Administrators will need to revisit governance policies under Ontario’s latest pension changes

Alongside the Ontario government’s announcement earlier this month regarding a new funding framework for defined benefit pension plans in the province, it also said it would require plan administrators to establish written governance and funding policies.

This move is one of a number of proposed measures designed to protect benefit security for members of defined benefit plans once the new funding framework, which will eliminate solvency funding for plans with a funded ratio of at least 85 per cent, is in place. The other measures include increasing the monthly pension amount guaranteed by the pension benefits guarantee fund in the event of employer insolvency and requiring increased disclosure to plan members regarding the funded status of their plan.

Read: Ontario announces long-awaited DB solvency reforms

The proposed measure around governance and funding policies is consistent with similar measures enacted for defined benefit plans in Alberta in 2014 and British Columbia in 2015. But apart from bringing Ontario in line with the legislative moves in those other jurisdictions, what the benefit of imposing a statutory requirement on plan administrators to establish written governance and funding policies, particularly where written governance policies (at least) are already the norm among most defined benefit plan sponsors and administrators?

The answer is clear: there’s value to codifying the requirement for formal governance and funding policies and increasing plan member disclosure in a regulatory environment where managing risk and establishing and monitoring the objectives and processes for plan governance are the primary means for ensuring defined benefit plans are sustainable.

Read: 2016 Top 100 Pension Funds Report: Solvency reform on the agenda

The framework in Alberta and British Columbia

It’s useful to take a look at the statutory required contents for a governance policy that currently exist under Alberta and B.C. pension legislation. While most of the items are already familiar to plan sponsors that follow the Canadian Association of Pension Supervisory Authorities’ pension plan governance guidelines, there are some additional items reflected in these provinces’ legislative provisions.

The governance policy for a plan registered in Alberta or B.C. must:

  • Set out the structures and processes for overseeing, managing and administering the plan;
  • Explain what those structures and processes aim to achieve;
  • Identify all participants who have authority to make decisions in respect of those structures and processes and describe their roles, responsibilities and accountabilities;
  • Set performance measures and establish a process for monitoring the performance of each of the participants in the structures and processes who has the authority to make decisions in relation to them;
  • Establish procedures to ensure the plan administrator and any other participants have access to relevant, timely and accurate information;
  • Establish a code of conduct for the administrator and a procedure to disclose and address conflicts of interest;
  • Identify the educational requirements and skills necessary to perform the duties associated with the structures and processes;
  • Identify material risks that apply to the plan and establish internal controls to manage them; and
  • Establish a process for the resolution of disputes involving members and others entitled to benefits under the plan.

Since the Alberta and B.C. legislation took effect, a number of these requirements have led to a modification of many existing pension governance structures. They include the requirements for a dispute resolution process; identifying skill sets and establishing performance measures for participants in the pension governance process; and establishing specific internal controls in order to manage pension risks.

Read: Is your pension plan compliant with B.C.’s new PBSA?

For its part, a funding policy under Alberta and B.C. legislation must:

  • Set out funding objectives for the plan as it relates to the following items: benefit security, benefit levels and, if applicable, stability of contributions and contribution levels;
  • Identify material risks that affect the plan’s funding requirements and the tolerances for them;
  • Establish internal controls to manage the risks;
  • Set out expectations for the going-concern funded ratio, and if applicable, the solvency ratio of the plan;
  • Set out expectations for the amortization of unfunded liabilities and, if applicable, solvency deficiencies;
  • Set out expectations for the reduction of benefits, where applicable;
  • Set out expectations for the utilization of actuarial excess and surplus; and
  • Establish a standard for the frequency of actuarial valuation reports, whether or not the plan files them with the superintendent.

Combined with the requirement for written governance and funding policies in Alberta and British Columbia is a statutory requirement to perform an assessment of the administration of the plan at least once every three years and prepare and retain a written report on it.

What are the implications of a statutory requirement for governance and funding policies?

Most importantly, a statutory requirement for written governance and funding policies, particularly if they’re accessible to plan members under pension legislation, provides a contractual basis for enforcing the plan administrator’s responsibilities. It also provides an effective enforcement tool in the hands of the pension regulator, which will be in a better position to monitor and enforce the plan administrator’s governance responsibilities based on the procedures, objectives and measures outlined in those policies.

Read: A look at Quebec’s pension solvency changes one year on

As demonstrated by the revised CAPSA governance guideline published in 2016, Canadian pension regulators continue to believe that effective pension governance is key to ensuring the plan administrator is able to deliver on the pension promise consistent with the plan documents and pension legislation.

With the changes in pension funding rules, it’s even more important that plan administrators turn their minds to revisiting and revamping their governance and funding policies, in order to effectively meet their pension obligations as a shield against potential losses or claims. Plan administrators should also bear in mind that as plan members and pension regulators can use governance and funding policies as a sword, they must craft them carefully.