Feds releases final regulations to boost protection for private pension plan members

Date: Monday, June 28, 2010
Author: Investment Executive

The Department of Finance has finalized regulations relating to federally regulated private pension plans, aiming to enhance protection for plan members, reduce funding volatility and modernize the rules for investments by pension funds.

It announced on Friday that three amendments to the Pension Benefits Standards Regulations, which were published for public comment in May, have been finalized.

“These amendments reflect financial market volatility in recent years, which points to the need to enhance protection for plan members,” said Finance Minister Jim Flaherty. “The changes also modernize the rules for pension fund investments and give plan sponsors greater flexibility in terms of investment allocation to allow them to better manage their funding obligations.”

The first amendment will bring a new standard that uses average -- rather than current -- solvency ratios to determine minimum funding requirements. The government says this will soften the impact of short-term market fluctuations on a plan’s solvency funding requirements.

Secondly, the changes will limit contribution holidays unless the solvency ratio exceeds full funding plus a new solvency margin, set at a level of 5% of solvency liabilities. This measure will enhance benefit security by helping to maintain a cushion of pension plan assets, according to Finance Canada.

Lastly, the new regulations feature a modernized investment framework that removes the limits on the amounts pension plans can invest in resource and real property investments. These limits are considered “cumbersome”, Finance says, and their removal will offer greater latitude in building a prudent fund portfolio.

During the public consultation period, the government said additional concerns were expressed around other quantitative investment limits in place, including a rule that prevents pension plans from owning more than 30% of the voting shares of a single entity. But Finance concluded that this rule remains appropriate for “prudential reasons,” since it believes that removing the rule would increase the potential for pension plans to own and operate companies.

Still, it said it intends to propose further modifications to the investment rules, including the rule prohibiting a pension plan from invest more than 10% of its portfolio in a single investment, in future regulatory amendments.

Indeed, the government said it intends to make additional changes to the legislative and regulatory framework in the coming months. The changes are part of the modernized federal pension framework announced in October 2009.

Finance said that by encouraging more stable funding, the amendments announced on Friday will reduce the probability of having to adopt other temporary regulations.

“Ad hoc temporary regulations in order to adapt to a particular situation are inefficient, due to the substantial resources that are required to put them into effect, and because they can result in a lack of certainty over the regulatory framework,” the government said.

The Office of the Superintendent of Financial Institutions will provide guidance shortly on the implementation of the new funding rules to help plans prepare their December 2009 actuarial reports.