The coming into force of an administrative monetary penalty regime under Ontario’s Pension Benefits Act on Jan. 1, 2018, will change the risk profile for plan sponsors and administrators, necessitating a review of governance and compliance policies.
Current enforcement tools, primarily compliance orders and fines of up to $100,000 for a first offence and $200,000 for subsequent breaches of the Pension Benefit Act, will remain in place. Fines, however, require prosecutions in provincial courts, an onerous and lengthy process that has dissuaded regulators from resorting to them.
Read: Plan sponsors face new monetary penalties under Ontario pension changes
“AMPs are more flexible, cost-effective tools to address non-compliance than what currently exists, and therefore regulators are more likely to resort to them,” says Anna Zalewski, a pensions lawyer in Osler Hoskin & Harcourt LLP ‘s Toronto office.
The new regime comes amid the upcoming launch of the Financial Services Regulatory Authority, which will take over from the Financial Services Commission of Ontario in 2018.
“The FSRA will have more resources than FSCO does,” says Zalewski. “The combined effect signals a change in the way the new regulator could approach compliance.”
The upshot is likely a more intense emphasis on plan governance that will require sponsors and administrators to focus on understanding their obligations and their responsibility to ensure compliance.
Read: Ontario announces plans for new pension regulator
“The changes underscore the need for clarity in the roles and responsibilities involved in plan administration, as well as adequate reporting and monitoring where functions are delegated,” says Zalewski. “And while that is a bit of motherhood, it’s surprisingly lacking in some cases.”
Documenting compliance processes once they’re in place is also critical, both to ensure a quick response to breaches and to provide evidence of diligence in setting up the necessary systems that will mitigate the consequences of an infraction.
The new rules contemplate both summary and general penalties. Both are subject to maximums of $10,000 for individuals and $25,000 otherwise. What’s unclear is whether the maximums apply to a series of breaches or to each occurrence or where multiple offenders are involved.
Summary penalties, which will carry penalties of $100 to $200 daily, target minor breaches. By way of example, they’ll apply to missed deadlines for amendments to plans or a statement of investment policies and procedures, annual returns and financial statements.
“The focus here is on timeliness, meaning that administrators should now be taking steps to ensure that statutory deadlines will be met,” says Zalewski.
Read: A primer on reviewing statements of investment policies and procedures
General penalties target breaches of a variety of regulatory requirements. They include the duty to administer the pension plan in accordance with its terms; following statutory investment guidelines and the plan’s statement of investment policies and procedures; and providing proper notice to members for events such as windups.
Both inadvertent and intentional conduct, such as paying out a benefit based on a erroneous calculation or a benefit formula misinterpretation, can lead to general penalties.
“It’s hard to predict how these inadvertent breaches will occur, even with good compliance processes in place,” says Zalewski. “But it’s important to address and resolve them quickly when they do arise, because I would hope and expect that penalties will not be imposed if plan administrators are proactive.”
Precise amounts for general penalties are at the discretion of the superintendent of financial services, who must consider only the following criteria in making the determination: the extent to which the breach was intentional, reckless or negligent; the harm caused; the remedial action taken; whether the offender received any economic benefit; and any previous misconduct relating to pension benefits legislation in designated jurisdictions in the past five years.
Finally, because the administrative monetary penalty regime specifically prohibits payment of the penalties from the pension fund itself, administrators will have to consider how to pay for them, who will pay and in what proportion and whether appropriate insurance is in place.
Read: Top 50 DC plans report: A look at the latest governance trends