Proposed changes to assessment calculations
Effects for pension funds
On October 1 2011 the federal government announced changes to the regulations that govern the way in which the Office of the Superintendent of Financial Institutions (OSFI) recovers costs from the pension industry for the administration of the Pension Benefits Standards Act 1985.
OSFI, in administering the act, fully recovers its costs from the pension industry. It does this through the annual assessment of federally registered private pension plans. For 2010-2011, the total value of assessment (corresponding to the costs of OSFI's supervisory and regulatory role in relation to federal pension plans) was C$7.9 million. The assessment value is collected from the pension industry each year.
Each federal pension plan pays an annual fee that is determined by multiplying the plan's fee base by the basic rate. The fee base is determined by the number of members in the plan (which at present includes only active members). The basic rate is the dollar amount that, when multiplied by each plan's fee base, covers OSFI's costs for the year. For example, for 2010-2011 the basic rate was C$22.
Proposed changes to assessment calculations
The proposed changes are designed to ensure that annual assessments are better aligned with OSFI's costs of supervising and regulating pension plans. There will be no change to the total amount collected to cover OSFI's costs for a year (ie, the total value of assessment). Rather, the manner in which fees are calculated will be adjusted. As a result, a pension plan may see an increase or a decrease in its annual assessment.
Most significantly, the new regulations propose to expand the fee base by including all plan beneficiaries, rather than only active members. In order for the total assessment to remain unchanged, this increase in the fee base will be offset by a decrease in the basic rate. For example, if this change had been implemented for 2010-2011, OSFI would still collect C$7.9 million in fees, but the basic rate would have been set at C$12, as opposed to C$22.
The proposed changes are summarised in the table below.
|Assessment calculated as fee base multiplied by basic rate||No change to assessment formula|
|Fee base includes only active members||Fee base includes all plan beneficiaries, deferred vested members, retirees and beneficiaries|
|Above 1,000 members, each additional member increases the fee base by 0.5 until the fee base cap is reached||Above 1,000 members, each additional member increases the fee base by 0.75 until the fee base cap is reached|
|Minimum plan fee base is 20 beneficiaries (regardless of whether the plan has fewer than 20 members)||Minimum plan fee base is 50 beneficiaries (regardless of whether the plan has fewer than 50 members)|
|Maximum plan fee reached with 19,000 active members||Maximum plan fee reached with 26,333 active members and beneficiaries|
|Minimum annual fee C$440(1)||Minimum annual fee C$600(2)|
|Maximum annual fee C$220,000||Maximum annual fee C$240,000|
(1) The current minimum and maximum amounts are based on the basic rate of C$22 that was applied in 2010-2011.
(2) The minimum and maximum amounts under the proposed formula reflect a basic rate of C$12 that would have been used if the new formula had been in place in 2010-2011.
In addition, the regulations are being transferred from being issued pursuant to Section 25 of the Pension Benefits Standards Act to being issued pursuant to the Office of the Superintendent of Financial Institutions Act.
The increase in the fee base cap is of particular interest to larger defined benefit plans, as it is likely to result in higher costs for these plans. The government has stated that this change is appropriate because these plans can demand significant OSFI resources when problems arise.
Many defined contribution plans will see a decrease in the amount paid.
Since the new regulations propose to increase the minimum assessment base to 50 beneficiaries, the smallest plans will pay slightly more than under the old regulations. However, this increase is modest, as the minimum assessment for the smallest plans will increase from C$440 to C$600 (based on a C$12 basic rate).
The changes to the assessment regulations will take effect on April 1 2012. OSFI will update its reporting forms to accommodate the adjustments to the assessment formula.
Transitional provisions will be in place for 2012, as the existing regulations and the new regulations both indicate that the basic rate will be published at least 180 days before an assessment is due. However, in order to allow for a transition to the new regulations by April 1 2012, this notice period will be reduced to 60 days in 2012.
Implementing the proposed changes should generate minimal costs for pension plans. Plan sponsors may incur modest costs as they will be required to include retirees and other beneficiaries in their reports to OSFI. However, plan sponsors already maintain this data.
There is a natural and well-grounded suspicion whenever governments alter their assessment methodology that there is an underlying motive to increase fees gradually. Time will tell whether total fees will increase under this revised formula.
The change in the assessment formula to include inactive members and beneficiaries may create an incentive for plan sponsors to annuitise retired and inactive members in order to reduce annual fees. The cost saving in some cases could be significant.
It is not particularly fair that larger pension plans should bear an even greater proportion of the total cost. Pension plans of all sizes can demand OSFI's resources; it depends on the issues unique to any particular pension plan at a point in time.
Many plan sponsors may question whether it is realistic or good policy for OSFI to administer the Pension Benefits Standards Act on a full cost-recovery basis. Part of OSFI's mandate is to encourage the establishment and maintenance of registered pension plans. The imposition of onerous annual fees of this nature – in particular, fees of C$250,000 – can be said to be at odds with this mandate.
For further information on this topic please contact Mark Newton at Heenan Blaikie LLP by telephone (+1 416 360 6336), fax (+1 416 360 8425) or email ([email protected]).