Canada: DC SIPPs And ESG Factors – FSCO Investment Guidance Notes Provide Useful Information For Plan Administrators (Part I)

As we noted in a previous blog post, effective January 1, 2016 pension plan administrators must file their Statement of Investment Policies and Procedures (SIPP) with the Financial Services Commission of Ontario (FSCO).

  • Existing pension plans will have to file their SIPP by March 1, 2016.
  • Plans registered on or after January 1, 2016 will have to file the SIPP within 60 days of registration.

Prior to this, while every pension plan registered in Ontario was required to have a SIPP, the SIPP did not have to be filed with the regulator.

In addition, the new legislative provisions require that all SIPPs must now include information about whether environmental, social, and governance (ESG) factors are incorporated into the SIPP and, if so, how the ESG factors are addressed in the plan's investment strategy.

FSCO recently published two Investment Guidance Notes that will assist plan administrators in the preparation of their SIPP:

  • Investment Guidance Note IGN-003 provides guidance on the preparation of a SIPP for a member-directed defined contribution (DC) pension plan, in response to recent changes to federal pension standards legislation that is incorporated by reference into the Ontario pension standards legislation.
  • Investment Guidance Note IGN-004 provides guidance on the incorporation of ESG factors into the SIPP.

In Part I of this two-part series, I will discuss Investment Guidance Note IGN-003.

Background: Why do DC plan administrators need FSCO's guidance?

Under subsection 78(1) of Regulation 909 (the PBA Regulation) under the Pension Benefits Act (PBA), all pension plan administrators must establish a SIPP that meets the requirements of the federal investment regulations, as modified by certain sections of the PBA Regulation.  "Federal investment regulations" is defined in subsection 66(1) of the PBA Regulation as "sections 6, 7, 7.1 and 7.2 and Schedule III to the "Pension Benefits Standards Regulations, 1985" made under the Pension Benefits Standards Act, 1985 (Canada) as they may be amended from time to time."  Thus, the content requirements for the SIPP of an Ontario-registered pension plan are prescribed by reference to specified rules in the federal pension standards legislation.

Effective April 1, 2015, the Pension Benefits Standards Regulations, 1985 (PBSR) were amended to provide that a SIPP does not have to address plan assets related to "member choice accounts", which is essentially a reference to a DC pension plan where members have the ability to direct the investment of their account.  While the PBSR will be amended to provide for other asset-related disclosure requirements related to member-directed DC plans, those requirements will not apply to Ontario-registered plans because they will not form part of the "federal investment regulations" which are incorporated by reference into the PBA.

Ontario-registered member-directed DC pension plans must still establish a SIPP, as required under section 78 of the PBA Regulation,. however, the content requirements set out in the PBSR no longer apply to such plans.  FSCO has therefore published Investment Guidance Note IGN-003 in order to provide guidance to administrators on what should appear in the SIPP of a member-directed DC plan.

What are the new requirements for DC plan SIPPs?

IGN-003 recommends that the following information be included in the SIPP for a member-directed DC pension plan:

  • General investment principles, such as the administrator's philosophy on active versus passive management, the type of funds to be offered, etc.;
  • Permitted asset classes;
  • Information about the default option for members who fail to make an investment selection;
  • Procedures for the selection, monitoring, and termination of investment managers and/or investment funds;
  • Information on plan expenses and investment fees, such as whether they will be charged to member accounts or paid by the employer;
  • Information on related party transactions; and
  • A description of the information/education to be provided to plan members.

In addition, IGN-003 advises administrators that while the requirement in section 7.2 of the PBSR that SIPPs be reviewed and confirmed at least once annually no longer applies to SIPPs for member-directed DC plans, such SIPPs should still be reviewed periodically.  In particular, these plans should be reviewed after "major plan events" such as a downsizing or asset transfer, in accordance with the administrator's fiduciary duties.

In Part II of this series I will consider Investment Guidance Note IGN-004:  Incorporating Environmental, Social, and Governance Factors into the SIPP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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