FSRA Examinations – Keep Calm and Carry On
Several of our clients have had the pleasure of being ‘audited’ by the Financial Services Commission of Ontario (“FSCO” – now renamed the Financial Services Regulatory Authority of Ontario or “FSRA”) with respect to their defined benefit pension plan.
If you find yourself in a similar situation, the first thing I will say is, “Don’t panic!” Admittedly, panicking may be a reasonable response when FSRA comes knocking if you have been ignoring your pension plan for too long, but for those plan sponsors with good service providers and strong governance processes the audit will only be a minor nuisance.
My understanding is that virtually all the examinations performed by FSCO are random; therefore, there is generally a presumption of innocence for the unlucky few who are selected. Also, in my experience, FSCO’s bark is worse than its bite (as the old saying goes). The pension regulator is genuinely trying to do its job to confirm that the pension plans under its watch are being managed correctly and that members are receiving their promised benefits. FSCO’s feedback generally consists of constructive comments to rectify deficiencies or adopt best practices; this is in contrast with Canada Revenue Agency (“CRA”) audits which tend not to be quite so friendly and can lead to significant pain such as fines and penalties.
Prior to showing up for the examination, FSCO will provide the DB pension plan sponsor with a list of 22 items that are required to be made available at the start of the audit. Most of these are self-explanatory and should be readily available in your files or those of your service providers; however, be aware that some of the items that they demand are not actually required under pension legislation (e.g. pension committee charters, policies and procedures manuals). While many of their requested documents are certainly best practices, there is no one-size-fits-all solution for pension plan governance and plan sponsors shouldn’t necessarily feel pressure to create these documents prior to the audit.
After the examination, FSCO will issue a letter with their findings. In this correspondence they are usually clearer on what items are legal requirements and which items are only ‘recommended’; however, in my experience the recommendations don’t consider the specifics of the plan or the plan sponsor. Some of the items that they will demand be fixed will often be small nitpicky things, like a missing description of the pre-retirement death benefits for a small pension termination option form (really??); however, I take comfort in this fact as it means they tried their best and that’s the only dirt they could find.
Related to pension examinations are the ‘targeted reviews’ with which FSCO has been experimenting over the past few years. First was a targeted review of Form 7s to examine the reporting and monitoring of required contributions to pension plans. Unfortunately, all this review demonstrated was that the Form 7 process designed by FSCO is broken and is not effective at identifying problems with contributions on a timely basis while at the same time being an undue burden on plan sponsors that are trying to properly contribute to their plans. Hopefully FSRA will overhaul the Form 7 reporting and monitoring process early in their new mandate.
FSCO’s second targeted review is currently in progress and is an examination of member options forms for terminations and retirements. Based on our experience with FSCO on behalf of some of our clients who were selected for this targeted review, it may be a while yet before any results are published. While Form 7s are fairly simple and uniformly applied to all pension plans, member option forms come in all shapes and sizes, uniquely tailored to each plan. I imagine that these reviews are taking a lot more time as they require a much deeper understanding of each pension plan. That being said, I look forward to FSRA’s report on this targeted review and I hope that it will contain specific examples of common deficiencies so that the industry can learn and incrementally improve their processes and forms.
Finally, as FSCO transitions to FSRA, I have some suggestions to make their examination process more effective:
- Use risk-based criteria to select targets – to me it doesn’t seem like a good use of tax dollars to send 3 people to a client site for 5 days to audit two $5 million pension plans just because they were randomly selected.
- Better coordination internally at FSRA is needed between the pension officers, the teams performing the examinations, and the investigations unit. I’ve seen real-life examples where it was clear that the left hand wasn’t talking to the right hand (and neither were talking to the brain!) as FSCO was trying to resolve a relatively simple compliance issue related to a single pension plan.
- Make it clear to plan sponsors that many of the 22 items are not legally required but instead best practices. Also, they should acknowledge that some of those best practices may be better suited to giant pension plans rather than the ones sponsored by a small, privately-owned employer. FSRA’s post-audit communication should be better tailored to the facts of the situation.
- If a plan sponsor has been selected in the recent past for a full examination, don’t select that same plan sponsor for a ‘targeted review’ since the regulator will not find anything new to justify the plan sponsor’s effort to respond to this new request.
So, long story short, if you find yourself the subject to a pension examination or a targeted review, stay calm and follow instructions; but keep in mind that not everything is required, and pension plan sponsors should consider whether they want to share items like pension committee charters with FSRA (and may even want to consult legal counsel before they do).