On November 27, 2014, new amendments to the Regulations under the Ontario Pension Benefits Act (PBA) came into force, revising the rules related to Statements of Investment Policies and Procedures (SIPPs), and adding a new requirement to send pension statements to deferred vested and retired pension plan members. Set out below is a summary of the changes, and some recommendations for pension plan administrators to take in order to prepare for the changes.

SIPPs

Effective January 1, 2016, plan administrators must file the pension plan’s SIPP with the Financial Services Commission of Ontario (FSCO). Prior to these regulatory changes, while every pension plan registered in Ontario was required to have a SIPP, the SIPP did not have to be filed with the regulator. In addition, all SIPPs must now include information about whether environmental, social and governance (ESG) factors are incorporated into the SIPP and, if so, how the ESG factors are addressed in the plan’s investment strategy.

Note that the regulatory amendments do not require plan administrators to include ESG factors in their investment decision-making process; the requirement is limited to disclosing whether or not ESG factors are considered when making investment decisions. If ESG factors are incorporated into the plan’s investment strategy, however, then plan administrators must disclose in the SIPP how the ESG factors are incorporated.

To date, FSCO has not provided any guidance on what sort of factors would be considered to be “environmental, social, and governance,” nor are those terms defined in the PBA or the Regulations. In order to determine whether or not to incorporate ESG factors into their investment selection process, all plan administrators will have to consider what sort of factors would fall under the ESG rubric, and then consider whether it is appropriate in the context of their plan investments to incorporate some of those factors into the investment selection process.

In our view, in its fiduciary role, the plan administrator must carefully consider these issues with a view to the best interests of the plan members, and not, for example, simply dismiss ESG factors out of hand. Plan administrators may wish to obtain legal advice in this regard, in order to properly fulfill their fiduciary duties. At a minimum, the administrator (or its delegate, the pension committee) must consider ESG factors and whether it makes sense to expressly incorporate some such factors into its investment selection criteria. The legal issues are complex, and there are no clear answers regarding the extent to which ESG factors may be taken into account in the context of the administrator’s primary objective to achieve an optimal rate of return with an acceptable level of risk. When deciding whether to invest in a particular company, for example, can the company’s environmental record trump considerations of the expected growth in its share price? Or can environmental issues only be taken into account insofar as they might be expected to affect the share price, either in the short term or over a longer period of time? Legal advice for the administrator is certainly warranted, to ensure that the interplay between its fiduciary duties and the consideration of ESG factors is clearly understood.

Whether or not the decision is made to incorporate such factors, the administrator’s decision-making process should be well-documented, in case questions or member challenges later arise. If it is decided that certain ESG factors should be taken into account, the relevant provisions of the SIPP will have to be carefully drafted, aiming for clarity while preserving flexibility for the relevant decision-makers.

For existing pension plans, plan administrators must file their SIPP with FSCO within 60 days after January 1, 2016. For plans registered on or after January 1, 2016, the SIPP must be filed within 60 days after the plan is registered. Also, any amendment to a SIPP must be filed within 60 days after the amendment is made. Given the timing of the changes to the SIPP requirements, we recommend that pension plan administrators put these issues on the agenda of their pension committee or board of directors (as appropriate) early in 2015, in order to leave sufficient time for the necessary review.

Pension Statements for Deferred Vested Members and Retired Members

Another significant change for pension plan administrators are the revisions to the Regulations that now require administrators to provide former members and retired members with written pension statements every two years. Before these changes, while annual pension statements had to be provided to active members, there was no requirement in the PBA to provide pension statements to deferred vested members or to retired members. The regulatory amendments set out the prescribed information that must be included in these new statements, which is similar to the information currently provided in annual statements to active members.

For existing pension plans, the first statements for former and retired members must be transmitted no later than July 1, 2017. After that, plan administrators will have to provide statements to former members and retired members every two years, within six months after the plan’s fiscal year end.

For plans registered on or after January 1, 2015, the first statements must be transmitted within 18 months after the plan’s year end. After that, plan administrators will have to provide statements to former members and retired members every two years, within six months after the plan’s fiscal year end.

In addition, the revised Regulations require that all member statements (including the annual statements to active plan members) must also include the following information, related to the SIPP changes discussed above:

  1. A statement that the plan administrator must establish a SIPP in respect of the plan’s portfolio of investments and loans;
  2. Information about whether ESG factors are incorporated into the plan’s SIPP and, if so, how the ESG factors are incorporated; and
  3. Information about how interested members may inspect or obtain a copy of the plan’s SIPP.

These new requirements will raise awareness among plan members about the contents of the SIPP, and advise them that the SIPP is available to them, should they wish to obtain a copy. Plan administrators can expect to receive more questions (and perhaps more scrutiny) from plan members regarding the SIPP and the plan’s investments generally, and therefore should be prepared to answer those questions, including questions regarding investments based on ESG factors.

Since SIPPs must now be filed with FSCO, we recommend that plan administrators review the SIPP governing their plan, to ensure that it complies with the new legislative requirements as well as the requirements that have always applied to SIPPs. In addition, in order to prepare for the new requirements for pension statements, plan administrators should start collecting the data necessary to prepare the former member and retired member statements, and if possible verify that the addresses for these members are still current. It would also be advisable for administrators to start preparing a template for the statements for former members and retired members, and to revise the existing annual member statement template to incorporate the new required information about SIPPs.