The Ontario Securities Commission (“OSC”) is closely scrutinizing pension disclosure by reporting issuers with defined benefit plans. Collapsing equity markets have reduced pension assets such that increased pension contributions and expense may, in the current unfavourable economic conditions, materially affect cash flows and earnings. While many issuers are using general language in their management discussion and analysis of financial condition (“MD&A”) that accompanies quarterly statements, more detailed pension disclosure will likely be required as updated information on fund valuations becomes available.  

OSC Pension Disclosure Review

In November, the OSC sent letters to issuers reminding them that their MD&A must include a discussion of the material impacts of pension plans when addressing liquidity and critical accounting estimates (see Items 1.6 and 1.12 of Form 51- 102F1). The OSC asked issuers to ensure that, if material, the MD&A include:  

  • a discussion of the anticipated impact of the funding status of the company’s pension plan on future contributions, cash flows and future pension expense; and a discussion tailored to the company on the risks associated with its pension plan.  

The following three examples of possible risk disclosure were noted:  

  • There is no assurance that the plan will be able to earn the assumed rate of return.  
  • Market driven changes may result in changes in the discount rates and other variables which would result in the company being required to make contributions in the future that differ significantly from the estimates.  
  • The measurement uncertainty incorporated into the actuarial valuation process.  

For some issuers, the OSC required a response that was to include an analysis, in light of current economic conditions, of the anticipated impact of the pension plan’s funding status on future contributions, cash flows and future pension expense. Issuers generally were given a week to respond.

Plan Ahead for More Detailed Disclosure

Mid-way through a fiscal year and the pension plan’s valuation period, an issuer may not have extensive pension information to provide. Pension disclosure issues will become more sensitive and require careful consideration as the company obtains updated information on funding status, even before the next actuarial valuation report and/or MD&A is finalized. If updated information indicates that there is likely to be an impact on future pension contributions or expense, an issuer will need to consider whether the expected impact is material to the issuer. If so, the issuer must determine the nature and timing of the required disclosure.  

Under Ontario securities laws, a reporting issuer is required to promptly issue a news release and then file a material change report disclosing a “material change”, being a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of its securities. For example, immediate disclosure may be required if the issuer becomes aware of additional pension contributions that threaten the solvency, and therefore the business and operations, of the issuer.  

Even if the updated funding information does not constitute a material change, issuers listed on the Toronto Stock Exchange (“TSX”) have somewhat broader disclosure obligations. The TSX requires an issuer to promptly disclose “material information” relating to the business and affairs of the issuer that results or would reasonably be expected to result in a significant change in the market price or value of the issuer’s listed securities. Updated funding information may constitute material information requiring disclosure under the TSX rules, particularly if the issuer will be required to make significant additional funding contributions. 

Issuers need to plan in advance for a disclosure process that takes into account preliminary information regarding pension funding status. If a company has previously disclosed the funding status of its pension plan and updated information indicates that material deviations from the prior disclosures are likely, an issuer must determine the appropriate time at which to update its public disclosure and the manner and nature of such disclosure.