The Financial Services Commission of Ontario has said it expects to perform an on-site examination of every pension plan in the province over the next five years. So what do plan sponsors need to know to prepare for the regulator’s knock on the door?
First of all, the examinations aren’t random, said Randy Bauslaugh, practice leader for McCarthy Tétrault LLP’s national pension, benefits and executive compensation practice, during a webinar on the topic last week.
“I don’t think they have got the resources to look at every plan in detail . . . so they have this risk-based approach to ferreting out the plans they want to take a look at,” he said, noting the five main areas of risk are: funding, investment, administration, governance and sponsor/industry risk.
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The examinations are a sort of audit, noted participants during the webinar, which was hosted by Toronto-based investment and governance firm Proteus Performance Management. “They want to look at your records; they will do sample calculations to make sure you’ve calculated the benefits properly; they’re going to look at your plan documents to see that they’re in compliance with the [Pension and Benefits Act]; and they may look at how you’ve organized yourself to actually govern and operate the plan,” said Bauslaugh.
What the regulator is really checking for is that plan sponsors have a process that they’re following and they have risk controls in plan to avoid any problems that can occur, said Jeff Grey, vice-president and senior consultant at Proteus. “Problems will come up, there will be errors, there’s lots of people, there are things that move. . . . The problem with pension plans over time is that it’s hard to fix them retroactively.”
Some of the issues that are more likely to lead to an examination include compliance issues in the past, members having complained to FSCO on a regular basis and financial instability, participants at the webinar heard.
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Bauslaugh noted FSCO is looking for more than just the items in the Pension Benefits Act. “Obviously, they’re looking for clear violations. They are also there to make sure that you’re operational and governance systems are likely going to function properly in this environment. That means knowing how long you need to keep records . . . looking at privacy issues, looking at whether you have an appropriate appeal procedure. . . . I would say a lot of what they’re looking at is not in the act; it’s a lot around your governance and your operational systems.”
And size does matter when it comes to which pension plans can expect a visit from FSCO, according to Bauslaugh. “I think small gets more attention than large with tons of resources helping them,” he said. “If I was putting together a risk-based approach of when I’m going to monitor, I think I’d be more concerned about smaller plans that are relying on one outside provider instead of having a whole host of people inside who really know what they’re doing or outside providers that are assisting them.”
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Looking back at the Canadian Baptist Ministries’ random examination by FSCO, Andrew Epp, the organization’s director of pension and insurance, called the experience helpful. “They are really here to educate, to help, to make our plans better,” he said.
However, one tip for other plan sponsors is to ensure they’re completely free during the time FSCO drops by and to organize themselves in advance. “I just didn’t have five days to sit around with these guys, let alone the hours it took to find hundreds of documents,” said Epp. “We negotiated time. They call and say they’d like to come in four weeks to examine. We said, well, give us a month and a half. My tip would be [to] book yourself free for that week or have meaningless work on your desk that you can drop quickly.”
Ultimately, FSCO is aiming to help plan sponsors, not penalize them, Bauslaugh suggested. “Even if they find that you’re non-compliant, they aren’t going to issue a ticket like a police officer would if you’re in a no-parking zone,” he said. “They’re going to ask you about it and ask you to come up with a plan and they’re probably going to give you oodles of time to become compliant. They’ll leave you with some valuable advice about what you might do to improve your governance and operational structures in the future. There are mostly good outcomes from these examinations.”
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