On June 9, the Office of the Superintendent of Financial Institutions released a policy advisory to provide guidance to administrators of federally regulated defined benefit pension plans that are considering entering into longevity risk hedging contracts.

While OSFI considers longevity risk hedging contracts to be permissible investments and pension plans are not required to inform plan members of the existence of such contracts, the advisory stresses that such investments must comply with legal regulations and the terms of the relevant pension plan.

The advisory also discusses the potential risks to pension plans and sets out the issues that a plan administrator should review when considering such contracts, including cost, acceptability under the law and terms of the plan, administrative complexity, duration, liquidity and actuarial valuation implications.

The advisory also sets out OSFI’s expectations in relation to such hedging activities. Among other things, OSFI expects plan administrators to: (i) understand the impact of longevity risk on their pension plan; (ii) determine whether entering into the longevity risk hedging contract is in the best interest of beneficiaries; (iii) determine whether entering into such a contract offers value for cost; (iv) consider the risks to the pension plan; (v) ensure that privacy laws are followed; and (vi) develop adequate controls and oversight to manage risks. Plan administrators should also ensure that individuals with the appropriate level of knowledge are involved in the decision-making process and/or advice is received from individuals with experience in the market, the hedging contract is reviewed on a regular basis and that there is adequate documentation.

For more information, see OSFI Policy Advisory #2014-002.