into a transaction with a related party of the plan. Related parties are defined in the FIR to include an employer that participates in a pension plan, the administrator of a pension plan and a person that holds or invests assets of a pension plan. Under the existing FIR, a pension fund is permitted to hold securities of related parties if they are acquired on a stock exchange listed in Schedule III. Changes to the FIR that will become effective on July 1, 2016 will remove the stock market acquisition exemption for employers and other related party investments. After July 1, 2016, the limited exceptions for investments in related party securities will be confined to:

  • Indirect investments through an investment fund in which the plan administrator and affiliates cannot invest.
  • Investments in a fund that replicates the composition of an index of a broad class of publicly traded securities or a derivative contrast based on such an index.
  • Investments in insurance company general funds.
  • Investments in securities issued or guaranteed by a Canadian government or government agency.

Plan administrators will have until July 1, 2021 to dispose of any off-side related party securities held on July 1, 2016. There will also be a five-year grace period for an administrator to divest a prohibited investment where the investment results from a transaction by a third party, such as a corporate take-over.

The FIR will retain the exception for related party transactions having nominal or immaterial value. It appears that this exception will apply to investments in related parties.

Previously, transactions involving a pension plan and related parties acting as service providers or lessors were only permissible if the transactions were "required" for plan administration and on "market terms and conditions". As of July 1, 2016, the exemption will no longer stipulate that such non-investment transactions be "required". This change makes it clear that all non-investment related party transactions are acceptable if they are on market terms.

  • Defined Contribution Plans and Disclosure

Effective April 1, 2015, a new concept of "member choice account" ("MCA") is introduced to the FIR. A MCA is an account under a DC pension plan or an account under a defined benefit plan for additional voluntary contributions, where the member is permitted to make investment choices. After April 1, 2015, a Statement of Investment Policies and Procedures ("SIP&P") is no longer required for the MCA components of a federally regulated pension plan. It is important to note that the Financial Services Commission of Ontario ("FSCO") has taken the position that an Ontario pension plan with MCA components must continue to have a SIP&P. FSCO's position is based on Section 78 of the Ontario regulation that establishes the requirement to have a SIP&P. FSCO has promised to provide further guidance on the required contents of a SIP&P for Ontario DC pension plans.

In lieu of a SIP&P, administrators of federally regulated MCA type plans must provide members with an annual statement that provides prescribed information, including:

(a)    the investment objective, degree of risk, largest investments, performance history, fees and benchmark for each investment option that a member can select;

(b)    a description of how the member's funds are currently invested; and

(c)    any timing requirements that apply to the making of an investment choice.

  • 30% Rule Review

In the 2015 federal budget tabled April 21, 2015, the government promised that it would review the current provision of the FIR that limits pension investments in voting shares of a corporation to 30%. Changes to this rule will be of particular interest to very large pension plans, many of which have employed complicated holding structures to get economic exposure to an investment that cannot be directly made as a result of the 30% rule.

2.    New Ontario Filing Disclosure Requirements

Sponsors and administrators of Ontario registered pension plans should take note of important changes to member disclosure obligations.

  • SIP&P for Ontario Plans to be filed with FSCO

Before Ontario's adoption of the FIR in 2000, Ontario pension plans were required to file their SIP&P with FSCO. In a "Back to the Future" type of development, Ontario plans will once again be required to file a SIP&P with the regulator. Pension plans that are registered before January 1, 2016 must file a SIP&P no later than February 29, 2016. Amendments to a SIP&P after 2015 will also be required to be filed within sixty (60) days of the date of the amendment. With these changes, Ontario will join New Brunswick as the only jurisdictions in Canada requiring the filing documents.

  • Disclosure of Environmental, Social and Governance Factors

Effective January 1, 2016, the SIP&P of an Ontario pension plan must include information about whether environmental, social and governance factors (the "Factors") are incorporated into the plan's investment policies and procedures and if so, how the Factors are addressed. The Factors are not defined in the regulation and FSCO has yet to provide guidance on what it considers relevant factors.

At a high level, this regulation simply requires disclosure of whether and how the Factors are made part of a plan's investment process. When considered more closely, the requirement will place a specific area of fiduciary decision making in the spotlight. Plan administrators will be obliged to give careful consideration to the interplay between the integration of the Factors in the investment of a plan's assets and the best interests of the plan members. This can involve analysis of the complex interplay between maximizing return at an acceptable risk and the softer "moral" issues of environmental, social and governance considerations.

For the large group of plans that invest through managed investment funds, the issue will be straightforward. The factors will be employed, if at all, at the investment fund level. The issues will be more complex for plans that have large funds invested in individually managed corporate securities. In all cases, the administrator's process of deciding whether or not to incorporate the Factors must be clearly documented.

Plan administrators can anticipate increased member interest and engagement in plan investment issues after July 1, 2016. All member, former member and retiree statements issued after that date must include information respecting the plan's SIP&P. This information includes statements that alert the plan participants to the fact that a SIP&P is required, and that the individual is entitled to access the SIP&P through the employer or through FSCO.

  • Pension Statements for Former and Retired Members

Plan administrators have long been required to provide plan members with an annual pension statement. New regulations now stipulate that biennial statements must be provided to former members and retirees. New Sections 40.1 and 40.2 of the Ontario Pension Benefits Act regulations set out the information that must be included in these new statements, which substantially parallels the current requirements for annual member statements.

For existing pension plans, the first biennial statement must be provided to former and retired members no later than July 1, 2017. For plans registered after January 1, 2015, the first statement must be provided to former and retired members within 18 months after the plan's first year end. In either case, plan administrators must continue to provide statements every two years thereafter, within six months following the plan's fiscal year end.

3.    Administrator Take-Aways

Plan administrators should become familiar with the new federal and provincial investment and disclosure rules to ensure their pension plans comply with the amended requirements by the applicable coming-into-force dates. Plan administrators should also start collecting the data necessary to prepare the new biennial disclosure statements and statements to former and retired members. In light of the new disclosure requirements, plan administrators should consider revising existing disclosure statement templates or preparing new templates for statements to former and retired members.

Footnote

1. The FIR are found in sections 6 to 7.2 of the regulations under the Pension Benefits Standards Act, 1985, Schedule III to the regulations.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Stefanie Di Francesco
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions