Summary of Outcomes and Recommendations at the Conclusion of the Joint FSRA/OSFI Defined Contribution Pension Plans Committee

The Financial Services Regulatory Authority of Ontario (FSRA) and the Office of the Superintendent of Financial Institutions (OSFI) established the Technical Advisory Committee on Defined Contributions plans (the Committee). The Committee was established to review the approaches of both regulators to supervising Defined Contributions (DC) plans and where possible find opportunities for regulatory improvement and harmonization. Through this collaboration, FSRA and OSFI worked with the Committee towards improving outcomes for plan members. The Committee also focused on enhancing regulatory efficiency and effectiveness for DC plans.

The Committee met six times with the following outcomes and recommendations:

Pension and Non-Pension Capital Accumulation Plans

• The Committee was of the view that DC pension plans are a better vehicle to deliver good retirement outcomes relative to other employment-based group savings plans (e.g. group RRSPs, DPSPs, TFSAs). However, the Committee identified that non-pension group savings plans are often favoured by plan sponsors for a variety of reasons. In terms of retirement outcomes, the Committee was of the view that DC plans provide advantages including “locking-in” rules and more robust administrator and regulatory oversight - but place additional filing and oversight responsibilities on sponsors and administrators. This is often seen as a drawback and a reason for offering a non-pension savings vehicle.

Improve Regulatory Guidance for DC Plans

• The Committee identified a number of recommendations to improve outcomes of DC pension plans.
• The Committee proposed that these recommendations be presented to the Canadian Association of Pension Supervisory Authorities (CAPSA) to be considered in the review of the Guidelines for Capital Accumulation Plans (“CAP Guideline”) of the Joint Forum of Financial Market Regulators. In light of the wide acceptance of CAP Guidelines, the Committee recommended putting forward its recommendations to CAPSA as a way to reduce regulatory duplication and support harmonization across Canada. The recommendations are appended to this summary.
• Next steps include:
  • CAPSA’s continued work on the CAP Guideline with publishing targeted for July 2022.
  • Following this release, OSFI and FSRA will review the guidance and may reconvene the Committee to assess the merits of developing complementary guidance.

Promote Member Engagement

• A plain-language member-focused guide was developed with the Committee to support improved awareness and understanding of DC plans. The guide has been endorsed by CAPSA and is expected to be made available on CAPSA’s website. The guide will also be made available by OSFI and FSRA as well as by any industry participant or regulatory office that chooses to do so.
• The Committee strongly supported the need to provide retirement income projections to plan members. Such projections are considered an important tool to enable plan members to make well-informed financial and retirement planning decisions and to encourage members to augment their projected retirement income, if desired.

Explore Regulatory Efficiency and Effectiveness

• The Committee identified ways to improve regulatory efficiency and effectiveness for DC plan administrators through simplified regulatory filings and reduced data collection. To that end, FSRA and OSFI are conducting a review of regulatory filings and data collected. The review considers input received from the Committee and is being balanced with the need to supervise the sector and ensure that plans continue to be well administered and that plan members continue to be protected.

Decumulation

• The Committee recommended that FSRA and OSFI continue to explore and consider opportunities to support DC plan administrators in providing decumulation options to their plan members within the existing regulatory and legislative framework.

Additional Recommendations

• The Committee encouraged FSRA and OSFI to continue to evaluate other resources and tools (e.g. small business toolkit) to support administrators of small pension plans and employers who are considering sponsoring DC plans.
• Over the course of 2022, FSRA will review DC plan administration (and the use of life insurance companies and third-party service providers) to inform FSRA’s future supervision of DC plans including supervisory processes and tools.
• Similarly, OSFI will apply the insights gained through the Committee to further develop its Supervisory Framework for Federally Regulated Pension Plans.
• FSRA and OSFI intend to keep CAPSA informed of their work.

Working Towards Harmonization: Recommendations for Strengthening the CAP Guidelines from the Joint OSFI and FSRA Technical Advisory Committee for the Review of DC Pension Plans

October 7, 2021

The Technical Advisory Committee for the Review of Defined Contribution Plans (the “Committee”) is a collaboration between the Office of the Superintendent of Financial Institutions and the Financial Services Regulatory Authority of Ontario. The Committee is comprised of representatives from a cross section of the DC pension plan sector: plan administrators, unions, retirees, industry associations, advisors/consultants and insurance companies.

As part of its deliberations, the Committee arrived at the following recommendations for regulatory guidance to improve the outcomes of DC pension plans. In light of the wide acceptance of the Guidelines for Capital Accumulation Plans (the “CAP Guidelines”) of the Joint Forum of Financial Market Regulators, the Committee recommended putting forward its recommendations to the Canadian Association of Pension Supervisory Authorities (“CAPSA”) as a way to continue to support harmonization across Canada, improved regulatory efficiency and education of plan administrators/sponsors.

While this document reflects the overall view of the Committee, it may not in each instance reflect the view of a particular Committee member. Nonetheless, the recommendations reflect the practices and views of many leading plans and service providers, most of which have pan-Canadian scope.

Information about the Committee, including its members, summary of outcomes and meeting summaries, can be found on the websites of OSFI and FSRA.

Note: While these recommendations arose in the course of the Committee’s deliberations on DC pension plans, they may also benefit the operation of other CAP plans. Except as otherwise specified or unless the context requires otherwise, (i) the recommendations should be read as having general application to all forms of CAP plans, and (ii) the term “administrator” refers to the administrator of a DC pension plan (usually the employer) and the term “sponsor” refers to the entity (usually the employer) establishing a CAP plan other than a DC pension plan.

Recommendation #1 – Outcome-Focused Decision-Making

Recommendation

While the Guideline already includes guidance about defining the purpose of a CAP plan, it needs to go further in making this concept more resonant in plan governance activities.

• The Guideline should place additional emphasis on the importance of having a clear sense of purpose for decision-making.
• It is also critical for the Guideline to define purpose in terms of a plan’s intended outcome for members, taking into account the plan’s contribution formula. For DC plans, the Guideline should be clear that the primary purpose of the plan is to enable members to eventually receive lifetime retirement income from their savings, which is a more wholistic description of purpose than simply retirement savings as the Guideline currently states.^{Footnote 1}

Rationale

Having a clear understanding of purpose in terms of member outcomes, within the parameters of the plan’s contribution formula, provides a framework for making decisions and evaluating effectiveness. A focus on outcomes provides clarity for prioritizing decisions with the greatest impact on outcomes, e.g., (i) participation in a plan, (ii) early and greater contributions, and 3) appropriate investment selection. A focus on outcomes can highlight the benefits of automatic plan features, such as enrolment and escalation, and simplified investment decisions. Attention to outcomes can serve to differentiate the characteristics of different CAP plans and assist plan sponsors in choosing the CAP plan or combination of CAP plans most suitable for the intended member outcomes.^{Footnote 2}

For DC plans, defining purpose in terms of retirement income can shift focus from savings to income, e.g., to considering the kind of lifetime income that could be produced from savings or creating awareness about the kinds of savings needed to generate specific retirement incomes.

Recommendation #2 – Member Engagement as a Pillar of Success

Recommendation

While the Guideline should continue to be clear that members bear responsibility for making informed decisions, it should be updated to include additional guidance for addressing the challenges of enhancing member engagement.

• The Guideline could do this by including considerations for administrators/sponsors about how to better communicate information and engage members (e.g., leading communication techniques, the insights of behavioural economics and the benefit of on-going sponsor engagement with members).^{Footnote 3}
• Engagement activities should be geared toward the outcome intended by the plan. For plans with a retirement focus, the Guideline should encourage practices that help members understand their level of savings and likely income in retirement. Such practices include statement designs organized around clear, first-page content that projects potential income and shows members how to change course, if desired.

Rationale

By shifting focus to how information is provided, the Guideline can lead to more effective member engagement practices, which in turn can lead to better plan-member decisions and outcomes. In DC pension plans, the onus often rests on members to take a number of actions, both during and after employment, for the plan to deliver its intended outcome (e.g., whether to join the plan, how much to contribute^{Footnote 4}, investment selection and asset allocation over different life stages, reviewing retirement scenarios and income projections, and how to draw down savings in retirement). However, varying levels of financial literacy and interest, financial capacity to save and ability to access plan information, create challenges for members in engaging with their plans and making informed decisions ^Footnote 5. Assessing the need for and effectiveness of member engagement practices can often be difficult in practice but tying engagement practices to the intended outcomes is a way to start.

Recommendation #3 – Investments

Recommendation

The Guideline should provide more specific guidance into appropriate default fund selections and investment line-up design principles. 

• The Guideline should specify that short-term investments (e.g., money market) are typically inappropriate as the default investment option for members with a long-term investment horizon.
• Line-ups with fewer investment options for members are considered to lead to better member outcomes and more efficient governance reviews for administrators.

Rationale

Investment line-up practices have evolved since the CAP Guidelines were first introduced, including as result of innovations in fund design (e.g., target date/risk funds and other fund-of-fund designs). The default option can be suitable as the core, if not all, of a member’s investments, not just in the context of an absence of member choice. Considerations of investment complexity, behavioural economics and minimizing administrator governance burden favour designs anchored by the default investment option with a small number of additional options added to allow customization by members. The Guideline could serve to make administrators, sponsors and their advisors aware of the risks to their standard of care in providing too many options.

Recommendation #4 – Administrator/Sponsor Responsibility

Recommendation

The Guideline should make clear that administrators and sponsors of all CAPs are expected to adhere to common standards of governance and responsibility to plan members regardless of the regulatory regime applicable to the plan.

• The Guideline should also emphasize the continuing responsibility of administrators/sponsors for administering their CAP plans where responsibilities have been delegated.
• The Guideline can assist by providing administrators/sponsors with a practical, easy-to-use tool for carrying out their governance activities, such as a one-page governance checklist.^{Footnote 6}

Rationale

For non-pension CAP plans (RRSPs etc.), it is believed a degree of uncertainty exists in the broader CAP plan sector about the responsibilities and standards of care of sponsors in administering CAPs. This may contribute to a perception that non-pension CAPs are subject to significantly less onerous governance responsibilities and obligations – despite often having a similar structure and set of administrative decisions as DC pension plans. The same factors that inform the common law fiduciary duty within DC pension plan administration may similarly lead a court to find such a duty in non-pension CAP administration.^{Footnote 7} To support the continuous improvement and development of industry practices, the Guideline should explicitly set an expectation of common standards for all CAPs, regardless of the regulatory regime under which the plan operates.

While it is often advisable for plans to retain service providers, this practice can sometimes have the unintended consequence of disengaging administrators/sponsors from the administration of their plans. A practical, easy-to-use checklist can perform the work of distilling the CAP guidelines into best practices and efficiently focusing administrator/sponsor attention on the key activities and considerations for on-going plan governance.

Recommendation #5 – Value for Money

Recommendation

The Guideline should highlight the importance of aiming to achieve value for money when making administration and investment decisions.

• It should describe the different categories of fees (i.e., provide definitions of investment fund management fees and operating expenses, record keeping fees and advisor/broker/consultant fees) and identify questions administrators can ask to help them make informed decisions.
• It should indicate that administrators/sponsors need to consider the reasonableness of all member-borne fees (not just investment fees) and whether those fees achieve tangible benefits for members in terms of net return or services. It should encourage administrators/sponsors to adopt practices to determine whether the fees paid are reflective of a market rate (e.g., by going to market periodically).
• For communicating fee information to members, the Guideline should highlight the importance of describing in plain language both the services provided for the fees and the impact of fees^{Footnote 8} over the long-term on their savings and retirement income.

Rationale

CAP plans can assist members in achieving the intended retirement outcomes by pooling administrative and investment expenses; in this way, CAP plans can provide value relative to individual savings and investment vehicles. Low costs are important but so too are the services and investment strategies that can lead to better overall member outcomes given the unique characteristics and needs of each plan membership, which leads to a focus on value for money.

Administrators/sponsors, in meeting their standard of care, are in a position to ask questions to obtain the information needed for informed decision-making and understanding the tangible benefits to members of the fees paid. It is believed there exists among administrators and sponsors a relatively low level of awareness of the main categories of fees payable by plans.

Members have different information needs in that they are not selecting services and service providers as administrators/sponsors. While the current CAP Guidelines provide guidance on describing member-borne fees and expenses to members, the Guideline could emphasize the importance of clearly explaining this information so that members can understand the value of their plan. This information can be particularly relevant when comparing in-plan savings opportunities relative to other opportunities, such as can be the case if a plan offers decumulation options or the ability to transfer-in assets from outside the plan (e.g., additional voluntary contributions for a DC pension plan or combining other RRSP or TFSA savings).  Unnecessary detail when communicating to members, such as a breakdown of fees relative to different services, should however be avoided, consistent with the current CAP Guideline about the aggregation of fees.

Recommendation #6 – Decumulation

Recommendation

CAPSA should consider the outcomes of its decumulation committee and what guidance or action may be useful for plan administrators / sponsors to help support members in the decumulation phase. CAPSA should consider if sponsors and administrators would benefit from guidance on how decumulation options and practices should be communicated to members and / or encouraging in-plan decumulation options to be offered.

Rationale

The Committee was clear that effective decumulation options are critical to producing the intended outcomes of DC pension plans. In leaving their DC pension plan, many members are faced with making new kinds of investment choices for which they may not have any prior experience. Plans should consider the needs of members for making informed decisions as they enter the decumulation phase and begin to drawdown income. These needs include understanding longevity issues, such as sequencing risk,^{Footnote 9} and being informed of strategies for dealing with such issues. Member needs also include understanding the different investment options available, the importance of fees, and that fees can vary depending on the investment option and may be higher (and have more of an impact) on a retail basis than under their plan.