Regulatory Updates for Ontario DB and DC Pension Plans
Last month, the Financial Services Regulatory Authority of Ontario (FSRA) issued their Pension Update newsletter with a number of items that will impact all DB and DC pension plans in Ontario. Because FSRA has been busy and the changes are noteworthy, this post covers changes for Form 7s, family law calculations, and auto-features for DC plans. Feel free to skip the ones that don’t apply to your situation…
New Approach and Transition for Form 7
A long-running complaint in the pension industry has been the cumbersome and inconsistently enforced contribution remittance process in Ontario. A quick recap: the Form 7 which summarizes the employee and employer contribution requirements is submitted to the pension fund trustee who is in charge of ensuring that the proper contributions are made on a timely basis, and any non-remittances and variances get reported by the trustee to FSRA.
When Form 7s were first introduced, some pension fund trustees did not appear to take their job seriously and failed to report scofflaws to the regulator on a timely basis. After some trustees were criticized, fined or even sued in court for a failure of duty, the pendulum swung the other way and some pension fund trustees were reporting any over/under contribution, and every deadline missed by a day, sometimes without a courtesy call to the plan sponsor to give them a chance to explain themselves. Revised Form 7s were sometimes required to be prepared multiple times per year to reflect relatively small differences between the originally estimated contributions and the actual contributions due to normal workforce variations. It was safe to say that nobody, including FSRA that had to receive all the delinquent reporting, was happy with how the Form 7 process had evolved.
The great news is that FSRA is updating the Form 7 process, including updated forms and guidance. The changes will take effect on a voluntary basis January 1, 2022 and become mandatory March 31, 2022.
Under the revised process:
- Annual Form 7 – Plan administrators will continue to complete and submit their annual Summary of Contributions / Revised Summary of Contributions (Form 7) to the pension fund trustee. The updated Form 7 can be found here.
- Non-remittance Reporting – Pension fund trustees will continue to report failures to remit any contributions to FSRA. Non-remittance reporting must be made to FSRA within 60 days following the contribution due date. This reporting remains on a monthly basis. In addition, any variance in special payments shall be included in this monthly reporting.
- Variance Reporting – The threshold for reporting variances in expected current service cost contributions will be increased from 10% to 25%. Any variance in going-concern or solvency special payments to DB plan will be treated as non-remittances as per the paragraph above. Similar to Alberta and British Columbia, the reporting period for informing FSRA of variances will change from monthly to quarterly. Pension fund trustees will be required to report any variances above the thresholds noted above to FSRA within 60 days after the end of each quarter. There continues to be no requirement to report variances that are “over-contributions”.
The forms have been greatly improved and are now available in both PDF and Microsoft Excel formats for ease of use. Further, with variance reporting only done on a quarterly basis with a 25% threshold, this should significantly cut down on the need to report variances due to normal workforce variations. In addition, FSRA has made it clear that a revised Form 7 is not required if the variation was temporary and a satisfactory explanation was provided by the plan sponsor to the pension fund trustee. Any reporting of late contributions by a trustee will also provide further details on the date the late contribution was made, so FSRA will not need to panic that the contribution remains outstanding (but I’m sure they will keep track of the worst offenders and those plan sponsors may be subject to further regulatory oversight).
The early feedback from ASI’s pension administration department is positive – although there are a few glitches in filling the forms, the logic of the new form is working well and we’re looking forward to preparing fewer revised Form 7s.
Family Law Guidance, Guide and New Forms
FSRA released final Guidance on the Administration of Pension Benefits Upon Marriage Breakdown. The Guidance provides FSRA’s position on issues relating to valuation, payment and division, and survivor benefits.
The Guidance is a must-read for anyone involved in the calculation and/or division of the Family Law Value of a pension, as it provides FSRA’s interpretation of the rules in all sorts of situations that unfortunately happen frequently in the context of a marriage breakdown. These calculations can be very complex and time delays between the date of separation, the date of valuation and the date of division can lead to further complications.
FSRA also released updated and simplified forms to accompany the Guidance. These forms are used to initiate the valuation of the pension asset, provide a standardized explanation of the calculations, and divide the pension asset. To allow time for transition, the existing and updated family law forms will both be available for use until the end of April 2022. Effective May 1, 2022, the updated family law forms must be used for any marriage breakdown calculations.
Thankfully the new FSRA forms are a great improvement over the old FSCO forms. Not only is the formatting better and the language clearer, but there are fewer requirements for the witnessing of signatures and obtaining certified copies of certain supporting documents. The old FSCO forms also came with complicated instruction guides and FAQs for each form, which made navigating the process very convoluted. Instead, FSRA has released a plain language guide for plan members and their spouses to answer their questions and guide them through the pension valuation and division process.
Thank you to FSRA and its Technical Advisory Committee for Family Law Pension Matters for putting in the effort to clarify and simply this area of practice as much as possible!
Automatic Features for Defined Contribution Pension Plans
Finally, FSRA also released Interpretation Guidance on automatic features in defined contribution pension plans.
The Guidance affirms that the Pension Benefits Act and its Regulations do not prohibit the use of automatic features. Features including auto-enrollment, auto-escalation and default funds may enhance retirement outcomes for plan members.
Of particular note, what makes a feature ‘automatic’ instead of ‘mandatory’ is that members retain the right to select a different option. In order words, members may ‘opt-out’ of the default. As per the FSRA guidance:
- Auto-Enrollment: all eligible employees are enrolled in the plan. In some cases, members who opt-out may be re-enrolled.
- Auto-Escalation: the plan increases member contributions based on a schedule or formula.
- Default Funds: a fund is selected that is intended to be suitable for long-term retirement investing. The member’s account is invested in that fund unless the member selects a different option.
FSRA’s guidance specifically confirms that the “Pension Benefits Act does not prohibit the use of automatic features in pension plan design.” This is obviously very clear and helpful. However, if you ask a lawyer, they will quickly point out that the Pension Benefits Act isn’t the only authority and the Employment Standards Act (ESA) has some things to say about deductions from employee’s wages of which you need to be mindful. In this regard, FSRA’s guidance unhelpfully says that “Plan sponsors may wish to seek legal advice regarding the application of the ESA.”
It is my understanding that the ESA imposes burdensome consent requirements in order to add or increase any deductions from payroll for existing employees. This imposes an obstacle on employers who are often trying to make their DC plan more generous to improve retirement outcomes for their employees.
That being said, perhaps this ESA concern is overstated as apparently auto-features are already reasonably prevalent, with FSRA observing that:
- certain DC pension plans have adopted auto-enrollment or auto-escalation for all eligible employees;
- other plans have adopted auto-enrollment or auto-escalation on a go-forward basis for new members; and,
- unions and employers have sometimes collectively bargained auto-enrollment and/or auto-escalation.
The obvious answer is for the Ontario Government to simply amend the Employment Standards Act to explicitly allow employers to implement auto-enrolment and auto-escalation features for DC pension plan. How hard can this be?
I suppose the good news from all this confusion around auto-features is that it brings much-needed attention to the design of DC pension plans and how to improve retirement outcomes for employees. Keep in mind that the finance department at some employers may resist the auto-enrollment and auto-escalation features because it may actually cost them money, depending on any matching formula; however, the human resources departments should battle hard for the greater good of their employees’ futures. As we’ve said before, many employees need to save more in order to have a shot at maintaining their current standard of living into retirement – and they need all the help and encouragement their employer can give them.
That being said, auto-features will not be suited to some workforces, such as those predominantly of lower-paid employees who may be able to maintain their standard of living in retirement with only government benefits such as the Canada Pension Plan, Old Age Security, Guaranteed Income Supplement and the Ontario Guaranteed Annual Income System. Keep in mind that many of those government programs are means-tested so that money coming out of a DC plan in retirement will severely penalize the employee. The better model for employees earning minimum wage or slightly above is often to put any savings into a TFSA rather than a DC plan or RRSP.
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As I said at the beginning, FSRA has been busy!
Feel free to reach out to us if you require any assistance implementing any of these changes.