The evolution of pension policy can best be described as “hurry up and wait.” The pension industry was asked in the summer of 2001, on short notice, to comment on no less than six policy documents.
In the case of the proposed merger of the Ontario Securities’ Commission (OSC) and the Financial Services Commission of Ontario (FSCO) and FSCO’s proposed policy on Advanced Pension Rulings (APRs), this was the second round of consultations. Release for comment on a model law prepared by the Canadian Association of Pension Supervisory Authorities (CAPSA) was also expected. With one exception, all other issues remain under consideration, and it is unlikely that any major substantive matters will be addressed before the spring or summer of this year.
Ontario
OSC/FSCO merger. The initial Ontario Ministry of Finance discussion paper Improving Ontario’s Financial Services Regulation: Establishing A Single Financial Services Regulator was dated September 2000. Answers to a list of specific questions were requested by Oct. 2, 2000.
Serious concerns were raised in a number of submissions as to the proposed rule-making power of the OSC, and the independence and the impartiality of the planned new pension tribunal. Many groups also recommended further consultations upon the release of any draft legislation.
As a result, in April 2001, the ministry released draft legislation in a further consultation document entitled Establishing A Single Financial Regulator with comments due at the end of June 2001. While the ministry clearly responded to some of the concerns raised in the first round of consultations, submissions at this stage still identified possible problems. A number of respondents also questioned the ministry’s rationale for the merger since it was based on at least two questionable premises:
•Premise #1: There is a need for investor protection from a single agency due to the increasing numbers of defined contribution (DC) plans. While the number of DC plans in Ontario has increased, many of these plans are small. Figures prepared by FSCO in 2000 reveal that the number of DC plan members only represented 13.5 per cent of all registered pension plan members.
•Premise #2: Similar harmonization and merger activities are taking place in other jurisdictions such as the United Kingdom and Australia. In fact, the activity in these countries has not brought occupational pensions into the financial services framework.
In addition, the Pension and Benefits Section of the Ontario Bar Association (OBA) suggested that the proposed OSC/FSCO merger might shift the focus of the ministry’s limited resources over the next several years from important substantive issues to structural changes. The need for greater certainty with respect to surplus distribution was specifically identified.
Surplus. Ontario’s surplus regulation which came into effect in December 1991, was originally implemented as a temporary measure to allow employers access to surplus funds in certain circumstances despite the moratorium on surplus withdrawals first introduced in 1986. Late in 2000, the current pension surplus sharing regulation was extended until Dec. 31, 2001. This marked the fourth extension of the surplus regulation, which was originally slated to expire in December 1992.
The need for a new regulation became more urgent with the release of the Ontario Divisional Court decision in Kent v. TecSyn (TecSyn) on May 26, 2000. TecSyn limits FSCO’s ability to approve surplus applications on wind up where employers have satisfied the surplus regulation by obtaining the agreement of two-thirds of plan beneficiaries, unless the employers can also establish their entitlement to surplus under plan provisions.
The OBA was assured by the ministry that the surplus issue was definitely on their “to do list.” This was confirmed July 18, 2001, when Ontario Finance Minister Jim Flaherty released a consultation paper entitled Surplus Distribution From Defined Benefit Pension Plans (the Surplus Paper), with comments due by Sept. 14, 2001.
It is not surprising that there was little if any consensus in industry responses to the Surplus Paper. The treatment of surplus on partial plan wind up is particularly contentious.
•Some plan sponsor representatives believe surplus does not crystallize on partial wind up, and therefore, surplus distribution should not be available or permissible under any circumstances at that time.
•Other employers believe that on partial wind up they should be permitted, but not required, to distribute surplus in accordance with actuarial liabilities.
•Employee groups generally support the dissenting opinion in the Financial Services Tribunal’s (FST) decision in Monsanto which suggested that effected members on partial wind up should have a right of notice and consent to a future surplus distribution. (The FST’s majority decision was reversed by the Divisional Court which adopted the dissenting opinion in its entirety. The appeal from the decision of the Divisional Court will be heard by the Ontario Court of Appeal in April 2002.)
Advance pension rulings. The first draft of the Proposed Policy On Advance Pension Rulings (APRs) was released by FSCO Aug. 28, 2000 with submissions due Sept. 30, 2000. The policy on APRs was intended to create “a workable model for offering advance rulings on complex pension issues, similar to advance taxation rulings.”
On July 23, 2001, FSCO released a revised draft policy that addressed many stakeholder concerns. In particular, the revised draft attempted to provide APR requesters with additional certainty regarding fees and turnaround time. It also introduced a two-step application process that would enable the requestor to accept or decline the terms specified by the regulator.
Additional issues were raised in the second round of submissions including insufficient protection afforded to the confidentiality of information surrounding APR requests and the inability of requestors to obtain an APR in a hypothetical situation.
Status update. All of the above initiatives appear to have been impacted to some degree by Ontario’s current political situation. With the resignation of Ontario Premier Mike Harris, former Minister of Finance Ernie Eves and the current Minister of Finance Jim Flaherty have become two of the five contenders for his job.
As a result, legislative priorities generally, and priorities of the Ministry of Finance in particular, have shifted. Neither the OSC/FSCO legislation nor the surplus amendments were introduced before politicians went home for the holidays in mid-December. The Ontario Progressive Conservative leadership convention is slated for March 2002, and the new session of the legislature will not begin until late March. Therefore, the government had no other option than to extend the current surplus regulation for the fifth time, until the end of 2002.
While the APR consultations are a FSCO project, it has also not moved ahead quickly. At least in part, this is due to uncertainty about pending structural changes if the OSC/FSCO merger goes ahead as planned. Also, it has been suggested that the stringent notice provisions necessary to satisfy employee groups may mean the APR process is used infrequently. Therefore, a decision must be made as to whether establishing an infrastructure to provide these rulings is actually warranted.
Joint Forum of Financial Market Regulators
The Joint Forum of Financial Market Regulators was established in 1999 to proactively facilitate and co-ordinate the development of harmonized cross-sectoral and cross-jurisdictional solutions to financial services regulatory issues. It was founded by the Canadian Council of Insurance Regulators (CCIR), the Canadian Association of Pension Supervisory Authorities (CAPSA) and the Canadian Securities Administrators (CSA), and also includes representation from the Canadian Insurance Services Regulatory Organizations (CISRO) and the Bureau des services financiers in Quebec.
On April 27, 2001, the joint forum released the discussion paper Proposed Regulatory Principles for Capital Accumulation Plans for review and comment by July 31, 2001. The discussion paper considered the adequacy of the disclosure and other regulatory protection offered to members who are entitled to make investment decisions in defined contribution pension plans and other similar types of capital accumulation plans.
It contained broad regulatory principles and was intended to be a concept paper for consultation purposes, not a proposal for legislation.
The discussion paper elicited numerous and varied responses. Many groups were disappointed that a U.S.-style “safe harbour” was not recommended to protect plan sponsors who allow plan members to invest in a specified minimum number of investments with different risk and reward profiles. Concerns were also raised that if disclosure by way of a prospectus is required by all institutions that offer group defined contributions plans, costs will become prohibitive and fewer employers will establish pension plans.
It is not yet clear what further action the joint forum will take with respect to this issue, or how they intend to facilitate adoption of their proposals by legislatures or groups that set pension policies in multiple jurisdictions across the country.
The Canadian Association of Pension Supervisory Authorities (CAPSA)
CAPSA includes representatives from the Canadian Customs and Revenue Agency (CCRA) plus the federal and provincial pension commissions. On May 25, 2001 CAPSA issued two consultation documents with comments requested by July 31, 2001:
•Proposed Regulatory Guidelines for Electronic Communication in the Pension Industry; and
•CAPSA Pension Governance Guideline and Implementation Tool.
A CAPSA “Model Pension Law” is also under development. This project is intended to resolve the many multi-jurisdictional problems faced by plan sponsors with employees in more than one part of the country.
Electronic communication. British Columbia, Ontario, Quebec and Saskatchewan have all introduced legislation to regulate the transfer of information electronically using new information technologies. The proposed CAPSA guidelines for electronic commerce, outlined in the consultation paper, are based on the Uniform Law Conference of Canada’s Uniform Electronic Commerce Act (1998). The purpose of the legislation is to remove barriers to the legally effective use of electronic communication by the various levels of government and the private sector.
Several submissions suggested that the CAPSA Proposed Regulatory Guidelines may already be dated in view of changes in technology since the Uniform Law was released. In particular, the CAPSA document appears to be based on the assumption that electronic communication refers only to documents sent as attachments via e-mail — “paper” documents in electronic form.
In fact, the preferred, secure approach is to send the person an e-mail advising him that he can retrieve information from a Web site using a unique “log-in” and password or personal identification number. Once the personal data is examined and changes are made and “saved,” the user must “log-off” to end the session. In other words, the premise of electronic “paper” is out of date. Instead, the current focus should be on the reality of “data,” and its electronic transmission.
A CAPSA press release announced the approval of guidelines for electronic communication in the pension industry in September 2001, and the final document was released in late December. Minor wording changes made to the proposed regulatory guidelines do not appear to fully respond to industry concerns described above.
Pension governance. Industry feedback with respect to the CAPSA Pension Governance Guideline and Implementation Tool indicated the guideline must be flexible and accommodate future change and the spectrum of pension plans and governing bodies. Furthermore, it was stressed that governance principles should recognize the need for harmonization and uniformity across Canada in both the federal jurisdiction and in each provincial jurisdiction.
It was also suggested that the guideline does not adequately distinguish between the roles of plan sponsor or employer and “administrator” ( as defined in the Ontario Pension Benefits Act). As a result, the legitimate right of a pension plan sponsor, acting in a non-fiduciary capacity to pursue its own business interests was identified as requiring further clarification.
CAPSA has not announced when revised pension governance guidelines will be issued, or what further activity may be expected with respect to this initiative.
Model pension law. CAPSA has delayed the release of its consultation paper on a model pension law until after CAPSA’s semi-annual meeting scheduled for April 2002. The reason for the delay is that CAPSA wishes to get additional input from regulators who would be actually involved in the drafting and implementation of parallel legislation in each jurisdiction.
While the pension industry supports a uniform pension statute in theory, getting provincial and federal politicians to buy-in to the same pension rules at the same time presents CAPSA with a unique challenge.
The prognosis
Significant pension policy development is underway in a number of different forums across the country. However, the complexity of the issues under consideration, and the political realities faced by regulators mean that initiatives often take longer than originally planned. Therefore, the pension policy prognosis for 2002 is definitely “a waiting game” until further notice. We will keep you advised as matters evolve.
Sheryl Smolkin is a lawyer and director of Watson Wyatt Worldwide’s Canadian Research & Information Centre in Toronto. For more information contact 1-866-206-5723 or [email protected].
In the case of the proposed merger of the Ontario Securities’ Commission (OSC) and the Financial Services Commission of Ontario (FSCO) and FSCO’s proposed policy on Advanced Pension Rulings (APRs), this was the second round of consultations. Release for comment on a model law prepared by the Canadian Association of Pension Supervisory Authorities (CAPSA) was also expected. With one exception, all other issues remain under consideration, and it is unlikely that any major substantive matters will be addressed before the spring or summer of this year.
Ontario
OSC/FSCO merger. The initial Ontario Ministry of Finance discussion paper Improving Ontario’s Financial Services Regulation: Establishing A Single Financial Services Regulator was dated September 2000. Answers to a list of specific questions were requested by Oct. 2, 2000.
Serious concerns were raised in a number of submissions as to the proposed rule-making power of the OSC, and the independence and the impartiality of the planned new pension tribunal. Many groups also recommended further consultations upon the release of any draft legislation.
As a result, in April 2001, the ministry released draft legislation in a further consultation document entitled Establishing A Single Financial Regulator with comments due at the end of June 2001. While the ministry clearly responded to some of the concerns raised in the first round of consultations, submissions at this stage still identified possible problems. A number of respondents also questioned the ministry’s rationale for the merger since it was based on at least two questionable premises:
•Premise #1: There is a need for investor protection from a single agency due to the increasing numbers of defined contribution (DC) plans. While the number of DC plans in Ontario has increased, many of these plans are small. Figures prepared by FSCO in 2000 reveal that the number of DC plan members only represented 13.5 per cent of all registered pension plan members.
•Premise #2: Similar harmonization and merger activities are taking place in other jurisdictions such as the United Kingdom and Australia. In fact, the activity in these countries has not brought occupational pensions into the financial services framework.
In addition, the Pension and Benefits Section of the Ontario Bar Association (OBA) suggested that the proposed OSC/FSCO merger might shift the focus of the ministry’s limited resources over the next several years from important substantive issues to structural changes. The need for greater certainty with respect to surplus distribution was specifically identified.
Surplus. Ontario’s surplus regulation which came into effect in December 1991, was originally implemented as a temporary measure to allow employers access to surplus funds in certain circumstances despite the moratorium on surplus withdrawals first introduced in 1986. Late in 2000, the current pension surplus sharing regulation was extended until Dec. 31, 2001. This marked the fourth extension of the surplus regulation, which was originally slated to expire in December 1992.
The need for a new regulation became more urgent with the release of the Ontario Divisional Court decision in Kent v. TecSyn (TecSyn) on May 26, 2000. TecSyn limits FSCO’s ability to approve surplus applications on wind up where employers have satisfied the surplus regulation by obtaining the agreement of two-thirds of plan beneficiaries, unless the employers can also establish their entitlement to surplus under plan provisions.
The OBA was assured by the ministry that the surplus issue was definitely on their “to do list.” This was confirmed July 18, 2001, when Ontario Finance Minister Jim Flaherty released a consultation paper entitled Surplus Distribution From Defined Benefit Pension Plans (the Surplus Paper), with comments due by Sept. 14, 2001.
It is not surprising that there was little if any consensus in industry responses to the Surplus Paper. The treatment of surplus on partial plan wind up is particularly contentious.
•Some plan sponsor representatives believe surplus does not crystallize on partial wind up, and therefore, surplus distribution should not be available or permissible under any circumstances at that time.
•Other employers believe that on partial wind up they should be permitted, but not required, to distribute surplus in accordance with actuarial liabilities.
•Employee groups generally support the dissenting opinion in the Financial Services Tribunal’s (FST) decision in Monsanto which suggested that effected members on partial wind up should have a right of notice and consent to a future surplus distribution. (The FST’s majority decision was reversed by the Divisional Court which adopted the dissenting opinion in its entirety. The appeal from the decision of the Divisional Court will be heard by the Ontario Court of Appeal in April 2002.)
Advance pension rulings. The first draft of the Proposed Policy On Advance Pension Rulings (APRs) was released by FSCO Aug. 28, 2000 with submissions due Sept. 30, 2000. The policy on APRs was intended to create “a workable model for offering advance rulings on complex pension issues, similar to advance taxation rulings.”
On July 23, 2001, FSCO released a revised draft policy that addressed many stakeholder concerns. In particular, the revised draft attempted to provide APR requesters with additional certainty regarding fees and turnaround time. It also introduced a two-step application process that would enable the requestor to accept or decline the terms specified by the regulator.
Additional issues were raised in the second round of submissions including insufficient protection afforded to the confidentiality of information surrounding APR requests and the inability of requestors to obtain an APR in a hypothetical situation.
Status update. All of the above initiatives appear to have been impacted to some degree by Ontario’s current political situation. With the resignation of Ontario Premier Mike Harris, former Minister of Finance Ernie Eves and the current Minister of Finance Jim Flaherty have become two of the five contenders for his job.
As a result, legislative priorities generally, and priorities of the Ministry of Finance in particular, have shifted. Neither the OSC/FSCO legislation nor the surplus amendments were introduced before politicians went home for the holidays in mid-December. The Ontario Progressive Conservative leadership convention is slated for March 2002, and the new session of the legislature will not begin until late March. Therefore, the government had no other option than to extend the current surplus regulation for the fifth time, until the end of 2002.
While the APR consultations are a FSCO project, it has also not moved ahead quickly. At least in part, this is due to uncertainty about pending structural changes if the OSC/FSCO merger goes ahead as planned. Also, it has been suggested that the stringent notice provisions necessary to satisfy employee groups may mean the APR process is used infrequently. Therefore, a decision must be made as to whether establishing an infrastructure to provide these rulings is actually warranted.
Joint Forum of Financial Market Regulators
The Joint Forum of Financial Market Regulators was established in 1999 to proactively facilitate and co-ordinate the development of harmonized cross-sectoral and cross-jurisdictional solutions to financial services regulatory issues. It was founded by the Canadian Council of Insurance Regulators (CCIR), the Canadian Association of Pension Supervisory Authorities (CAPSA) and the Canadian Securities Administrators (CSA), and also includes representation from the Canadian Insurance Services Regulatory Organizations (CISRO) and the Bureau des services financiers in Quebec.
On April 27, 2001, the joint forum released the discussion paper Proposed Regulatory Principles for Capital Accumulation Plans for review and comment by July 31, 2001. The discussion paper considered the adequacy of the disclosure and other regulatory protection offered to members who are entitled to make investment decisions in defined contribution pension plans and other similar types of capital accumulation plans.
It contained broad regulatory principles and was intended to be a concept paper for consultation purposes, not a proposal for legislation.
The discussion paper elicited numerous and varied responses. Many groups were disappointed that a U.S.-style “safe harbour” was not recommended to protect plan sponsors who allow plan members to invest in a specified minimum number of investments with different risk and reward profiles. Concerns were also raised that if disclosure by way of a prospectus is required by all institutions that offer group defined contributions plans, costs will become prohibitive and fewer employers will establish pension plans.
It is not yet clear what further action the joint forum will take with respect to this issue, or how they intend to facilitate adoption of their proposals by legislatures or groups that set pension policies in multiple jurisdictions across the country.
The Canadian Association of Pension Supervisory Authorities (CAPSA)
CAPSA includes representatives from the Canadian Customs and Revenue Agency (CCRA) plus the federal and provincial pension commissions. On May 25, 2001 CAPSA issued two consultation documents with comments requested by July 31, 2001:
•Proposed Regulatory Guidelines for Electronic Communication in the Pension Industry; and
•CAPSA Pension Governance Guideline and Implementation Tool.
A CAPSA “Model Pension Law” is also under development. This project is intended to resolve the many multi-jurisdictional problems faced by plan sponsors with employees in more than one part of the country.
Electronic communication. British Columbia, Ontario, Quebec and Saskatchewan have all introduced legislation to regulate the transfer of information electronically using new information technologies. The proposed CAPSA guidelines for electronic commerce, outlined in the consultation paper, are based on the Uniform Law Conference of Canada’s Uniform Electronic Commerce Act (1998). The purpose of the legislation is to remove barriers to the legally effective use of electronic communication by the various levels of government and the private sector.
Several submissions suggested that the CAPSA Proposed Regulatory Guidelines may already be dated in view of changes in technology since the Uniform Law was released. In particular, the CAPSA document appears to be based on the assumption that electronic communication refers only to documents sent as attachments via e-mail — “paper” documents in electronic form.
In fact, the preferred, secure approach is to send the person an e-mail advising him that he can retrieve information from a Web site using a unique “log-in” and password or personal identification number. Once the personal data is examined and changes are made and “saved,” the user must “log-off” to end the session. In other words, the premise of electronic “paper” is out of date. Instead, the current focus should be on the reality of “data,” and its electronic transmission.
A CAPSA press release announced the approval of guidelines for electronic communication in the pension industry in September 2001, and the final document was released in late December. Minor wording changes made to the proposed regulatory guidelines do not appear to fully respond to industry concerns described above.
Pension governance. Industry feedback with respect to the CAPSA Pension Governance Guideline and Implementation Tool indicated the guideline must be flexible and accommodate future change and the spectrum of pension plans and governing bodies. Furthermore, it was stressed that governance principles should recognize the need for harmonization and uniformity across Canada in both the federal jurisdiction and in each provincial jurisdiction.
It was also suggested that the guideline does not adequately distinguish between the roles of plan sponsor or employer and “administrator” ( as defined in the Ontario Pension Benefits Act). As a result, the legitimate right of a pension plan sponsor, acting in a non-fiduciary capacity to pursue its own business interests was identified as requiring further clarification.
CAPSA has not announced when revised pension governance guidelines will be issued, or what further activity may be expected with respect to this initiative.
Model pension law. CAPSA has delayed the release of its consultation paper on a model pension law until after CAPSA’s semi-annual meeting scheduled for April 2002. The reason for the delay is that CAPSA wishes to get additional input from regulators who would be actually involved in the drafting and implementation of parallel legislation in each jurisdiction.
While the pension industry supports a uniform pension statute in theory, getting provincial and federal politicians to buy-in to the same pension rules at the same time presents CAPSA with a unique challenge.
The prognosis
Significant pension policy development is underway in a number of different forums across the country. However, the complexity of the issues under consideration, and the political realities faced by regulators mean that initiatives often take longer than originally planned. Therefore, the pension policy prognosis for 2002 is definitely “a waiting game” until further notice. We will keep you advised as matters evolve.
Sheryl Smolkin is a lawyer and director of Watson Wyatt Worldwide’s Canadian Research & Information Centre in Toronto. For more information contact 1-866-206-5723 or [email protected].
