Amendments to the Pension Benefits Standards Regulations, 1985 (PBSR), first announced by the Minister of Finance in October 2009 and released in draft form on September 19, 2014, were released in final form on March 25, 2015. The amendments to the PBSR involve changes to the pension investment rules, changes affecting the regulatory framework for federally regulated defined contribution (DC) plans, as well as other changes affecting member disclosure, electronic communications and improving protection for plan members and beneficiaries under federally regulated plans. The amendments are scheduled to come into force on April 1, 2015 and July 1, 2016.
Changes to the Pension Investment Rules
Significant changes to the PBSR have been made in order to modernize the pension fund investment rules found in Schedule III of the PBSR. The changes will apply to federally regulated plans and to pension plans registered in Canadian jurisdictions that have adopted the federal investment rules, namely, Ontario, Alberta, British Columbia, Manitoba, Newfoundland and Saskatchewan.
The new pension investment rules will come into force on July 1, 2016. All plan investments must comply with the new rules by this date. Any related party investments that do not comply with the new rules (e.g., investment in employer debt or equity securities) must be divested within five (5) years from this date.
A summary of the significant changes under the new rules, and how they compare to the old rules, is set out below:
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PBSR: Old Rules vs. New Rules |
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Provision |
Old Rules |
New Rules |
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10% Rule |
1. Plan administrators are prohibited from investing/lending more than 10% of total book value of plan’s assets in single entity or associated or affiliated entities (subject to certain exceptions). |
1. Plan administrators will be prohibited from investing/lending more than 10% of total market value of plan’s assets in single entity or associated or affiliated entities (subject to certain exceptions). This test applies only at time investments or loans are made. |
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2. The test also applies at a member level to funds in Member Choice Accounts (defined below) where the plan allows a member to make investment decisions. |
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Related Party Rules |
1. Administrator may purchase related party securities if acquired on public exchange. |
1. This exception will be eliminated. |
2. Administrator may enter into transaction with a related party:
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if required for the operation or administration of the plan and the transaction is under terms no less favourable than market terms and conditions; or
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if the value of the transaction is nominal or the transaction is immaterial to the plan
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2. Exemption maintained that allows administrator to enter into transaction with a related party:
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for the operation or administration of the plan and under terms no less favourable than market terms and conditions, provided that it does not involve the making of loans to, or investments in, the related party; or
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if the value of the transaction is nominal or the transaction is immaterial to the plan
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3. A new exception permits the investment in securities of a related party if securities are held in an investment fund or segregated fund in which investors other than the administrator and its affiliates may invest, provided fund complies with certain quantitative limits under the PBSR |
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Defined Terms |
The term “public exchange” is defined by reference to a prescribed list of exchanges. |
The term “marketplace” will replace “public exchange” to reflect that investments may be bought and sold on a public exchange, on a quotation and trade-reporting system or other platform. |
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Definitions of “mutual fund” and “pooled fund” |
The term “investment fund” will replace “mutual fund” and “pooled fund”; investment fund will include a mutual fund, pooled fund as well as other funds established by a corporation, limited partnership or trust. |
Introduction of Variable Benefits Under a DC Plan
Federally regulated DC plans will be permitted to pay variable benefits directly from the plan to terminated members who are retirement-eligible. If the eligible member has a spouse or common-law partner, then that person’s consent is required in order for the payment to be made. The payments made are similar to those under a life income fund. Variable benefit payments will be permitted commencing as of April 1, 2015.
New Disclosure Related to Member Choice Accounts
The individual accounts of members of a DC plan who are permitted to make investment choices are referred to in the amended PBSR as Member Choice Accounts. The PBSR amendments require certain information to be provided at least annually to a person with a Member Choice Account as of July 1, 2016. The new disclosure includes information about the investment options available, as well as information on how the person’s funds are currently invested and any timing requirements that apply in the making of investment choices, including information for each investment option available to the person:
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its investment objective;
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the type of investments and the degree of risk associated with it;
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its 10 largest assets holdings based on market value, expressed as a percentage of total assets;
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its performance history;
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a statement that past performance is not necessarily an indication of future performance;
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the benchmark that best reflects its composition;
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the fees, levies and other charges expressed as a percentage or a fixed amount; and
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its target allocation.
In light of the new disclosure requirements, a statement of investment policies and procedures (SIP&P) is no longer required for federally regulated DC plans where members make investment decisions. Plan administrators must take steps to revise, as appropriate, the disclosure provided to federally regulated participants in DC plans in order to comply with the new rules.
Further, in response to the federal changes, the Ontario pension regulator has recently confirmed that a SIP&P will still be required for DC plans registered in that province, although the SIP&P for an Ontario-registered DC plan will no longer have to meet the content requirements of the federal investment regulations.
New Annual Statement Requirements
Effective July 1, 2016, a plan administrator will be required to provide a former member and his or her spouse or common law partner with an annual statement. A former member includes a former terminated member and a retired member.
The amended PBSR also specifies new information that must be included in annual statements to active members and their spouses or common law partners effective July 1, 2016. These disclosure requirements apply to annual statements provided to former members as well as their spouses or common law partners. New information required to be incorporated includes the plan’s ten largest asset holdings and target asset allocation expressed as a percentage of total assets, as well as certain additional information for defined benefit plans. Certain other information must be included in annual statements to individuals with Member Choice Accounts, as well as to individuals in receipt of DC variable benefits.
Administrators should review their annual member statements to incorporate the new requirements as of July 1, 2016.
Spousal Consent to Portability
If a member elects to transfer his or her benefits out of a pension plan, the amended PBSR requires that the member’s spouse or common law partner, as applicable, consent to the transfer commencing as of July 1, 2016. A member eligible to take a portability option may also transfer his or her benefit to a pooled registered pension plan.
Electronic Communications
Effective April 1, 2015, the amended PBSR will allow for the use of electronic communication as a means of providing required information to pension plan members and others to whom information is required to be provided. The recipient of the electronic information must provide his or her consent in writing, in either paper or electronic form, or orally, in order to be provided with the electronic communication. Prior to obtaining a recipient’s consent, the administrator must provide the recipient with certain information about his or her rights and responsibilities with respect to the transmission of the information electronically.
Next Steps for Plan Administrators
The To-Do list for pension plan administrators resulting from the PBSR changes is no small task. First, plan administrators should be amending their SIP&Ps for each DB Plan to reflect the changes to the pension investment rules that will come into effect on July 1, 2016. Second, compliance monitoring systems must be reviewed to ensure that any required plan administration and disclosure changes affecting federally regulated plans or members are implemented. Pension plan administration manuals must be updated as necessary. Third, member disclosure (including the existing format of active member statements, as well as new statements for former members) must be updated to comply with the changes. And lastly, pension administration staff training will be necessary in order to ensure that the new requirements are met.
