Changes to Canadian pension investment rules are coming into force, at the federal level and in Ontario and British Columbia. This bulletin addresses changes affecting plans with member-directed investment. For changes affecting pension plans generally, see our bulletin Changing Pension Investment Rules: Part I - DB Plans.
Member Choice Account
Changes to the federal rules introduce the concept of member choice accounts - where the member, former member or beneficiary is permitted to make investment choices. As of July 1, 2016, Schedule III to the federal Pension Benefits Standards Regulations, 1985 (Schedule III) will apply differently to member choice accounts than to pension plans generally.
Recall that Schedule III sets out restrictions on dealings with related parties and two quantitative limits: a maximum of 10% of plan assets may be invested in one entity or a group of related entities (10% limit) and a plan may not invest its monies in securities of a corporation that carry more than 30% of the votes to elect directors (30% limit).
10% Limit
The 10% limit will be applied separately to each member choice account, but it remains the duty of the plan administrator to ensure compliance. For all pension plans, the 10% limit will now be calculated for loans and investments combined, on the basis of market value rather than book value, as determined each time an investment is made.
For a member choice account, investment in an investment fund (as newly defined to replace the terms mutual fund and pooled fund) or segregated fund will not be subject to the 10% limit if that fund itself complies with the 30% limit, without that fund needing to itself comply with the 10% limit.
The other exemptions from the 10% limit, including the new exemption for a derivative based on a widely recognized index, also apply to member choice accounts.
An administrator could assure compliance of member choice accounts with the 10% limit by limiting investment options to those that are exempt from the 10% limit.
30% Limit
The 30% limit has been retained, but the federal government will undertake a public consultation on the usefulness of the rule. Although the 30% limit is not applied separately to each member choice account, for now it applies in determining whether an investment fund or segregated fund offered as an investment option is exempt from the 10% limit and the related party restrictions.
The administrator of a plan with member choice accounts is still expected to ensure that the plan does not exceed the 30% limit on an aggregate basis, including all direct investments and investments through funds. It may be difficult to monitor holdings of a particular corporation by all member choice accounts, depending on the offered investment options, though it seems unlikely that the accounts would in the aggregate exceed the 30% limit.
Related Party Restrictions
For all pension plans, loans to and the holding of investments in securities of a related party, as well as transactions with a related party, are prohibited unless an exemption applies. The definition of "related party" relates to the plan and not the particular member directing investment.
The exceptions to the related party restrictions are being revised. Member choice accounts will not be permitted to directly invest in securities of a related party, including any employer participating in the plan. A member choice account may invest in related parties through investment funds and segregated funds in which others outside the plan also invest, if each fund itself complies with the 30% limit. The fund need not itself comply with the 10% limit.
Unless another exception applies, existing direct investments in related parties must be eliminated by June 30, 2021.
Safe Harbour for Federally-Regulated Plans?
As of April 1, 2015, a form of safe harbour came into effect regarding member choice accounts for federally-regulated plans only. With respect to an account for which an investment choice is made by the member, former member or beneficiary (which may not include an account automatically invested in the default option), the administrator will be deemed to have met its statutory duty regarding investment of plan assets if investment options are offered with varying degrees of risk and expected return that would allow a reasonable and prudent person to create a portfolio of investments that is well adapted to their retirement needs. This may limit members from successfully making arguments based on the employer's general investment duties if they later regret their investment choices. However, an administrator must still comply with Schedule III.
Federal Elimination of SIPPs for Member Choice Accounts
As of April 1, 2015, a written statement of investment policies and procedures (SIPP) is no longer required for assets of a federally-regulated plan related to member choice accounts. Instead, effective July 1, 2016 a statement must be provided annually to each member regarding investment options, a member's holdings and any timing requirements regarding investment choices.
Ontario SIPPs for Member Choice Accounts
A SIPP is still required for an Ontario-regulated plan with member choice accounts. The Financial Services Commission of Ontario (FSCO) has published a draft Investment Guidance Note (IGN-003) regarding the expected content of the SIPP for such plans, which includes: the investment philosophy statement, permitted asset classes from which investment funds can be selected, the default investment option and why it is appropriate, the process for monitoring service providers, the process for selecting, monitoring and terminating investment managers and funds, guidance concerning plan expenses and investment fees, policies regarding related party transactions and guidelines for information to be provided on investment options. The final version of IGN-003, when it becomes available, should be reviewed before finalizing an updated SIPP.
For other Ontario changes regarding SIPPs that apply to all plans, see our bulletin Changing Pension Investment Rules: Part I - DB Plans.
New British Columbia Legislation
British Columbia's new Pension Benefits Standards Act and Pension Benefits Standards Regulation became effective September 30, 2015.
By December 31, 2015, the filed plan text for a defined contribution plan must indicate whether the member or the administrator or both are responsible for the direction of the plan's investments.
The required plan summary must, for member choice accounts, include a statement of how investment direction is to be provided, a description of the investment options available and an explanation of the default option. Members must be offered a sufficient number of investment options of varying degrees of risk and expected return that would allow a reasonable and prudent person to create a portfolio of investments that is appropriate for retirement savings. Unlike federally, this is an obligation, rather than a safe harbour.
By June 28, 2016, the default option for a member who fails to provide investment direction must be either a balanced fund or a portfolio of investments that takes into account the member's age.
