As noted in our previous September 2014 Blakes Bulletin: Alert: Proposed Changes to Federal Pension Fund Investment Regulations, the federal Department of Finance released proposed amendments (Proposed Amendments) to the Pension Benefits Standards Regulations, 1985 (PBSA Regulations) made under thePension Benefits Standards Act, 1985 (PBSA), including to various provisions of the pension fund investment regulations contained in Schedule III to the PBSA Regulations (Schedule III). Changes to Schedule III are significant to both federally regulated pension plans and pension plans governed by provincial legislation that incorporates Schedule III.

On March 25, 2015, finalized amendments were published in the Canada Gazette (Finalized Amendments). While the Finalized Amendments also contain technical amendments to a number of other pensions-related regulations in addition to the PBSA Regulations, this Bulletin highlights key changes to Schedule III and provisions of the PBSA Regulations applicable to federally regulated pension plans.

SCHEDULE III

The provisions of the Finalized Amendments amending Schedule III will generally come into force on July 1, 2016. The key changes are discussed below.

Introduction of Term ‘Investment Fund’

The terms “pooled fund” and “mutual fund” will be repealed and replaced with the term “investment fund,” which captures both of these types of funds and includes a fund that could be established by a corporation, limited partnership or trust. The term “investment fund” is used in the rules governing indirect investments, as well as in amendments to the 10% Rule and restrictions on transactions with related parties, both of which are discussed below.

10% Rule Based on ‘Market Value’

The prohibition on a pension plan investing or lending greater than 10 per cent of its assets in or to a single person, two or more associated persons, or two or more affiliated corporations is commonly referred to as the “10% Rule.” The 10% Rule will be amended to be based on the “market value” of a pension plan’s assets rather than the “book value.”

10% Rule Applies at Time of Transaction

The revised 10% Rule, which is now based on market value, will be amended to clarify that it applies at the time of an investment or loan, rather than applying continuously. As such, a loan or investment will be prohibited where it would result in 10% or more of the market value of the plan’s assets being invested in or loaned to a single person, two or more associated persons, or two or more affiliated corporations. An administrator will not be required to divest an investment of the plan where the net value of such investment increases to an amount that exceeds 10% of the market value of the plan’s assets, but will not be able to make any further investment or loan, as applicable, in or to such entity. The 10% Rule will also apply to Member Choice Accounts, which are discussed below.

Exceptions to 10% Rule

Schedule III currently contains exceptions to the 10% Rule and the Finalized Amendments will add the following exceptions for:

  1. Investments in an “investment fund” or a segregated fund that itself complies with:
    1. In the case of investments applicable to a Member Choice Account as discussed below, section 11 of Schedule III, which prohibits investments in the securities of a corporation to which are attached more than 30 per cent of the votes that may be cast to elect the directors of the corporation, commonly known as the “30% Rule”
    2. In the case of any other investments, the requirements applicable to a plan that are set out in Schedule III.
  2. Investments in a fund that replicates the composition of a widely recognized index of a broad class of securities traded at a “marketplace.” The term “marketplace” will replace the current term “public exchange” and this term is broader as it will include an exchange, quotation and trade-reporting system and certain other entities maintained to bring together the buyers and sellers of securities or derivatives.
  3. Investments that involve the purchase of a contract or agreement in respect of which the return is based on the performance of a widely recognized index of a broad class of securities traded at a “marketplace” (e.g., a futures contract).

Transactions with Related Parties

Schedule III prohibits plan administrators from transacting with a “related party” to the pension plan (for example, an employer who participates in the pension plan), subject to certain exceptions. The Finalized Amendments will amend the related party transaction rules as follows:

The Finalized Amendments will allow an administrator to enter into a transaction with a related party for the operation or administration of the plan if it is under terms and conditions that are not less favourable to the plan than market terms and conditions, and it does not involve the making of loans to, or investments in, the related party. The Proposed Amendments initially proposed language that was capable of a narrower interpretation, and the changes in the Finalized Amendments more clearly allow for broader non-investment/loan transactions with related parties. 

  1. The Finalized Amendments will remove the current exception which allows an investment in the securities of a related party if those securities are acquired at a “public exchange” and will expressly list the following exceptions for investments for related party transactions:
  2. In an “investment fund” or a segregated fund in which investors other than the administrator and its affiliates may invest and that complies with:
    1. In the case of investments applicable to a Member Choice Account as discussed below, the 30% Rule
      1. In the case of any other investments, the requirements applicable to a plan that are set out in the 10% Rule and the 30% Rule.
      2. In an unallocated general fund of a person authorized to carry on a life insurance business in Canada
    2. In specified investments guaranteed by the Canadian government or a provincial government, or an agency of either of them
    3. In a fund that replicates the composition of a widely recognized index of a broad class of securities traded at a “marketplace”
    4. That involve the purchase of a contract or agreement in respect of which the return is based on the performance of a widely recognized index of a broad class of securities traded at a “marketplace.”
  3. The Proposed Amendments had proposed to remove the existing exception from the related party transaction prohibition for transactions that are “nominal or immaterial.” However, as a result of concerns expressed by stakeholders that this would result in a significant administrative burden and might impact administrators’ ability to invest in a prudent manner, the exception for “nominal or immaterial” transactions has been retained without amendment. 
  4. Where an administrator is in contravention of this related party transaction prohibition as a result of a transaction that was entered into by someone other than the administrator or an entity controlled by the administrator, the administrator will have five years to comply from the date of contravention
  5. Administrators that are not in compliance with the prohibition on related party transactions as of July 1, 2016, will be given five years to comply.

MEMBER CHOICE ACCOUNTS

Amendments to the PBSA coming into force on April 1, 2015, will explicitly recognize that a pension plan with a defined contribution provision may permit a member, former member, survivor or former spouse or former common law partner of a member or former member to make investment choices with respect to their personal defined contribution account (Member Choice Account).

Effective July 1, 2016, the Finalized Amendments will amend the PBSA Regulations to require a written statement to be provided annually to any person who is permitted to make such investment choices in a Member Choice Account, which:

  1. Includes a description of each investment option available to the person, including, among others, information regarding: 
    1. Its investment objective
    2. The type of investments and the degree of risk associated with it
    3. Its performance history
    4. The benchmark that best reflects its composition
    5. Fees, levies and other charges.
  2. Includes a description of how the person’s funds are invested
  3. Indicates any timing requirements that apply to the making of an investment choice.

The plan’s Statement of Investment Policies and Procedures will not have to address Member Choice Accounts. 

VARIABLE BENEFITS

Amendments to the PBSA coming into force on April 1, 2015, will permit members or former members who are entitled to or are eligible to receive an immediate pension benefit under a defined contribution provision to elect to receive a variable annual payment, or a “variable benefit,” directly from the plan, subject to the consent of a spouse or common-law partner.

The Finalized Amendments set out details concerning the minimum and maximum amounts to be paid, the form for obtaining the required consent of a spouse or common-law partner in order for the member or former member to receive a variable benefit and, effective July 1, 2016, prescribe disclosure requirements for written statements to be provided in respect of a former member who is receiving a variable benefit.

ENHANCED DISCLOSURE

Effective July 1, 2016, a number of provisions in the Finalized Amendments provide additional disclosure requirements, and in particular, will prescribe content requirements for:

  1. The written explanation to be provided to each member, eligible employee and that person’s spouse or common-law partner, for negotiated contribution plans, including a description of the funding arrangement and other information regarding the plan
  2. Annual statements to each member and the member’s spouse or common-law partner, including information regarding the assets of the plan and specified disclosure for defined benefit and negotiated contribution plans
  3. Annual statements to each former member and the former member’s spouse or common-law partner, including information regarding the assets of the plan and specified disclosure for defined benefit and negotiated contribution plans.

Effective April 1, 2015, there are new prescribed forms for the statement to be provided to a plan member and to the member’s spouse or common-law partner upon the member ceasing to be a member of the plan for any reason other than the termination of the whole or part of the plan or retirement, and upon the member’s death.

Finally, the Finalized Amendments include the prescribed forms for the statement to be provided to each member and former member and to the spouse or common-law partner of each member or former member upon plan termination.

SPOUSAL CONSENT FOR PORTABILITY

The PBSA currently allows plans to permit portability where a member, after becoming eligible for early retirement but before commencement of a pension, ceases membership. The PBSA will be amended to require spousal consent for portability transfers to a locked-in registered retirement savings plan, a life income fund or a restricted life income fund pursuant to subsection 26(2.1) of the PBSA. The Finalized Amendments set out the prescribed form for such spousal consent.

ELECTRONIC COMMUNICATIONS

Amendments to the PBSA coming into force on April 1, 2015, will allow plan administrators to provide plan members and other persons with information electronically, subject to certain conditions. The Finalized Amendments set out requirements for the recipient’s consent to receive information electronically and other requirements for electronic documents, including where information is provided on a website.

The Finalized Amendments may require changes to be made to a pension plan’s Statement of Investment Policies and Procedures, investment management agreements and other plan-related documents and forms.