New enforcement regime changes risk profile for pension plans
Administrative monetary penalties (“AMPs”) are coming to the regulated pensions sector in Ontario. The recently published “Administrative Penalties” regulation (the “AMP Regulation”) under the Pension Benefits Act (Ontario) (“PBA”), provides the final details of the regime. The AMP Regulation is scheduled to come into force, along with the related PBA provisions, on January 1, 2018.
Plan sponsors, administrators and third party providers should take a close look at the impact of these regulations, and the AMP regime under the PBA, on their activities, and whether their compliance and governance systems continue to be appropriate, in advance of the AMP regime coming into place. While AMPs do not change the substance of the law applicable to pension plans, they will impact the enforcement of the law and therefore increase the risks inherent in pension plan sponsorship and administration.
The AMP Regulation is one step along Ontario’s road to bringing in a pensions and financial services regulator with more muscle. Currently, the regulatory enforcement tools in the Ontario pension sector are relatively limited—they include compliance orders by the Superintendent of Financial Services (the “Superintendent”) and the imposition of fines for breaches of the PBA and regulations (up to a maximum of $100,000 for a first offence and $200,000 for subsequent offences). Fines are rarely sought to be imposed due to the relatively cumbersome and costly provincial prosecution process now in place.
Over the course of the past year, Ontario has been moving to a stronger enforcement regime. Among other things, late last year, Ontario introduced legislation establishing a new financial services regulator, the Financial Services Regulatory Authority (“FSRA”), which will take over regulatory responsibilities from the existing Financial Services Commission of Ontario. In conjunction with the introduction of the FSRA legislation, the Government of Ontario also took the first steps to bring in AMPs.
The PBA provisions applicable to AMPs have been in place, though not in force, since December 2016. New sections 108.1-108.5 of the PBA will allow the Superintendent to levy AMPs for violations of the provisions of the PBA and regulations under the PBA specified in the AMP Regulation. AMPs are intended to add to, not replace, the existing regulatory enforcement tools available to the Ontario regulator. The AMP provisions of the PBA are consistent in spirit with the AMP model in place in the pension standards legislation of British Columbia and Alberta since 2015 and 2016, respectively.
Overview of AMPs
Under the amendments to the PBA and the AMP Regulation, AMPs fall into one of two categories: (i) general administrative penalties (“General Penalties”); and (ii) summary administrative penalties (“Summary Penalties”). For both General and Summary Penalties, AMPs may be imposed either to promote compliance with PBA requirements or to prevent a person from deriving any economic benefit as a result of non-compliance with PBA requirements.
General Penalties contemplate more severe breaches of the PBA and allow AMPs to be levied where a person has not complied with
- a specified requirement of the PBA (over 100 of these are prescribed in the AMP Regulation),
- a requirement imposed by order of the Superintendent, which could include compliance or other orders, or
- an obligation assumed by way of undertaking, which could include undertakings filed by pension fund subsidiary corporations.
General Penalties apply to a broad cross section of regulatory requirements. Some breaches of the PBA and regulations under the PBA on which a General Penalty may be levied include the duty to administer the pension plan in accordance with the plan documents filed with the regulator; the requirements to ensure that investments are made in accordance with the PBA and the regulations, the federal investment rules and the plan’s statement of investment policies and procedures (“SIPP”); and the requirements to provide notices to members and others in various circumstances (e.g., wind-up).
Notably, breaches of the standard of care imposed on pension plan administrators under s. 22 of the PBA are not subject to AMPs, though they were included in the original proposal for AMPs and are subject to the AMP regime in Alberta and British Columbia.
Summary Penalties contemplate less severe breaches of the PBA and may be levied by the Superintendent where a person has not complied with a prescribed requirement of the PBA. Summary Penalties apply to discrete regulatory requirements involving filing and other deadlines. Some breaches of the PBA on which a Summary Penalty may be levied include missing a deadline for filing plan amendments, annual information returns, financial statements or SIPP amendments. Summary Penalties take the form of a prescribed daily penalty ranging from $100-$200 per day in breach, up to the maximums set out below.
Process for imposing general penalties
There is no set amount payable for General Penalties (subject to certain maximums, discussed below). However, in determining the amount of the penalty to be imposed, the Superintendent is required to consider only the following criteria:
- the degree to which the breach was intentional, reckless or negligent,
- the extent of the harm or potential harm to others resulting from the breach,
- the extent of any attempts to mitigate any loss or take other remedial action,
- the extent to which any economic benefit, either direct or indirect, was derived by the person in breach or reasonably might have been expected to be derived, and
- any other breaches of the PBA, or failures to comply with the pension benefits legislation of a designated jurisdiction, by the person during the preceding five years.
The above factors emphasize the importance of having a strong governance structure and processes in place to achieve and monitor compliance of both pension plan administration and pension fund investment; the importance of taking proactive steps to address incidents of non-compliance; and the importance of addressing systemic issues that could lead to repeat errors.
Should a General Penalty be imposed, the Superintendent must give a formal written notice of intended decision (“NOID”) and must inform the person alleged to be in breach of their right to request a hearing. The person has 15 days in which to request a hearing before the Financial Services Tribunal (the “Tribunal”), but if no hearing is requested then the Superintendent may order payment of the AMP.
Process for imposing summary penalties
Should a Summary Penalty be imposed, a formal NOID is not required, but the Superintendent must give the person alleged to be in breach a reasonable opportunity to make written submissions before making an order. The Superintendent may order payment of the AMP if the Superintendent continues to reasonably believe that a contravention has occurred. The person has the right to appeal the order levying the Summary Penalty to the Tribunal, and an appeal operates as a stay of the order until the matter is finally disposed of.
Both General and Summary Penalties are subject to certain limits. For a breach of the PBA by a person other than an individual, a maximum penalty of $25,000 applies. For a breach of the PBA by an individual, a maximum penalty of $10,000 applies. It is possible that AMPs could be imposed on an organization as a whole (e.g. in its capacity as administrator, sponsor or agent) and/or on individuals within the organization responsible for the breach (e.g. individual trustees on a board of trustees or others within the organization). Where there is a series of breaches or where the breach affects multiple members, it is not clear whether these limits will be applied to the series or per occurrence.
Prohibition on paying from pension fund
One point of contention around the new AMP regime concerns the prohibition on the payment of AMPs out of the pension fund, a rule which is explicit in subsection 108.1(4) of the PBA. While it is likely that for most single-employer pension plans (“SEPPs”), the AMP could be payable by the employer that is both sponsor and administrator of the plan (or a third party provider--if such party is liable), how such payments will be dealt with in the context of jointly sponsored and multi-employer pension plans, and SEPPs where the plan sponsor is not also the administrator, could be more complex. Because the rules mandate that there is no recourse to the pension fund in respect of the payment of penalties, pension plan administrators will need to turn their minds to how to protect employees and trustees from the imposition of AMPs for innocent mistakes and delays that happen in the normal course of pension administration. Possibilities may include indemnification from sponsors (where available) and expanded insurance coverage, although any such arrangements must be carefully structured to avoid running afoul of the prohibition in subsection 108.1(4) of the PBA and being unenforceable.
What should administrators be doing?
With the AMP Regulation and related PBA provisions coming into force on January 1, 2018, pension plan sponsors, administrators and others will have little time to prepare for the coming of the new regime. While it’s too early to tell how the new AMPs will be applied by the regulator, the creation of the power to impose AMPs in itself changes the risk profile applicable to pension plan administration. Here’s what should be on your radar in the coming months (before the AMPs come into effect)
- Those involved in pension plan administration, including boards of directors and trustees, should be made aware of the new AMP regime and plan administrators should consider the impact of the new regime on enterprise risk.
- Because the new AMP regime signals a new focus on compliance by the pension regulator, administrators should review their own governance and compliance processes and procedures, as well as the manner in which they document compliance, to ensure that
- they clearly allocate (and document) roles and responsibilities for compliance (particularly as between the administrator and service providers);
- where functions are delegated, ensure adequate reporting and monitoring is in place and documented; and
- compliance processes are in place, and documented, to prevent and quickly respond to non-compliance.
A strong compliance framework could be a factor that helps show that a breach was not intentional, reckless or negligent and therefore could be a strong defence in the face of a penalty being imposed.
- Because timeliness of filings with the regulator is one of the areas of focus of the AMP regime, now is the time for administrators to ensure timelines can and will be met.
- Plan administrators should also consider how penalties, if imposed, will be paid and, in particular, whether current insurance and indemnity arrangements are appropriate.
- Both plan administrators and their service providers may also need to consider whether their contracts appropriately apportion liability for mistakes that lead to AMPs.
If you have any questions about the AMP regime, please don’t hesitate to contact a member of our Pensions & Benefits Department.