The planned merger to create a single financial services regulator has serious implications for pension plans.
In its 2000 budget, the Ontario government announced the merger of the Ontario Securities Commission (OSC) and the Financial Services Commission of Ontario (FSCO) into a single financial services regulator.
The government intends to introduce legislation before the end of the year to create the Ontario Financial Services Commission (OFSC), a Crown corporation with self-funding and rule-making authority responsible for regulating financial services in the province.
In September, a Discussion Paper outlining the proposed regulatory framework was released for comments. It is interesting to evaluate the government’s goals for the planned merger and the proposed rule-making authority, as they specifically relate to pension plans.
CONTEXT FOR CHANGE
Historically, each of the four financial sector pillars — banks, insurers, trust companies and securities firms — provided different services, and were governed by different legislation. Ontario’s financial services regulatory framework, like that in other provinces, was created when the four pillars were separate and there was an assumption that the institutions and their regulatory issues were materially different.
With the elimination of most of the rules separating the four pillars, Canadian financial regulations allow competition among the different providers. The result is that many of the products and services offered to consumers by the insurance, deposit-taking and securities industry cut across traditional regulatory boundaries. Concerns are raised that the distinctions between these products may be difficult to perceive for consumer or investor.
The Discussion Paper specifically notes the increasing popularity of defined contribution pension plans (DC) which give pension plan members choices on how to invest their pension assets. Furthermore, it is suggested that this marks a departure from the traditional role of the plan administrator, which included sole fiduciary responsibility for investing the fund.
Given this trend, the government believes that there is a need for regulators to clarify the plan administrator’s fiduciary duties, and to enhance protection for members to ensure they can make informed decisions.
It is noted also that there is a mismatch between the regulatory structure and the marketplace that has resulted in duplication and overlap of regulations, different regulatory treatment of similar products and gaps in consumer protection. To remedy these problems, the goal is to create a single integrated financial services regulatory agency that will lead Canada in consumer and investment protection.
WHAT ABOUT PENSIONS?
With respect to pension matters, there may be some merit in combining the enforcement aspects of the OSC and FSCO, if the pooling of resources could lead to a more effective enforcement mechanism. However, the stated vision and scope of the Discussion Paper overstates the overlap between pension regulation and other areas currently regulated by the OSC and FSCO, particularly with respect to defined benefit pension plans (DB).
The concept of “consumer and investor protection” is at the core of the stated rationale for the merger of the OSC and FSCO. Employer sponsored plans are essentially compensation arrangements between the sponsor and the participants, and do not constitute a financial service sector. In effect, the sponsor is the consumer of the services provided by the financial sectors. The participant is constrained to use only those investment funds selected by the sponsor for the particular plan. The sponsor is subject to all the fiduciary and governance obligations to provide full disclosure and/or to provide the facilities for full disclosure. As long as the participant remains in the plan, there is really no need to “level the playing field.”
In the pension context, the need for “consumer and investor protection” might be a concern with respect to DC where members direct invest. However, if a plan sponsor directs DC investments, members are protected by the sponsor’s general fiduciary duties, and it is unlikely plan members will run the risk of unfair, improper or fraudulent practices. This risk is reduced further when one considers that, unlike the promotion of other types of securities, employers do not establish DC plans for the purpose of direct financial gain from offering the investments.
Section 22 of the Ontario Pension Benefits Act (OPBA) places certain fiduciary duties on a plan administrator regarding the administration of the plan. These duties already impose a fiduciary obligation on plan sponsors to ensure that plan members have sufficient information to make informed decisions.
The focus in the Discussion Paper on the protection of the investor from “unfair, improper or fraudulent practices” also fails to recognize that the pension regulator has a much broader role. The pension regulator monitors pension plans to ensure:
•compliance with the minimum legislative standards in the OPBA;
•proper administration; and
•compliance with OPBA restrictions in funding and investing.
These functions will require a regulatory focus that differs from the investor protection philosophy in the Discussion Paper. The commonality of function and purpose which drives the Discussion Paper simply does not exist in relation to all of the functions of a pension regulator.
RULE-MAKING AUTHORITY
The government plans to give the OSFC rule-making power for the statutes it will be charged with administering and enforcing (similar to the authority given to the OSC). The regulator will have the authority to implement, amend or appeal regulations as necessary, while imposing checks and balances on the exercise of that authority in the face of a rapidly changing marketplace. The Discussion Paper further comments that unlike interpretative, non-binding policies used by regulators to help stakeholders, rules are binding and provide greater certainty in the regulatory environment.
The rule-making process the government would like to implement is described in detail, including a 90-day consultation period which mirrors current OSC rules. Once the Commission has adopted a rule after the notice and comment process, an amended copy would be sent to the Minister of Finance for consideration within a specified period (60 days under the OSC rule). If the Minister does not approve, reject or return the rule, it will become effective within a specified period (75 days under OSC, unless otherwise stated).
It is suggested that rule-making authority under the Pension Benefits Act include a number of administrative issues — registration, investment matters, filing deadlines and methods of calculating interest payable.
RATIONALE FOR RULE-MAKING
The rationale for rule-making by the OSC was contained in the 1994 Daniels Report. It recommends rule-making for the following reasons:
•cost and efficiency of cabinet review (i.e.: regulation-making can take one year or more);
•pace of development and change in capital markets;
•need to accommodate demand for new regulations; and
•recognition of the expertise of the OSC and staff.
It is questionable whether the pace of capital market change and demand for new regulations truly translates to the area of pension regulation.
There are certainly administrative powers under the OPBA that lend themselves to rule-making. For example, time periods for filing, registration requirements, rules regarding the records that must be kept by plan administrators, notices, and content of forms, by their nature do not affect the fundamentals of the pension system. For the sake of clarity and ease of regulation, they could be subject to rule-making.
There seems to be an inherent conflict in a proposed system where the regulator that will be administering the rules is the same body that is developing policy with respect to other key areas. Rule-making power should not be given to the OFSC with respect to the core pension issues that by their nature relate to a collective vision of how the pension system should be regulated.
Any change to the fundamentals of the system are important public policy decisions that should be debated openly and thoroughly, with the ultimate decision made not by the regulator, but by elected officials.
The government should retain the right to promulgate regulations and remain accountable for policy decisions with respect to:
•what is a pension plan?;
•preservation of pension assets;
•calculation of values and other related issues currently based on Canadian Institute of Actuaries guidelines and standards;
•surplus distribution;
•Pension Benefits Guarantee Funds (PBGF) and other protections for members; and
•unlocking of pension monies.
NEXT STEPS
Submissions by many pension stakeholders asked for a further consultation period of 60 to 90 days once the draft legislation is released. Clearly there are numerous issues that cannot be properly addressed until the actual internal governance structure of the OFSC is disclosed and can be analyzed to determine its impact on the pension industry.
However, if the initial brief consultation period is any indication, the ministry has a very aggressive timetable. It remains to be seen whether industry comments received will be reflected in the final product, or if further public input will be sought.
Sheryl Smolkin is a lawyer and director of Watson Wyatt Worldwide’s Canadian Research & Information Centre in Toronto. She can be reached at (416) 943-6082 or [email protected].
The analysis of provisions in the Discussion Paper in this article draws on separate submissions made to the Minister of Finance by Watson Wyatt Worldwide and the Canadian Bar Association Ontario Pension and Benefits Section.
The government intends to introduce legislation before the end of the year to create the Ontario Financial Services Commission (OFSC), a Crown corporation with self-funding and rule-making authority responsible for regulating financial services in the province.
In September, a Discussion Paper outlining the proposed regulatory framework was released for comments. It is interesting to evaluate the government’s goals for the planned merger and the proposed rule-making authority, as they specifically relate to pension plans.
CONTEXT FOR CHANGE
Historically, each of the four financial sector pillars — banks, insurers, trust companies and securities firms — provided different services, and were governed by different legislation. Ontario’s financial services regulatory framework, like that in other provinces, was created when the four pillars were separate and there was an assumption that the institutions and their regulatory issues were materially different.
With the elimination of most of the rules separating the four pillars, Canadian financial regulations allow competition among the different providers. The result is that many of the products and services offered to consumers by the insurance, deposit-taking and securities industry cut across traditional regulatory boundaries. Concerns are raised that the distinctions between these products may be difficult to perceive for consumer or investor.
The Discussion Paper specifically notes the increasing popularity of defined contribution pension plans (DC) which give pension plan members choices on how to invest their pension assets. Furthermore, it is suggested that this marks a departure from the traditional role of the plan administrator, which included sole fiduciary responsibility for investing the fund.
Given this trend, the government believes that there is a need for regulators to clarify the plan administrator’s fiduciary duties, and to enhance protection for members to ensure they can make informed decisions.
It is noted also that there is a mismatch between the regulatory structure and the marketplace that has resulted in duplication and overlap of regulations, different regulatory treatment of similar products and gaps in consumer protection. To remedy these problems, the goal is to create a single integrated financial services regulatory agency that will lead Canada in consumer and investment protection.
WHAT ABOUT PENSIONS?
With respect to pension matters, there may be some merit in combining the enforcement aspects of the OSC and FSCO, if the pooling of resources could lead to a more effective enforcement mechanism. However, the stated vision and scope of the Discussion Paper overstates the overlap between pension regulation and other areas currently regulated by the OSC and FSCO, particularly with respect to defined benefit pension plans (DB).
The concept of “consumer and investor protection” is at the core of the stated rationale for the merger of the OSC and FSCO. Employer sponsored plans are essentially compensation arrangements between the sponsor and the participants, and do not constitute a financial service sector. In effect, the sponsor is the consumer of the services provided by the financial sectors. The participant is constrained to use only those investment funds selected by the sponsor for the particular plan. The sponsor is subject to all the fiduciary and governance obligations to provide full disclosure and/or to provide the facilities for full disclosure. As long as the participant remains in the plan, there is really no need to “level the playing field.”
In the pension context, the need for “consumer and investor protection” might be a concern with respect to DC where members direct invest. However, if a plan sponsor directs DC investments, members are protected by the sponsor’s general fiduciary duties, and it is unlikely plan members will run the risk of unfair, improper or fraudulent practices. This risk is reduced further when one considers that, unlike the promotion of other types of securities, employers do not establish DC plans for the purpose of direct financial gain from offering the investments.
Section 22 of the Ontario Pension Benefits Act (OPBA) places certain fiduciary duties on a plan administrator regarding the administration of the plan. These duties already impose a fiduciary obligation on plan sponsors to ensure that plan members have sufficient information to make informed decisions.
The focus in the Discussion Paper on the protection of the investor from “unfair, improper or fraudulent practices” also fails to recognize that the pension regulator has a much broader role. The pension regulator monitors pension plans to ensure:
•compliance with the minimum legislative standards in the OPBA;
•proper administration; and
•compliance with OPBA restrictions in funding and investing.
These functions will require a regulatory focus that differs from the investor protection philosophy in the Discussion Paper. The commonality of function and purpose which drives the Discussion Paper simply does not exist in relation to all of the functions of a pension regulator.
RULE-MAKING AUTHORITY
The government plans to give the OSFC rule-making power for the statutes it will be charged with administering and enforcing (similar to the authority given to the OSC). The regulator will have the authority to implement, amend or appeal regulations as necessary, while imposing checks and balances on the exercise of that authority in the face of a rapidly changing marketplace. The Discussion Paper further comments that unlike interpretative, non-binding policies used by regulators to help stakeholders, rules are binding and provide greater certainty in the regulatory environment.
The rule-making process the government would like to implement is described in detail, including a 90-day consultation period which mirrors current OSC rules. Once the Commission has adopted a rule after the notice and comment process, an amended copy would be sent to the Minister of Finance for consideration within a specified period (60 days under the OSC rule). If the Minister does not approve, reject or return the rule, it will become effective within a specified period (75 days under OSC, unless otherwise stated).
It is suggested that rule-making authority under the Pension Benefits Act include a number of administrative issues — registration, investment matters, filing deadlines and methods of calculating interest payable.
RATIONALE FOR RULE-MAKING
The rationale for rule-making by the OSC was contained in the 1994 Daniels Report. It recommends rule-making for the following reasons:
•cost and efficiency of cabinet review (i.e.: regulation-making can take one year or more);
•pace of development and change in capital markets;
•need to accommodate demand for new regulations; and
•recognition of the expertise of the OSC and staff.
It is questionable whether the pace of capital market change and demand for new regulations truly translates to the area of pension regulation.
There are certainly administrative powers under the OPBA that lend themselves to rule-making. For example, time periods for filing, registration requirements, rules regarding the records that must be kept by plan administrators, notices, and content of forms, by their nature do not affect the fundamentals of the pension system. For the sake of clarity and ease of regulation, they could be subject to rule-making.
There seems to be an inherent conflict in a proposed system where the regulator that will be administering the rules is the same body that is developing policy with respect to other key areas. Rule-making power should not be given to the OFSC with respect to the core pension issues that by their nature relate to a collective vision of how the pension system should be regulated.
Any change to the fundamentals of the system are important public policy decisions that should be debated openly and thoroughly, with the ultimate decision made not by the regulator, but by elected officials.
The government should retain the right to promulgate regulations and remain accountable for policy decisions with respect to:
•what is a pension plan?;
•preservation of pension assets;
•calculation of values and other related issues currently based on Canadian Institute of Actuaries guidelines and standards;
•surplus distribution;
•Pension Benefits Guarantee Funds (PBGF) and other protections for members; and
•unlocking of pension monies.
NEXT STEPS
Submissions by many pension stakeholders asked for a further consultation period of 60 to 90 days once the draft legislation is released. Clearly there are numerous issues that cannot be properly addressed until the actual internal governance structure of the OFSC is disclosed and can be analyzed to determine its impact on the pension industry.
However, if the initial brief consultation period is any indication, the ministry has a very aggressive timetable. It remains to be seen whether industry comments received will be reflected in the final product, or if further public input will be sought.
Sheryl Smolkin is a lawyer and director of Watson Wyatt Worldwide’s Canadian Research & Information Centre in Toronto. She can be reached at (416) 943-6082 or [email protected].
The analysis of provisions in the Discussion Paper in this article draws on separate submissions made to the Minister of Finance by Watson Wyatt Worldwide and the Canadian Bar Association Ontario Pension and Benefits Section.
