Federal Government Releases Revised Pension Investment Rules and Other Regulatory Amendments

Amendments to the Pension Benefits Standards Regulations, 1985 (Canada) (PBSR) regarding pension plan investments, defined contribution (DC) plans and disclosure of information to plan members, among other things, were published in the Canada Gazette this week, and are scheduled to come into force on April 1, 2015 and July 1, 2016, as detailed below.

An earlier draft of the revised Schedule III to the PBSR (the “investment rules”), initially published last fall for comment, raised concern in the pension community that the new investment rules did not fully support modern pension investment practices.  As a result of  industry feedback, the investment rules have been further revised to address many of the concerns raised.

The key changes to  the investment rules as well as the amendments to the PBSR related to DC plans and disclosure of information to plan members are summarized below.

Federal Investment Rules

The revised investment rules  are scheduled to come into force on July 1, 2016, and will apply to federally regulated plans plus all Canadian jurisdictions that have adopted the federal investment rules, as they are amended from time to time —namely, Ontario, British Columbia, Alberta, Saskatchewan, Manitoba and Newfoundland & Labrador.

Key changes to the current rules include the following:

10% Rule

  • A change from book value to market value in determining compliance with the 10% (diversification) rule and clarification that the test is a purchase test rather than an ongoing monitoring requirement.

Related Party Rules

  • An approach to the related party rules that strikes a balance between the relatively more permissive approach under the current rules and the much more restrictive version of the rules in the draft released last fall,  including, among other things:
    • Maintenance of the exception for transactions that are nominal or immaterial.
    • Maintenance of the exception for transactions for the operation or administration of the plan that are on terms no less favourable than market terms and conditions, with the added condition that such transactions cannot involve investments in, or loans to, the related party. Notably, the revised exception no longer provides that such a transaction must be “required”.
    • Several new exceptions, including a new exception for investment funds and segregated funds.  This exception provides that administrators are exempt from the requirements of the related party rules where they invest in an investment fund or segregated fund in which investors other than the administrator and its affiliates may invest as long as such fund complies with the 10% rule and 30% rule (in respect of defined benefit (DB) plan investments). In contrast to the exception introduced in the fall, the revised exception now makes it clear that the investment fund need not comply with related party rules for the exception to apply.
    • Elimination of the exception for securities acquired at a public exchange. As a result, unless an investment in securities of a related party falls under one of the other exceptions now available, it will be prohibited, which is a significant change from current compliance practices; and
    • A five year period for administrators to come into compliance with the new related party rules from the date the rules come into effect. Going forward, a 5 year “cure” period is permitted where a related party transaction is entered into by someone other than the administrator or an entity controlled by the administrator.

There is significant lead time for administrators to prepare for the coming into force of the amendments to the investment rules.  However, because of the significance of the changes, it will be important for administrators to begin consideration of the changes as soon as possible in order to allow sufficient time to implement new compliance policies and/or practices.

For example, statements of investment policies and procedures that refer to current rules will need to be updated to ensure that the new requirements are reflected, as will any investment guidelines provided to investment managers. In addition, agreements with investment managers and others may need to be reviewed to ensure that they are fully consistent with the new rules and that compliance responsibilities are appropriately delegated. In addition, both external and internal compliance monitoring systems will need to be updated to reflect the new requirements.

While there is a five year period permitted for the divestment of related party investments that are not permitted under the new rules, administrators may wish to take inventory of such investments  as soon as possible so that they can develop the appropriate strategy with respect to divestment on a favourable basis at the appropriate time or restructuring if appropriate.

DC Plans and Disclosure

The amendments to the PBSR also contain certain amendments related to DC pension plans and disclosure on annual statements.  These amendments are scheduled to come into force on April 1, 2015, other than amendments related to additional disclosure on annual statements, disclosure to DC plan members regarding investments and statements for retired and former members, which come into force on July 1, 2016.

The highlights of the amendments include:

  • Variable Benefits: DC plans will be permitted to provide variable benefits, which will allow pensioners to withdraw variable amounts from their pension fund each year.
  • Investment Information: Plans that permit members to make pension plan investment decisions (i.e., DC plans where investment is member directed) will have to provide members with specified information annually, including: a detailed description of each investment option, a description of how the person’s funds are currently invested, and any timing requirements that apply to the making of an investment choice. Statements of Investment Policies & Procedures will no longer be required for DC plans where members make investment decisions, since the investment choices will now be subject to their own disclosure requirements.
  • Annual Statement Requirements: Member annual statements will now be required to include the plan’s ten largest asset holdings and target asset allocation, and for defined benefit plans, the valuation date and the solvency ratio reported in the most recent actuarial report, the total value of solvency assets and liabilities on the valuation date, and the employer’s total payments made to the plan for the plan year. Plans will have to provide retirees and other former pension plan members with an annual statement (as they currently do for active members). The amendments also include specific requirements for annual statements for negotiated contribution plans and plans with variable benefits.

Administrators of federally regulated pension plans should review the disclosure to members in DC plans to ensure compliance with the amended regulations and to ensure that their annual statement practices meet the new requirements.