7.1 The Challenge of Regulating Occupational Pension Plans
Defined benefit (DB) pension plans present a particularly difficult regulatory challenge. Very large sums of money are involved; the stakes are high for Ontario employers, workers, retirees, investors, taxpayers and communities; and the pension promise — which is supposed to be calculated with precision — must somehow survive intact despite changes in life expectancy, corporate structures, career patterns, bond yields and equity returns. Not surprisingly, the legal regime governing pensions is very dense. And not only dense but complex: “pension law” comprises a somewhat ill-assorted mixture of common law doctrine and statutory rules; trust agreements and insurance contracts; professional standards and best practices; and elements of adjacent legal regimes governing taxation, insolvency, labour relations and intergovernmental relations. And not only dense and complex, but volatile as well: regulatory requirements are (or should be) adjusted frequently to take account of changing business conditions and financial markets, changing social facts and public policies, changing plan designs and funding approaches, and changing professional practices and regulatory technologies.
As a result, the substantive rules of the regulatory system are almost incomprehensible to anyone who is not an expert in the field — including most especially employers who must honour the pension promise and workers who are its beneficiaries. Pension plans, and their sponsors and beneficiaries, must therefore invest heavily in legal, actuarial, accounting, investment and other professional advice.
Finally, responsibility for the administration of “pension law” in the largest sense is widely distributed:
(1) within the Financial Services Commission of Ontario (FSCO) as between the Superintendent of Financial Services and the Financial Services Tribunal (FST); (2) between ordinary courts of civil jurisdiction and those that undertake judicial review or the administration of insolvency, tax and criminal law; and (3) among a miscellany of other forums including professional standard-setting and disciplinary bodies; ad hoc arbitrators and labour tribunals; and — in the ordinary course of business — plan trustees, administrators, advisors and service providers who generate and enforce a form of “soft law.” Pension disputes may therefore find their way — simultaneously or consecutively — into several different forums where decision-makers tend to interpret pension law in light of their own mandate and expertise. The results are sometimes unexpected, sometimes contradictory, and occasionally, I was told, disruptive of the whole pension system. To overcome such results, legislation and plan documents may have to be re-drafted, well-established practices revised, and new funding arrangements put in place — thus adding to the complexity and cost of the system.
It is no wonder, then, that so many briefs submitted to the Commission complained of the complexity of pension law, of its unpredictable character, of the costs and delays associated with attempts to vindicate the legal rights of sponsors or beneficiaries, and of the inefficiency and ineffectiveness of much of the regulatory apparatus. Each of those matters is addressed in this chapter.
7.2 Establishing Norms of Pension Regulation
As suggested in Chapter One, an important principle informing the work of this Commission is the need to “coordinate pension policy with other policy domains and legal–regulatory regimes.” This involves three aspects. The first is to ensure that elements of federal tax and insolvency law that bear on pension provision, entitlement, administration and security make sense in terms of Ontario’s pension policy. In Chapters Four, Six and Ten, I make several recommendations to this end. The second is to secure greater convergence or harmonization among provincial pension regimes in order to minimize the paper burden for plans that operate across provincial boundaries. This is also the subject of a recommendation in Chapter Ten.
The third — dealt with next — is to better integrate provincial statutes with the principles and doctrines of common law and equity. Some briefs and submissions argued for the abolition or extension of “trust law” and for the primacy or suppression of “contract law;” others proposed codification of all pension law within an expanded Pension Benefits Act (PBA); and still others proposed that the PBA itself should become less an impenetrable collection of detailed rules and more a statement of general principles — supplemented by policy statements and, where deemed necessary, by binding regulations or rules.
7.2.2 Trust law and contract law
Many proposals either to “abolish” trust and contract law, or to extend their reach, were designed to change specific aspects of pension law that are presently or potentially grounded in trust or contract doctrine. The changes sought relate to such matters as the ownership of surplus on partial wind-ups, the imposition of fiduciary duties and the unilateral right of sponsors to alter the terms of a plan. I believe that it is preferable to treat such matters on their own merits, rather than as part of a general project to consolidate and simplify the law — and have done so elsewhere in this report.
7.2.3 Codification of pension law
There is much to be said for codifying pension law so that the PBA (and rules or regulations made pursuant to it) becomes the single, authoritative source of all substantive and procedural rules governing the field. First, this would ensure that disputes are resolved in a manner consistent with the logic of pension regulation, rather than with the logic of general legal doctrines, which originate in and encompass very different domains of social and economic conflict. Second, the rules can be framed in language that is familiar to people who deal with pension issues. And third, if carefully drafted, statutory provisions can reduce or eliminate ambiguities that generate expensive litigation and unexpected outcomes, which, as I have noted, may destabilize the pension system.
This last point requires explanation. It is unlikely that even the most carefully drafted statute can capture all contingencies, or that even the most comprehensive scheme of regulation will deter judges from dealing with pension-related issues that arise in other contexts such as, say, a dispute over the distribution of matrimonial property, the interpretation of a collective agreement or a challenge to the jurisdiction of the pension regulator. Nonetheless, a well-drafted and comprehensive PBA can do much to reduce the risks of inappropriate interpretations and the importation of doctrines and concepts from other fields of law into pension law. So, too, can a well-designed regulatory structure that consciously seeks to minimize, if not entirely eliminate, the role of the courts — a challenge addressed in sections 7.3 through 7.5 of this chapter. On the one hand, it is important to reduce incentives for interested parties to seek relief outside the regulatory structure laid down in the legislation; on the other, it is desirable to increase incentives for legislators to address pension issues in a comprehensive, integrated and timely fashion by appropriate amendments to the governing legislation. Indeed, all these are elements of one of the guiding principles of this report identified in Chapter One: to strive for clear, comprehensive, consistent and — where possible — codified regulation.
Recommendation 7-1 — So far as possible, substantive rules intended to define the rights and responsibilities of participants in the pension system should be set out in the Pension Benefits Act or rules and regulations made pursuant to it. If feasible as a matter of statutory drafting, the Act should convey the intention of the legislature that the Act should be treated as the exclusive source of pension law.
As I have noted in Chapter Four, the Act was originally designed to regulate DB single-employer plans (SEPPs). As a result, SEPPs represent the paradigm or model from which departures are allowed only by way of specific exceptions. Such exceptions are indeed provided — in the Act or in regulations — for multi-employer (MEPP), jointly sponsored (JSPP) or defined contribution (DC) plans. However, neither a single part of the Act, nor a single section, nor even a specific regulation, deals comprehensively with one or more of these “exceptional” plans. This seems both odd and undesirable: odd because only some 27% of all active plan members are presently enrolled in DB SEPPs; undesirable because future growth in pension coverage will almost certainly occur in “exceptional” non-SEPP plans.
A recurring theme of submissions to the Commission has been that “one size does not fit all.” Clearly, different plan types — those already prominent, and others likely to be introduced in the future — should be acknowledged and accommodated within the regulatory scheme not as “exceptions,” but as plans with distinctive characteristics presenting unique regulatory challenges.
Recommendation 7-2 — As a medium-term project, the PBA and regulations should be re-drafted so as to clearly articulate both (a) general principles applicable to all types of pension plans, and (b) comprehensive codes applicable to specific plan types.
7.2.4 Rules and principles in pension regulation
Recommendation 7-2 implies that principles, as well as rules, have a role to play in pension legislation. Indeed, several stakeholders argued in favour of a “principles-based” approach to regulation, such as that recently adopted by the U.K. Pension Regulator. Moreover, there has been considerable interest recently in principles-based regulation as part of a larger, long-term trend toward deregulation and self-regulation in various domains of social and economic activity. However, although elements of this approach appear in the guidelines for plan governance and capital accumulation developed by the Canadian Association of Pension Supervisory Authorities (CAPSA), it has not yet been comprehensively studied or extensively applied in the pension field in Canada. Consequently, it may be useful to rehearse its key aspects in a little more detail.
Principles-based regulation typically involves the articulation of standards at a fairly high level of generality or abstraction. For example, the fiduciary duty imposed on administrators of pension plans to “exercise the care, due diligence and skill in the administration and investment of a pension fund that a person of ordinary prudence would in dealing with the property of another person” is an example of such a principle. This approach to the framing of regulatory norms requires regulators to focus on the quality of outcomes rather than on compliance with specific procedural requirements. And it requires sponsors, service providers and plan administrators to accept greater responsibility for the substantive judgments they make concerning compliance with the law. Proponents of a principles-based approach argue that open-textured statutory language can better deal with the changing circumstances mentioned in the introduction to this chapter, and can promote an approach by all actors that contributes to the overall health of the regulated field.
Rules-based regulation is often advanced as the alternative to a principles-based approach. Whereas principles-based regulation implies a compendium of broad principles from which may be deduced specific answers to any questions that arise in the course of plan administration, rules-based regulation implies the existence of an exhaustive code of clear and detailed rules with which every plan must comply. A principles-based approach, critics argue, can leave too much scope for regulatees to interpret the law in ways that suit them, does not provide them with sufficient guidance concerning funding obligations and benefit entitlements, and is not well-suited to the making of decisions that may have consequences far into the future when the regulatee may not be available to be held accountable.
Proponents of principles-based regulation counter that a rules-based approach can be excessively formal and inflexible — especially in areas in which the underlying industry changes rapidly — and that it permits regulatees to comply with the detailed letter of the law while skilfully avoiding its spirit and intent. In such circumstances, they note, regulators often find ways — imaginative interpretations, procedural improvisations or the establishment of materiality thresholds — to make rules behave more flexibly, like principles. They also point out that principles-based regimes are frequently — perhaps inevitably — supplemented by policy statements, advisory bulletins and other forms of regulatory “guidance,” which may or may not have the force of law, but which if ignored by regulatees, are likely to result in adverse consequences. Principles, in other words, can be made to behave like rules.
Clearly, then, as Mary Condon’s research conducted for the Commission shows, there are advantages and disadvantages to both approaches. Clearly, too, principles- and rules-based approaches can be blended to some degree — as proposed in Chapter Four in regard to the funding rules, and in Chapter Eight in regard to the governance and administration of plans.
Finally, the precise balance struck between rules and principles will heavily influence the optimal design, powers and staffing requirements of the pension regulator. Whatever balance is struck, it should be one that facilitates a guiding principle of this report: that of open, fair, effective and adaptable regulation.
Recommendation 7-3 — Revisions to the Pension Benefits Act should be drafted to provide both rules-based and principles-based approaches, as appropriate. In particular, minimum standards with respect to benefits should generally be rules-based; some aspects of investment, plan governance and innovation are more appropriately regulated by a principles-based approach; and funding requirements should likely involve a mixture of the two.
7.2.5 The role of professional standards in pension regulation
The PBA and its supporting regulations do not provide a comprehensive framework governing all conduct relevant to the administration of the pension system. They are supplemented to a considerable extent by detailed, technical rules promulgated by professional governing bodies — especially the Canadian Institute of Actuaries (CIA) — that prescribe how professional functions within their special area of competence must be performed. The means of performing a pension valuation is an important example of how professional standards fill a gap in the regulatory norms of the pension system.
However, it is important that public regulatory bodies not simply abdicate their responsibilities to professional bodies. In Chapter Four, I recommend that assumptions underlying actuarial valuations be made more precise, consistent and transparent. This could be accomplished either by amending the statute and regulations, or by the CIA undertaking a revision of its existing standards, which, I understand, they are in fact doing. The latter is clearly the preferable approach, but it leaves open the question of how to ensure that the CIA’s revisions in fact produced the desired result.
Recommendation 7-4 — The government should accept ultimate responsibility for ensuring that all standards governing the conduct of professional and other participants in the pension system are appropriate and in the public interest.
The Pension Benefits Act and regulations should make clear provision for the adoption by reference of standards established by professional governing bodies such as the Canadian Institute of Actuaries. In addition, the pension regulator should work closely with professional governing bodies to ensure that the standards they establish, amend and apply to their own members from time to time are consistent with Ontario’s pension law and policy. To the extent that they are not, they should be replaced with more appropriate standards laid down in the Act or by regulation.
This recommendation should lead to greater engagement between the regulator and professional bodies, with a view to determining the appropriate standards to be applied to major aspects of risk-based assessment and other regulatory mechanics. The constructive participation of stakeholders in this process should be assured, as well — as I recommend in Chapter Ten.
Various recommendations in this and other chapters — for more transparent decision-making, more careful risk management and more widespread self-governance — are likely to lead to increased reliance by plans on the pension professionals who provide them with actuarial, legal or accounting services. It will therefore become increasingly important to ensure that high standards of professional conduct are enforced. Enforcement may take the form of professional discipline proceedings, as at present. However, because professional standards are adopted by reference in the regulations, they acquire the force of law. Failure to observe them will then expose wrongdoers to regulatory sanctions under the PBA and, in some cases, to prosecution under the Provincial Offences Act. Hopefully, vigilant enforcement of standards by professional bodies — the CIA, the Law Society of Upper Canada or the Canadian Institute of Chartered Accountants — will suffice; but prior or subsequent administrative or criminal sanctions are not legally precluded by professional disciplinary proceedings. This issue is dealt with in greater detail in Chapter Eight.
7.2.6 Facilitating regulation for small plans
A frequent observation of stakeholders, confirmed by our research, was that small- and medium-sized enterprises (SMEs) are less likely than larger ones to have a pension plan, and that even fewer have a DB plan. While some SMEs are unable to afford to fund a pension plan, many — likely most — also lack the technical capacity to establish it and the in-house personnel to administer it in compliance with regulatory requirements. Given that one of the guiding principles of this report is to create a positive environment for DB plans within a voluntary system, these are issues that must be addressed.
In order to encourage SME sponsorship of pension plans, the PBA should provide an easy-to-use plain-language template that can be employed to initiate a pension plan with minimal legal or actuarial advice. Such templates are employed in connection with pension plans in other jurisdictions and, in Ontario, in other non-pension contexts, including “short forms” of various instruments used to transfer real property. In addition, some pension regimes provide for simplified registration procedures, valuations and annual filings for plans under a certain size. These would all be important ways of assisting SMEs that wish to provide pension coverage for their workers, and thus of promoting the expansion of pension coverage in a sector where it has considerable room to grow.
Recommendation 7-5 — Legislation should provide standard-form or template plans, particularly for the use of small- and medium-sized enterprises, and the regulator should develop simplified registration and filing requirements for such plans.
Template plans and simplified procedures will obviously not transform pension coverage among SMEs in and of themselves. However, they can at the very least remove some barriers to participation in the DB system for SMEs that wish to do so. No less important will be the measures, outlined in Chapter Nine, to facilitate the provision of investment and service packages to smaller plans, as well as other innovations that, I hope, will appeal especially to SMEs.
In addition to facilitating SME pension plans, there is a case to be made for minimizing the regulatory requirements for, and oversight of, “designated plans” or “individual pension plans.” These very small plans, established under special provisions of the Income Tax Act (ITA), are for the benefit of senior executives who, unlike most plan members, are typically able to protect their own interests and therefore do not require a high level of regulatory protection.
Recommendation 7-6 — Simplified registration and filing requirements should be adopted for designated or individual pension plans for senior executives. In addition, a protocol should be developed to identify a minimum membership threshold for plans below which the regulator should react to complaints, but not provide its normal level of regulatory oversight.
7.3 Functions of the Pension Regulator
FSCO — like its counterparts elsewhere — administers its statute and regulates the pension sector by maintaining various forms of oversight: passive (monitoring routine filings), active (providing approvals, issuing advisories and rulings), proactive (conducting audits and investigations), and reactive (responding to information or complaints from active and retired members, creditors or service providers).
All of these activities are valuable in themselves. Moreover, they offer a unique opportunity for the regulator to accumulate detailed information about the pension system as a whole, and about its constituent elements identified by plan type, risk exposure, employment sector or other characteristics. Elsewhere in this chapter, and in other chapters, I have underlined the need to collect and analyse systemic data as a foundation for the policy architecture of the system. In the present context, however, I note that extensive data collection and analysis will also enable the regulator to develop more reliable benchmarks by which to evaluate the performance of individual plans, often by means of algorithms that identify problem plans — a key feature of principles- and risk-based systems. The availability of such data also enables the regulator to evaluate its own work, make necessary changes in its procedures and practices, deploy its available resources where they are most needed, and make a persuasive case for new powers and personnel.
Further, in addition to its oversight functions, a pension regulator may be called on to defend the integrity of the pension system, whether through civil, criminal or administrative proceedings. Where administrative proceedings are mandated, as in Ontario, the regulator must establish and maintain fair and efficient dispute-resolving and decision-making processes with a capacity to deliver “graduated responses” appropriate to problems of differing urgency and intensity.
Finally, the regulator must constantly engage with stakeholders, mediate their conflicts and, on occasion, advocate on behalf of those whose interests are adversely affected but who lack the means to protect themselves. These functions imply that the regulator ought to commit significant resources to communicating to stakeholders and government concerning its work and general conditions that may affect the health of the pension sector.
This section of Chapter Seven is organized around a description and analysis of the four types of oversight listed above.
7.3.2 Passive oversight: monitoring periodic filings and compiling data
One of the most basic functions of the regulator is to ensure compliance with the PBA by monitoring reports filed by pension plan administrators. FSCO receives about 19,000 filings per year, including standard annual or triennial actuarial reports; annual information returns (AIRs); annual investment information summaries (IISs); summaries of contributions; cost certificates for the Pension Benefits Guarantee Fund (PBGF); and a miscellany of filings dealing with individual member or plan concerns, notices or applications in relation to plan amendments and other transactions.
AIRs record the plan’s basic characteristics and administrative information, including membership and financial data, information concerning the presence (if any) of a collective bargaining agent representing active plan members, the identity of custodial trustees, and other “tombstone” data that forms part of the profile of a pension plan once it has been registered. FSCO maintains data derived from AIRs in a consolidated database.
I described actuarial valuations in some detail in Chapter Four. When submitted to FSCO in the normal course of reporting, valuations are accompanied by a standard-form Actuarial Information Summary (AIS), which displays information about the assets, liabilities and funded status of the plan. A database built from AIS submissions is FSCO’s main tool for its risk-based assessment of plans.
The IISs — a recent innovation — contain somewhat more detailed information about plan assets. They are therefore essential to FSCO’s attempts to implement a risk-based approach to regulation. However, IISs presently provide a narrower range of data than they might. As risk-based regulation grows, also to likely increase is the importance and length of IISs and other required filings.
Sponsor contributions to a plan are normally remitted on a monthly basis to the plan administrator, and by the administrator to a custodial trustee such as a trust company. If contributions are not received, the custodial trustee must report this fact promptly; otherwise, contributions are simply reported annually to FSCO. Similarly, the PBGF cost certificate records receipt of the annual premium that the plan must pay to the PBGF. Non-payment of contributions or PBGF premiums is often a sign that the plan or the sponsor is in difficulty. Notice of non-payment should be required within a short period and the regulator should react promptly to any default. However, it is not clear to me that the present system contains a “red alert” function.
Certain filings — including the AIR and IIS — are performed electronically and monitored by FSCO in support of its risk-based analysis. Others are reviewed perfunctorily for timeliness. Still others — as FSCO frankly acknowledges — are filed without any review or response. Sponsors may not know whether their filings have been received, reviewed or “approved,” or whether they are deficient. This is not a desirable state of affairs. Standard filings are the main instrument for monitoring compliance. They should be reviewed and approved — or challenged — within reasonable periods of time, and sponsors should know that they will be.
Because FSCO does not collect all information it might use, review consistently and analyse in timely fashion all filings it does receive, or receive all filings in electronic form, it cannot make full use of the data it does collect. Reasons for this situation include a lack of capacity and resources, and too exclusive focus on immediate and critical plan-specific issues rather than on broader compliance patterns and their implications for regulatory re-engineering. As a result, during the current period of rapid economic change, FSCO has been effectively reduced to attempting to maintain “bare compliance” with the PBA by individual plans. It certainly cannot operate a sophisticated and effective risk-based system with its current limited capacities. Nor can it — as presently constituted and resourced — support effective implementation of many of the recommendations contained in this report.
Recommendation 7-7 — The pension regulator should develop filing requirements, processes and review procedures that enable it to better discharge its compliance, risk-assessment and data-gathering mandate. It should develop an electronic system for the timely review of filings and for the development of useful interrelated databases and reports.
Finally, filings should also be designed with a view not only to monitoring compliance by individual plans, but to aggregating data for other purposes — especially to support policy research and development. FSCO presently conducts some policy analysis with a focus on its own regulatory activities. It also participates in initiatives of CAPSA — the national association of pension regulators — which has developed model laws and reciprocal agreements dealing especially with plan governance and funding provisions. This is useful and necessary work. However, detailed policy development for Ontario-specific issues is lacking. For example, FSCO has undertaken no significant analysis of labour market developments — the principal source of changes in pension coverage. Nor could it easily do so: it has only one full-time staff member with significant experience in data collection and related economic and social policy analysis. But someone must. I return to this issue in Chapter Ten, but stress again that regulatory enhancements and fundamental policy development both draw sustenance from the same data source: filings with FSCO.
7.3.3 Active oversight: reviewing and approving transactions
One of the regulator’s primary functions is reviewing and approving major pension plan transactions, such as splits, mergers and conversions, all of which are dealt with in Chapter Five. As noted in that chapter, FSCO has had great difficulty in processing these approvals in a timely fashion, both because of delays attributable to complexities or ambiguities in the law and because the Notice of Proposal (NOP) approvals procedure mandated by the PBA is awkward. However, I am optimistic that changes I have recommended will improve the situation by providing greater legal clarity and more appropriate procedures.
If these recommendations are adopted, the NOP procedures will no longer apply to major plan transactions. Nor, if the next recommendation is implemented, would they apply to action taken by the Superintendent in her or his general oversight of plan administration.
Recommendation 7-8 — The present Notice of Proposal procedures should be repealed.
Applications seeking approval for major plan transactions should be dealt with in accordance with Recommendations 5-17 to 5-22.
Applications involving routine processing of other matters should be dealt with on the basis of a file review by the Superintendent. Other, more important matters should be dealt with pursuant to the procedures proposed in Recommendation 7-15.
The Superintendent should have power to approve, disapprove or issue directives concerning the matter at hand. Decisions of the Superintendent should be subject to appeal to and enforceable by the proposed Pension Tribunal of Ontario.
These expedited procedures should ensure that parties to a concluded transaction receive a more rapid determination of its legality. However, they do nothing to assist sponsors in assessing possible objections to future transactions. It is important to provide some kind of advance indication of the likely regulatory reaction to possible or pending transactions for two reasons. First, this might assist sponsors in structuring transactions from the outset so that they meet regulatory requirements. Second, it might save other parties affected by the transaction the time and expense associated with participation in the approvals process and subsequent appeals.
At present, FSCO sometimes provides feedback by discussing prospective transactions informally with the parties. FSCO also issues policy statements from time to time for the guidance of future applicants and, presumably, other interested parties. In addition, the Superintendent occasionally provides opinion letters about such transactions prior to their consummation, although this is done ad hoc with no clear supporting procedures in the PBA or regulations. And finally, some regulatory bodies (but not FSCO) issue advance rulings that are binding in a practical, if not technical legal, sense.
It would be useful to clarify and regularize these four somewhat different procedures. The first — informal discussion — is somewhat problematic. It is not transparent and it cannot, in the nature of an informal discussion, involve careful consideration. However, it is obviously “without prejudice” and neither binds nor predisposes the regulator; it contemplates full and fair ventilation of the issues at a subsequent hearing; and it allows the regulator to be helpful to a key client constituency. Still, informal discussions should be approached with caution on both sides. The second — issuing policy statements — is the most straightforward. It has a number of positive features: it allows time for careful consideration by the regulator; it does not involve prejudgment of any particular transaction; and it is transparent. FSCO should issue such statements more frequently, systematically and following consultation with stakeholders.
Recommendation 7-9 — The pension regulator should issue policy statements indicating how it views and intends to process all standard pension transactions. Before doing so, it should give notice of its intention to issue such statements, and provide stakeholders with an opportunity to submit comments. After doing so, while not bound by such statements, the regulator should depart from them only for good reason and, preferably, by way of an amending statement rather than in the context of a particular proceeding.
The third and fourth options — the provision of opinion letters, and advance rulings — pose the greatest difficulty. Opinion letters indicate prejudgment of the issues; they are usually given to a prospective applicant ex parte so that other affected parties do not have a chance to register their views; and such letters require full and frank disclosure of the facts by the applicant, who may be unwilling or unable to make such disclosure at an early stage in the transaction. For these reasons, no doubt, opinion letters are not usually considered binding. Advance rulings, by contrast, are usually made after all affected parties are afforded an opportunity to provide their views and, though prima facie binding, can presumably be set aside if disclosure or other requirements have not been met.
Opinion letters and advance rulings have proved useful in other regulatory contexts; with proper safeguards, they should be available in the pension field as well. Advance rulings may facilitate decision-making by the sponsor, the administrator or third parties, provide some degree of comfort concerning complicated major transactions that affect both the plan and the sponsor, engage members and other stakeholders in decision-making before rather than after the fact, and potentially reduce the incidence of non-compliance and the unnecessary use of regulatory resources. They would certainly help to reduce the serious delays that presently compromise the approvals process.
Recommendation 7-10 — The pension regulator should have power to provide opinion letters and advance rulings in connection with proposed or pending transactions. The regulator should feel free to disregard such letters or rulings in subsequent proceedings if the applicant has not made full disclosure of relevant facts; if they adversely affect other parties who have not had a prior opportunity to be heard; or if they contravene legal rules or regulatory policies that were not in force when the letter or ruling was issued.
7.3.4 Proactive oversight: monitoring, audits and investigations
A third important function of the regulator is proactive monitoring of pension plans. Currently, FSCO has no clearly defined policy of conducting random audits, field visits or other proactive monitoring activities as does, for example, the federal pension regulator, the Office of the Superintendent of Financial Institutions (OSFI).
Either on its own initiative or in response to complaints, FSCO has conducted some reviews of plans and sectors it deems at risk. However, these reviews, and the ensuing investigations, are regarded as having yielded relatively little regulatory impact. For example, FSCO recently completed a review of all MEPPs in the province, singling out two for special attention because they had been the subject of member complaints. This review — which consumed significant staff resources and occasioned some disruption of ongoing regulatory functions — resulted in charges being brought against only one plan.
The success of a proactive strategy cannot, of course, be measured only by the number of charges it generates. It may have other potential benefits, including the generation of systemic information (which FSCO is not presently able to use to full advantage) and deterrence of non-compliant plans, which will not wish to be caught in some future proactive initiative (effects that are impossible to measure). However, at the very least, FSCO’s recent experience suggests the need to develop a more sophisticated approach to proactive oversight, and the development of benchmarks with which to identify potential targets and evaluate the utility of this approach. For example, the failure of a number of plans in the manufacturing sector after 2000 might have led FSCO to develop a profile of plans deserving special attention by way of “field visits” or unscheduled “spot” audits. Similar proactive measures might help to pre-empt or mitigate failures in the event of a comparable sectoral crisis in the future. Indeed, such measures are virtually indispensable, especially in regulatory domains where a risk-based strategy is being pursued.
The following recommendation is designed to take the regulator much farther down the path to proactive oversight than at present.
Recommendation 7-11 — The regulator should:
- develop a program of proactive monitoring, auditing, inspections and investigations directed especially at plans whose profiles, sponsors’ profiles or sectoral location suggest that they may be at risk of failure or of significant under-funding;
- expand and update its existing systems for monitoring risks, ensure that these systems are designed and administered by expert staff, and supplement them with other strategies for detecting plans at risk; and
- be empowered to undertake remedial measures based on the results of its proactive monitoring.
7.3.5 Reactive oversight: responding to inquiries and complaints
Like all successful regulators, FSCO engages in reactive oversight: it responds to inquiries and complaints.
Inquiries to FSCO by active and retired plan members and other stakeholders appear to be rising rapidly — from about 650 in 2002 to 1,000 in 2007 — perhaps due to changing economic conditions. If so, inquiries will continue to consume an increasing proportion of regulatory resources. FSCO’s standard response is to advise those with queries or complaints to first approach their plan administrator and, if no satisfaction is obtained, to return to FSCO and initiate a written inquiry or complaint. About 80% of initial inquiries are “resolved” in this way, although there is no way of knowing whether the member received satisfaction or merely became discouraged and abandoned his or her inquiry. About 20% of these inquiries result in some action by FSCO, ranging from corresponding with the plan administrator to an order by the Superintendent requiring remedial action to — very rarely — prosecution.
Unfortunately, FSCO’s analysis of inquiries and complaints leaves much to be desired. It has not analysed the increase in inquiries or complaints; it does not provide a detailed breakdown of types of inquiry or rank them by degrees of seriousness; it does not define “resolution” or track outcomes or complainant satisfaction with outcomes. However, FSCO does have an internal system for encouraging informal resolution of complaints by members against sponsors and administrators, and does intervene if resolution is not achieved. Perhaps this system is operating well; perhaps it is not. In the former case, FSCO ought to be able to claim credit; in the latter, it ought to be able to correct shortcomings; but it can do neither because it does not have adequate information about the operation of its own system.
Recommendation 7-12 — The regulator should develop a set of internal controls to better understand the provenance, track the processing and evaluate the outcome of inquiries and complaints; use the results of this process to improve its performance; and communicate those results to stakeholders.
7.3.6 Facilitating access to the regulatory process by active and retired members
During the Commission’s hearings I received a number of representations to the effect that FSCO was not vigilant in protecting the interests of active and retired members; that it was not responsive to their inquiries, that it declined to provide information to which people felt they were entitled or that it made information available only through an expensive or awkward process; and in general, that FSCO was not “member- or retiree-friendly.” I am in no position to judge how fair or otherwise are these characterizations of FSCO, and I acknowledge that many of them may have come from individuals who had been hurt by plan failures for which FSCO was not ultimately responsible. However, any organization ought to be concerned if a significant number of its “clients” — those in whose interests it is meant to be acting — regard it in such a negative light.
This is especially true in the field of pensions, which, like the process that regulates them, is difficult to understand. These two difficulties — a complex subject and an opaque process — make it all the more necessary that the regulator devote greater attention to improving service to active and retired members. Other regulatory bodies develop strategies (information pamphlets, DVDs, on-line information) and employ personnel (complaints officer, ombudsperson or client advocate) to ensure that clients are, and perceive themselves to be, well served. The pension regulator ought to do likewise.
Recommendation 7-13 — The regulator should appoint a Complaints Officer with a mandate and supporting staff to assist complainants and persons making inquiries to secure the information they seek and the recourse to which they are entitled; to ensure the timely and responsive processing of inquiries and complaints; and to advocate on behalf of complainants within the regulatory process, where appropriate.
Another approach to the problem of enhancing access to the process for active and retired members is to facilitate advocacy on their behalf by unions or other representative organizations. Such groups often have trained pension staff or experienced pension volunteers who can provide advice to their members and appear as effective advocates on their behalf. Some have sufficient resources to hire lawyers or other pension professionals when required. Nonetheless, for almost all such groups — especially those organized ad hoc in response to a crisis in their pension plan — funding is a problem.
Reference to representative organizations raises another difficulty. A significant majority of plan members are represented by unions. However, some are not. Where there is no union, an effective union-substitute — such as a university faculty association or a retirees association — may exist. Or employees may form an ad hoc association to deal with the consequences of their employer’s insolvency and the associated failure of their pension plan. In such cases, the union is legally entitled to speak for all members of the bargaining unit (but not retirees) and a representative organization other than a union may represent their members (but not non-members). Furthermore, in some cases, individuals who might otherwise seek to be represented by their union are in fact in conflict with it — as, for example, when members feel that a union-dominated board of trustees is acting improperly. Thus there will always be ambiguous cases where the right of the representative organization to appear on behalf of particular individuals is called into question, or where individuals will wish to have separate representation.
Recommendation 7-14 — The Pension Benefits Act should clearly establish the right of unions and other representative organizations to participate in regulatory proceedings on behalf of individuals whom they represent, and of individuals to represent themselves. The Pension Tribunal of Ontario should be given discretion to order the sponsor or the plan to reimburse all legal and other costs necessarily incurred in the course of such participation in appropriate cases when claims or complaints are meritorious.
7.3.7 Securing compliance: administrative, civil and criminal sanctions
Most sponsors, pension professionals, trustees and service providers are knowledgeable, conscientious and law-abiding. However, this does not ensure that they are always in compliance with all of the regulatory requirements in the PBA. Some non-compliant conduct may result from inadvertence, some from misunderstanding of what the statute requires, some from ambiguities inherent in the roles assigned to various actors, and some — a very few — from deliberate decisions to break the law. Moreover, non-compliance ranges in seriousness from what might be called technical misdemeanours (such as late filing of a report), to clearly criminal conduct (such as falsification of information with intent to deceive).
To bring compliance as near to 100% as can be achieved, the regulator ought to have a number of strategies at its disposal. Disseminating information, dispelling misunderstandings, resolving ambiguities, developing open and cooperative relationships, providing positive incentives for willing compliance and forgiveness for innocent and minor transgressions are — and should be — part of any regulator’s repertoire. Nonetheless, significant and intentional violations will occur and must be dealt with.
The PBA gives the Superintendent three broad powers to secure compliance. The Superintendent may refuse to register a plan or a plan amendment, or revoke the registration of a plan that is not in compliance with the PBA. The Superintendent also has seemingly open-ended — but apparently untested — power to “require an administrator or any other person to take or refrain from taking any action in respect of a pension plan or a pension fund” not in compliance with the PBA. And the Superintendent may prosecute anyone for violating the Act, and ask the convicting court not only to impose a significant fine but also to order the sponsor — and its officers and directors personally — to pay monies owing to the plan. In addition, the administrator of any plan (but not, for some reason, the Superintendent) may sue civilly to restrain contraventions.
The Superintendent also has supplementary powers to deal with specified circumstances, such as the power to order the wind-up of a plan, to challenge actuarial assumptions and methods, to require certain types of disclosure, and to replace a plan administrator. And finally, as discussed above, the Superintendent’s consent is required for some types of transactions.
A study for the Commission by Lorne Sossin of FSCO’s regulatory powers and practices was circumscribed by the limited availability of data describing FSCO’s formal and informal efforts to secure compliance. As a result, it is difficult to come to any clear conclusions about how often and to what effect the Superintendent uses these statutory enforcement powers. Apparently, the Superintendent each year issues about 15 declarations, makes some 25 orders, and initiates about 100 NOPs (discussed above), in addition to Letters of Caution, Minutes of Settlement and other informal dispositions. However, none of these numbers is linked to an assessment of regulatory outcomes and all may well be understated.
What does seem clear, however, is that prosecution is seldom used — and perhaps for good reason. The need to explain the complexities of pension legislation to a judge unfamiliar with the field, to persuade that judge to impose significant penalties for a “white collar crime,” and to meet the criminal standard of proof are but three of the reasons that prosecution under the Provincial Offences Act is an unattractive option. Indeed, FSCO’s recent expensive but unsuccessful attempt to prosecute an actuary whose reports allegedly contravened the Act reinforces this conclusion. (The actuary eventually pleaded guilty in CIA disciplinary proceedings to a charge of professional misconduct, was fined and was suspended from pension practice for six months.)
It is not clear to me whether what appears to be a relatively low level of enforcement activity can be explained by a relatively low level of non-compliance, or by the unsuitable nature of the enforcement options available to the Superintendent, or by the success of informal, non-statutory strategies he or she has developed. But nor — on the basis of published information — does the Superintendent appear to know. I believe the Superintendent should know, and should have the necessary means to do so.
It is particularly important that a new enforcement strategy be put in place to complement the new approach to regulation proposed elsewhere in this report. In general, that new approach encompasses greater reliance on shaping conduct through principles augmented by guidelines, on extensive and open interaction between the regulator and the regulatees, and on the sophisticated monitoring and analysis of outcomes over long periods of time. What keeps such a trust-based system “honest” is the certain knowledge that violations will be promptly detected, that defaults will be corrected and that deliberate wrongdoing will be severely punished. The regulator, in other words, needs a large toolkit to enable graduated responses to be made to the situation at hand. Those tools must include both surgical instruments for the detection and correction of violations, and blunter instruments for punishment. Through a series of recommendations in earlier chapters, I have already proposed to provide the Superintendent with new or reinforced power to:
- review the plan’s selection of actuarial assumptions;
- give selective relief from contribution increases to certain plans;
- order interim valuations of plans at risk;
- conduct spot checks of filings;
- require a wind-up under certain circumstances;
- review the potential effects of mergers, splits and asset transfers;
- establish risk-assessment benchmarks and order additional actuarial valuations;
- approve arrangements notwithstanding the plan documents, under certain conditions;
- seek unpaid contributions from delinquent sponsors; and
- approve arrangements relating to a restructuring, and appoint administrators for insolvent or failing sponsors.
This list will be augmented by several additional recommendations I make in section 7.4 of this chapter and elsewhere. In general terms, however, a more expansive approach should be taken to the Superintendent’s powers than is possible under the existing NOP procedures. As noted above, the Act already gives the Superintendent the power to “require an administrator or any other person to take or refrain from taking any action in respect of a pension plan or a pension fund.” This broad and potentially useful power should fill the gap left by the abolition of the NOP procedure, as proposed in Recommendation 7-8, above. To facilitate its use, the procedural and remedial dimensions of the Superintendent’s power to deal with violations of the PBA and other contested matters should be more clearly specified.
Recommendation 7-15 — The Pension Benefits Act should grant the Superintendent power to:
- hold hearings, require the production of documents and the giving of testimony, receive and rely on valuations and reports submitted in the regular course of his or her oversight functions, and order the preparation of and rely upon special valuations and reports;
- make interim orders with effect for not more than 30 days — unless extended by the proposed Pension Tribunal of Ontario — on the basis of written documents, valuations, reports and submissions, where necessary to preserve the assets of a pension plan; and
- make any final order necessary to secure compliance with the Act or with regulations and rules made pursuant to the Act.
The Superintendent should provide all affected parties with as full a right to be heard as is feasible given the urgency of the situation.
Orders of the Superintendent should be enforceable by the Pension Tribunal of Ontario. All decisions and orders of the Superintendent should be subject to appeal to the Tribunal.
A guiding principle in the development and use of these powers should be the need for the Superintendent to be able to make graduated responses to emerging problems encountered in the context of a complex and rapidly evolving system.
7.3.8 Reporting on regulatory activity
A good regulator must be able to evaluate its own performance, and to communicate its findings internally and externally. As I have noted several times, however, FSCO’s evaluation and reporting mechanisms are inadequate.
FSCO employs five principal monitoring procedures that focus mainly on work-flow and timing. However, apart from the fact that FSCO itself makes limited use of these procedures, the conclusions they produce are not open to the public. FSCO maintains a website and a print publication and e-bulletin, which report selectively on its enforcement activities. These are also reviewed in its annual report and in an annual risk monitoring survey, which provides a summary of funding information across the pension system.
This is all useful, so far as it goes; but it does not go far enough. The regulator should initiate better data collection and more extensive analysis of its work, in regard both to enforcement and other matters. It should include in this analysis:
- performance objectives related to each major function of the regulator (passive, active, proactive and reactive oversight; advocacy and facilitation; data gathering and enforcement);
- accurate data measuring the regulator’s performance of these functions and its achievement of performance objectives;
- benchmarks to facilitate comparison of performance improvements over time;
- surveys of stakeholder perceptions concerning the regulator’s performance; and
- implications of its performance evaluation for regulatory reform, resource allocation and other aspects of its future development.
I do not mean to develop a template for such analysis. I do, however, strongly recommend that the pension regulator should do so.
Recommendation 7-16 — The regulator should improve its internal and external data collection and reporting activities and implement a program of rigorous self-evaluation that will contribute to the identification of possible improvements in its regulatory functions. It should make the results of this self-evaluation publicly available. The regulator should be given the human and material resources necessary to pursue this approach.
7.4 Re-inventing the Pension Regulator
If there was a single issue on which something like consensus emerged during the Commission’s public hearings, it was that FSCO is not operating as well as it should. Not far behind was the frequent observation that FSCO could do its job better only if given the mandate, powers and personnel it presently lacks. Both the diagnosis and the prescription were supported by research studies that directly addressed issues of regulatory design, as well as those that dealt with the regulator’s role in specific contexts, such as funding or plan failure. The research studies supported many of the anecdotal claims made at the hearings concerning regulatory delays and deficient performance. It illuminated a number of key regulatory reforms needed, in any event, but critical, if my recommendations for substantive reform are to be successfully implemented.
7.4.1 A renewed regulatory mandate
The Commission heard from a number of stakeholders about the current lack of a positive regulatory mandate for FSCO, symbolically represented by the absence of a “purpose clause” of the kind found in some regulatory statutes, and once enshrined in the PBA itself. The previous regulator, the Pension Commission of Ontario (PCO), was specifically enjoined to “promote the establishment, extension and improvement of pension plans throughout Ontario.” This language, some claim, informed the PCO’s approach to regulation and was one of the factors that led reviewing courts to defer to its decisions. By contrast, FSCO — with essentially similar regulatory functions — has a more anodyne, less ambitious, purpose clause: to “enhance the public interest and public confidence” in the pension system.
No mandate, no purpose clause, will enable the regulatory process to proceed, as it were, on automatic pilot. There will always be choices to make, always disagreements about which of those choices best serves the multiple — and sometimes conflicting — goals of the pension system. Nonetheless, a mandate captured in a purpose clause that gives positive direction to the regulator will serve as a benchmark enabling it to assess its own accomplishments, as a guide to the deployment of its resources, as a unifying principle that it can use to resolve difficulties over the interpretation of its statute, and as the recurring motif of a system of pension regulation that is increasingly principles-based. As noted earlier, such a clause may also remind courts dealing with pension legislation — whether in review or appellate proceedings, or otherwise — that the PBA must be read in light of its purposes, and that the achievement of those purposes was confided by the legislature to an expert regulatory body whose interpretations should be treated with respect. Finally, a purpose clause is a statement by the legislature of its own commitment to stated policy goals. At a moment when the future of the pension system is a matter of considerable concern and debate, reaffirmation of its purposes would send a clear signal to the stakeholders and to the general community.
Recommendation 7-17 — The Pension Benefits Act should include a “purpose clause” that will provide guidance to its interpretation and implementation. That clause should include reference to the need to maintain a balance among stakeholder interests, to keep pensions both secure and affordable, to both protect and promote the pension system, and to encourage innovation within the system.
7.4.2 A new institutional framework
As noted above, until 1997 administration of the PBA was assigned to a regulatory body — the PCO — exclusively concerned with this particular domain of public policy. In 1997, regulation of the pension field was reassigned to FSCO, which was also given jurisdiction over mortgage and trust companies, insurance companies, co-operatives and credit unions. FSCO’s constituent statute created three new structures:
- FSCO — a five-member Commission responsible for “provid[ing] regulatory services that protect the public interest and enhance public confidence in the regulated sectors” under the Financial Services Commission Act;
- the Superintendent, who is the chief executive officer of FSCO (the regulator); and
- the FST — an adjudicative body to which the Superintendent’s decisions may be appealed or through which they may be enforced.
FSCO — and each of its constituent elements — is funded by user fees on a cost-recovery basis. However, the fees are paid into the government’s consolidated revenue fund and FSCO’s budget is in turn paid out of the government’s general revenue account. Fees paid by each regulatory sector are fixed and accounted for separately. For reasons explored below, these funding and budgeting arrangements are not optimal.
While the 1997 amalgamation of regulation in the financial services sector was presumably intended to integrate regulatory functions and rationalize the use of staff resources across the entire sector, integration and rationalization have in fact been minimal. There is almost no integration of strategic planning and institutional development across the different policy domains administered by FSCO. Indeed, the pension staff, including many former PCO employees, operates within FSCO with a good degree of functional autonomy — except for some legal and enforcement personnel who perform services for all five sectors regulated by FSCO (an arrangement, I was told, that has some negative aspects). In the absence of any comprehensive evaluation of the 1997 amalgamation, or indeed of any evidence at all suggesting that common concerns have been pursued or that regulatory synergies have been achieved, it is hard to justify continuation of a single multi-purpose financial sector regulator.
To the contrary, briefs and research studies suggested that the 1997 amalgamation may have been harmful to pension regulation. FSCO is obliged to “have regard” to the Minister of Finance’s policy statements in the course of its decision-making, and is mandated to contribute to policy development by the Ministry. However, no policy statements appear to have been issued by the Minister, and FSCO has not contributed materially to the overall development of pension policy (except in relation to issues closely related to its regulatory functions). While this arrangement no doubt contributes to FSCO’s independence, and to that of the Superintendent and the FST, it is perceived by many to detract from the close integration of regulation and policy-making to the prejudice of both. In this respect, FSCO is compared unfavourably with its predecessor, the PCO. Moreover, some observers believe that FSCO’s relative detachment from the policy process has made decisions of the Superintendent and the FST more vulnerable to being reversed in court, though evidence on this point (canvassed below) is equivocal.
Both of these issues — the distancing of policy from regulation, and the enhanced risk of reversal — are matters that give me some concern. However, of greatest concern is the improbability that changes in pension policy and regulation, and in the human and financial resources and legal powers needed to support those changes, can be achieved within the context of a large multi-purpose organization. While framed somewhat differently, I take this also to be the purport of stakeholder submissions proposing re-establishment of the old PCO, or of a new pension agency with a structure, funding, powers and administrative autonomy akin to those of the Ontario Securities Commission (OSC). These suggestions, and others, converge on the establishment of a single-purpose pension regulator with an animating purpose, regulatory and adjudicative functions, and with clear independence from government.
In my view, establishing a new, independent single-purpose pension regulator would indeed yield significant benefits. Only such a regulator could possibly muster the capacity and develop the expertise to administer the regulatory approaches recommended elsewhere in this report, including principles-based reforms to the PBA, pro-active and risk-based regulatory strategies, the promotion of improved plan governance, the use of expanded rule-making powers and the facilitation of more rapid innovation.
Recommendation 7-18 — An independent pension regulator — the Ontario Pension Regulator — should be established with budgetary, staffing and other powers of self-management comparable to those of the Ontario Securities Commission.
Recommendation 7-19 — The Ontario Pension Regulator should comprise five commissioners — the Superintendent of Pensions and four independent, part-time commissioners with extensive experience in pensions regulation or policy. The commissioners should act as a board of directors with general power to:
- oversee and direct the functions of the Ontario Pension Regulator;
- approve its budget and administration;
- approve policies and issue policy statements relating to regulatory approaches;
- adopt procedural rules; and
- report annually to the Minister of Finance concerning the operations of the Regulator.
The commissioners should not perform operational regulatory functions involving individual plans.
Recommendation 7-20 — The Ontario Pension Regulator and the Superintendent of Pensions should exercise all pension-related functions now exercised by the Financial Services Commission of Ontario and the Superintendent of Financial Services, respectively, together with the additional functions recommended in this report.
However, this concentration by the Ontario Pension Regulator (OPR) on its enhanced oversight and remedial functions leads me to conclude — with some hesitation — that primary responsibility for overall pension policy ought to reside elsewhere. In Chapter Ten I recommend that a Pension Champion — either free-standing or inside the Ministry of Finance — should take the lead in developing pension policy and promoting non-statutory innovation in the pension system. I do contemplate that FSCO — or OPR if it succeeds to FSCO’s regulatory responsibilities — will be the crucial source of information concerning sponsors, pension plans and their active and retired members; that it will contribute its unique, experience-based insights to larger discussions of pension reform; and that it will develop policies related to the exercise of its own powers. But it will not be the primary source of larger, long-term initiatives in pension policy development.
Recommendation 7-21 — The new Ontario Pension Regulator should assist in the development of pension policy by collecting data, contributing its experienced-based insights into the operation of the regulatory system and refining and reflecting on the exercise of its statutory powers. However, it should not be assigned primary responsibility for overall pension policy development.
7.4.3 Enhanced resources, funding and staffing
A number of submissions to the Commission suggested that inadequate oversight, long delays, inconsistent treatment and awkward relationships with its “clientele” have resulted from FSCO’s inability to hire sufficient staff or to retain key professionals and experts. A review of the staffing model of FSCO’s pension branch suggests that this diagnosis is likely correct.
The problem has several dimensions. First, pension staff within FSCO must “compete” for shared resources with the four other sectors regulated by FSCO. This problem will be resolved if, as recommended above, FSCO is replaced by a free-standing pension regulator. Second, FSCO has great difficulty in recruiting and retaining senior actuaries, lawyers, analysts and other expert personnel because its pay scales are fixed — not by market rates of pay for such experts in the pension industry, but by the Ontario Public Service. Without adequate numbers of experienced professional personnel, it is very difficult for FSCO to maintain proper levels of service under existing law; it will be even more difficult for the proposed OPR to assume a more ambitious and proactive role in overseeing the pension system, as I have recommended.
FSCO — or its proposed successor, the OPR — ought to be able to raise the funds it needs to perform the important tasks assigned to it at a high level of expertise and efficiency. Since, as noted earlier, FSCO operates on a user-pay or cost-recovery basis, it should be able to modestly increase the levies it imposes on plans in order to provide itself with a budget adequate for all of its ongoing functions, and to charge additional user fees for specific resource-intensive regulatory interventions — approving plan transactions, for example — now performed free of charge. Where levies and fees vary with the type of regulatory oversight and intervention required, they should be transparent, and the fee implications of regulatory intervention and oversight should be predictable for participants. As is the case with the Ontario Securities Commission, the OPR should negotiate a multi-year financial plan with the Ministry of Finance, and the Lieutenant Governor in Council should approve its proposed schedule of levies and fees.
Recommendation 7-22 — The Ontario Pension Regulator should have greater control over its budget and hiring practices so that it can recruit, train and retain the professional and expert staff it needs to discharge its enhanced regulatory functions. With the approval of the Lieutenant Governor in Council, the Regulator should be able to fix levies on plans according to plan size or type, to charge user fees for particular regulatory transactions and to retain for its own purposes administrative fines levied by the new Pension Tribunal of Ontario.
I am optimistic that improved service levels for sponsors and enhanced capacity to protect the interests of active and retired members will, over time, convince the pension community that some increase in the charges they pay was justified.
By contrast, however, if FSCO is required to collect and analyse data to support policy development by another agency — the Ministry or the proposed Pension Champion — it is reasonable that the recipients and prime users of that data should pay for its collection.
Recommendation 7-23 — The Ministry of Finance should supplement the budget of the Ontario Pension Regulator to enable it to perform functions such as data collection and analysis, which support policy-making and other non-regulatory functions.
7.4.4 A risk-based approach to regulation
A fundamental premise of any regulatory strategy is that available resources will never be sufficient to accomplish all of the oversight functions that must be performed. The most obvious way of using scarce resources to best effect is to deploy them to deal with the most imminent risks, or those that have the greatest potential to do harm. This approach, which is designed to achieve the highest regulatory impact for any given investment of resources, requires a regulator to be proactive — to intervene with a view to preventing adverse outcomes before they occur. It also requires that the regulator have the capacity to detect and assess the existence of threats as well as their relative intensity. By definition, it also prioritizes some activities over others so that, from time to time, some sectors, regulatees or issues receive more scrutiny, and others less.
In 2000, FSCO adopted just such a risk-based approach to some of its regulatory activities. In particular, FSCO has been developing risk-based regulatory systems in two areas: the funding of pension plans and their investment profile. An assessment of plan funding relies primarily on the filing of its AIS (described above and in more detail in Chapter Four). The AIS updates key data found in the triennial actuarial valuation, including contributions and actuarial assumptions, and enables FSCO to monitor the plan’s funded status — a potential indicator of a plan’s health. Plan investments are monitored through annual IISs, which provide standardized data concerning compliance with the federal investment rules, use of particular types of investments and changes in asset mixes. Both of these assessment techniques are used to identify plans at risk, which then attract further scrutiny by FSCO staff.
This approach to regulation depends in significant measure on the development of risk-assessment techniques, particularly quantitative and probability-based measurements. However, FSCO’s implementation of its risk-based program has been uneven. First, FSCO’s capacity to develop and apply risk-assessment protocols is hindered by its limited resources, especially of highly skilled staff and the means to pay them what they can command in other jobs. Second, risk assessment depends on FSCO’s capacity to collect and filter large quantities of data supplied by plans, which, in turn, must be subject to appropriate controls to ensure compliance with the risk-assessment models developed by the regulator. And third, plans themselves must develop a commitment to and a capacity for risk assessment. This ought to be relatively easy for large plans, many of which already routinely conduct their own risk assessments. However, FSCO does not seem to have conducted any dialogue with these plans concerning the introduction of new risk-assessment tools and the promotion of standard risk-assessment methods, nor does it appear to have explored whether, and if so, how, to facilitate risk assessment by smaller plans, many of which do not now collect the data necessary to perform this function. In general, much more needs to be done before Ontario’s system of pension regulation can be said to be truly risk-based.
I also note that FSCO has not yet developed the use of two further “risk indicators:” the credit-worthiness of plan sponsors (now used in the United Kingdom), and plan size, which research suggests affects plan performance across a range of performance indicators. Both of these risk factors are the subject of recommendations elsewhere in this report. Nor does FSCO conduct research into industry conditions or the business of specific types of sponsors except in an ad hoc and reactive manner.
Of course, risk-based regulation is itself not without risk. The focus on some regulatees deflects attention away from others deemed less likely to present a risk — an assumption that, from time to time, may turn out to be unjustified. Similarly excessive reliance on quantitative information can cause a regulator to undervalue other forms of risk assessment, such as field visits and proactive plan audits, either randomly or in response to rumours or complaints, and the close monitoring of economic conditions in financial markets or in particular sectors — say steel or auto — in order to anticipate their impact on plans.
In Recommendation 7-11, I propose that the pension regulator be better equipped to engage more actively and effectively in risk-based regulation. In the present context, I wish to emphasize that at the same time, the regulator should guard against possible limitations of risk-based regulation by more rigorous self-examination and more frequent engagement with its clientele.
Recommendation 7-24 — The pension regulator should facilitate the introduction of a program of enhanced risk-based regulation by consulting closely with stakeholder groups concerning the collection and analysis of standard data on which risk assessment can be based, and it should subject its own risk-assessment systems to rigorous self-evaluation and to critical comment by stakeholders.
7.4.5 Rules and rule-making
A number of submissions received by the Commission proposed that the regulator should have rule-making authority similar to that enjoyed by the OSC.
Confronted with changing economic conditions and new pension designs, the regulator essentially has two options. The first is to pursue its objectives pragmatically on a file-by-file basis, using the language of the statute and the regulations enacted under it. This is often feasible and, indeed, desirable in the early stages of any new regulatory regime. The second — attractive especially after the regulator has gained some experience with a new set of issues — is to codify its approach in the form of rules for the guidance of its clientele and as a way of systematizing its own previous ad hoc approach. When stakeholders are afforded an opportunity to comment on proposed new regulatory norms — as I propose — this second approach helps to ensure that these norms are informed by stakeholder experiences and perspectives, and that stakeholders feel some sense of commitment to the new arrangements they have helped to shape.
The advantages of this approach are clear. The pension field is complex and is changing rapidly. If my recommendations are accepted, it may well become even more complex and change even more rapidly. Ideally, new complexities will be captured by amendments to the PBA and those amendments will be enacted as rapidly as required by the pace of change. However, the legislative mill grinds slowly, and in the case of pensions, almost always controversially and, for that reason, at infrequent intervals. Even regulations enacted by the Lieutenant Governor in Council under the authority of the PBA tend to lag the need for their enactment. Thus, a desirable approach is one that makes it easier for regulatees to plan their affairs (and for regulators to oversee them) with some degree of certainty about what will be acceptable and what will not. General principles contained in a statute or a regulation may be too vague to provide that certainty, which, however, may be provided by supplementary or explanatory rules that define terms, establish bright-line tests or set out standard operating procedures. (Of course, rules may not contradict or derogate from the provisions of a statute or regulation — only lend those provisions greater specificity and predictability.)
There are, of course, some potential disadvantages to this approach. The development of a thicker set of rules may compromise the flexibility of simpler, principles-based case-by-case decision-making. Further, there is some risk that stakeholder participation in rule-making will lead to “regulatory capture” — undue influence by the stakeholders over both the content of the rules and the mindset of the regulator. And finally, there is a risk that the legal status and effect of these rules may be challenged. To an extent, however, forewarned is forearmed. If the regulator is self-critical, it can retain discretion and flexibility in the context of individual cases while still laying down the general parameters within which these cases are to be decided. If it invites participation in rule-making by a broad range of stakeholders, it can reduce the chance that any one group will dominate the process. And if care is taken to authorize the making of rules by clear language in the PBA, the risk of legal challenges can be minimized or eliminated.
On balance, I believe that it would be best both for the regulator and for stakeholders that the OPR should be given, and should use, the power to make rules.
Recommendation 7-25 — The new Ontario Pension Regulator should have power to make rules in order to define and lend greater specificity and clarity to its governing statute and regulations. It should exercise this power only after giving stakeholders notice of, and an opportunity to comment on, proposed rules. Rules adopted pursuant to the use of this power should have the force of law so long as they are made in accordance with the statute and regulations and do not purport to contradict or derogate from them.
7.5 Adjudication and Appeals
As noted in section 7.3, the Superintendent engages in many different forms of regulatory oversight. Some of these are relatively passive and routine; others involve more active forms of decision-making; some — especially if my recommendations are adopted — amount to formal adjudication. But the Superintendent is not the only decision-maker. Unless he or she is to have both the first and last word in all matters relating to pension regulation, a second body must be established before which decisions of the Superintendent can be challenged, at least in important cases.
Two options are available. The first is to design a special appeals forum for pension matters; the second is to permit challenges to the Superintendent’s actions or decisions to be heard in the regular courts. These alternatives are not mutually exclusive. Even if a special pensions appeals process is established, it is possible to permit appeals from that process to a court of general jurisdiction, which would have the power to overturn the administrative decision if it is “wrong,” and to substitute another in its place. And even if no such appeals process is established, a dissatisfied litigant may nonetheless seek “judicial review” of a decision by the Superintendent or the special pensions appeals body — a more limited process that confines the reviewing court to overturning the previous decision only if serious errors are found, and to returning the matter to the administrative decision-maker for further consideration. Indeed, under our constitution, it is not possible to fully insulate administrative decision-making from both appeal and review.
Under the PBA, decisions of the Superintendent can be appealed to a special tribunal, the FST, which, as noted above, hears both pension appeals and those arising in other regulatory domains under the jurisdiction of FSCO. This arrangement differs somewhat from that which existed prior to the establishment of FSCO when pension regulation was assigned to the PCO. However, under the present arrangements — as under the PCO — decisions of the ultimate administrative decision-maker may be appealed to the Divisional Court, a special panel of the Ontario Court of Justice that deals with administrative law issues.
The FST is staffed by part-time panel members who are experts in their fields, as were the members of the PCO. Since its establishment in 1997, the FST has handled some 114 pension appeals from the Superintendent (40% of its overall caseload) of which 21 are still pending. Approximately 60 were settled and 33 were decided on their merits. Eleven of those decisions were appealed to the Divisional Court, nine of which were actually heard. The Divisional Court originally affirmed five FST decisions and reversed four — but after further appeals, two of the nine challenged decisions were affirmed, for a total of two reversals out of nine challenges.
Some stakeholders argued in briefs and submissions that these two reversals —compared with none for the PCO — signalled a trend to diminished judicial deference for FST decisions. This trend, they maintained, was attributable to either or both of the changes in the regulator’s “purpose clause” (discussed above), and the perceived dilution of FSCO’s and FST’s pension expertise since these bodies acquired regulatory responsibilities for non-pension matters in 1997. This may indeed be so, but nine appeals is too slight a foundation for such an important conclusion. Nor is it possible to evaluate this conclusion on its merits without considering the issues and circumstances of each case. The most that can be said is that — all things being equal — courts hearing appeals and applications for judicial review tend to be most deferential to administrative decision-makers when the latter are deciding issues whose resolution requires expertise, which they possess and courts do not.
Opinions concerning the FST, its functions and organization differed considerably. Some stakeholders noted particularly that its dependence on part-time panel members detracted from its ability to handle difficult issues. Moreover, since many of the part-time members with pension experience and expertise remained actively involved as advocates for, or advisors to, pension stakeholders, their impartiality was suspect. They might be replaced by members with no such affiliations, but this would detract from the overall pension expertise of the hearing panel. In addition, though the FST’s caseload is very light — a dozen hearings a year — I was told that the frequent disqualification of members for actual or perceived conflicts of interest made scheduling difficult and interfered with the prompt dispatch of its business. Whether for these or other reasons, a view seems to have developed within the ranks of pension lawyers that whatever the FST might decide, cases of any consequence would be appealed as a matter of course to the Divisional Court.
Nor were these the only complaints. Researchers noted that a considerable number of cases involved litigants without legal representation (a point addressed above). They also noted that the FST was not fully independent of FSCO, given that the Superintendent — whose decisions were challenged before the FST — was also the chief executive officer of FSCO, and that FSCO controlled the FST’s budget.
If the point of having a dedicated pension tribunal is to ensure that the regulator’s decisions are subject to arm’s-length scrutiny, to bring specialized expertise to bear on the issues, and to resolve them speedily and with finality, the FST is not — in the opinion of many — the answer. Nor, it seems, is the answer an enhanced role for the courts, as suggested by others. Stakeholders repeatedly (though not unanimously) told me that judges lacked expertise in the pension system and often failed to appreciate the impact of their decisions upon it. The pension system, they argued, is too complex for judges who encounter it for the first time in the course of a trial or appeal (as most do) to develop a sophisticated understanding of it. Such understanding requires a significant knowledge of the history, economics and politics of pensions, while comprehension of pension law requires the mastery of not only a significant body of technical statutory and common law but of the actuarial and accounting practices that inform and give point to the legal rules. Of course, one or more judges may have acquired expertise in pension matters prior to being appointed to the bench. However, there is no guarantee that judges with such expertise will be available to sit on pension appeals or judicial review applications or, for that matter, on civil cases involving pension disputes. Indeed, the odds are strong that a judge who hears any given pension case will not be familiar with the field.
That is why, on balance, I am persuaded that a specialized pension tribunal is better placed than a court to comprehend the practical consequences of its decisions, to use its knowledge of the system to evaluate changing patterns of behaviour by both stakeholders and the regulator, to make itself accessible to individuals affected by the system, and to provide consistent interpretations of pension law that will provide sensible guidance to litigants and to the pension community in general. My conclusions in this regard rest on my familiarity with the general literature on regulation, on some knowledge of the successful experience of tribunals in pension-related fields such as securities regulation and labour relations, and on what I have heard concerning the success of the former PCO. I therefore conclude that re-engineering the FST to overcome its perceived deficiencies is a more promising option than enlarging the role of courts in the regulatory process.
The task of re-engineering the FST begins with the observation that I have already recommended: that pension law be codified to the maximum extent possible. If this is achieved, and if other recommended reforms in the Superintendent’s jurisdiction, responsibilities and powers are instituted, I anticipate that the caseload of the appeals tribunal may grow somewhat. Second, if my recommendation for a free-standing single-purpose pension regulator — a new Ontario Pension Regulator — is accepted, it follows that the FST should be reconstituted as a stand-alone Pension Tribunal of Ontario (PTO) shorn of its responsibilities for other matters now under FSCO’s jurisdiction. It follows, as well, that all members appointed to the new tribunal should possess expertise in pensions or some closely related field. These steps should ensure both that the PTO is, in fact, an expert tribunal, and that it is perceived as such by reviewing or appellate courts and by the pension community.
Recommendation 7-26 — The pension jurisdiction of the Financial Services Tribunal should be transferred to a new Pension Tribunal of Ontario. The Tribunal should have power to hear and decide specified matters at first instance, and to hear and decide all appeals from orders made by the Superintendent.
The next issue that must be addressed is that of the membership of the proposed PTO. To reassure those who favour court determination of pension issues, the PTO ought to be led by a jurist of stature with considerable pension experience — a highly respected individual with legal training, such as a judge, lawyer, legal academic or former regulator. To avoid any possibility of a conflict or perceived conflict of interest, that person — the Chair of the PTO — ought either to be retired from their former position or to be employed part-time in some non-adversarial capacity (for example, as a member of a tribunal outside the pension field or as a mediator). Whether their service on the PTO is full-time or part-time will depend on how the caseload of the PTO develops. If the caseload grows considerably, a Vice-Chair with comparable credentials ought to be appointed. Currently, the FST comprises some 13 members, all part-time. I believe that a much smaller tribunal would resolve many of the scheduling and other difficulties associated with the present model. At the same time, the new PTO must be large enough to number among its members experts in both pension law and actuarial science — the two principal bodies of learning that ought to inform its decisions. However, in acknowledgement of the fact that a number of individuals have acquired great pension expertise without formal training or credentials in law or actuarial science, such credentials should not be a prerequisite for membership of the PTO. PTO members should, like the Chair, either be retired or employed part-time in some non-adversarial capacity, but not in the pension field.
Many individuals eligible for appointment as either Chair or members of the PTO will likely have a background in advising either sponsor- or member-side clients. To ensure that the PTO is, and is perceived to be, neutral and balanced as between sponsor and member perspectives, all appointments should be vetted by a bipartisan nominating committee. The committee may identify as members individuals who are highly respected and trusted as neutrals in the pension community despite their partisan background, or may seek balance within the PTO by nominating equal numbers of members with acknowledged partisan backgrounds that will offset each other. As the reputation and effectiveness of the PTO depend on the trust it enjoys among stakeholders, it is essential that the nominating committee propose for appointment only individuals of considerable ability. It is equally essential that the Lieutenant Governor in Council, in making appointments, should respect the advice of the nominating committee.
Recommendation 7-27 — The Pension Tribunal of Ontario should comprise a Chair who is a jurist of stature, two members with a background in law (or equivalent), and two members with a background in actuarial science (or equivalent). Appointments to the Tribunal should be recommended by a bipartisan nominating committee with a view to ensuring that the Tribunal enjoys the confidence of both sponsor-side and member-side stakeholders and is perceived to be balanced and neutral.
The Chair and members of the Tribunal should be allowed to serve part-time, but not to hold concurrent employment that might involve, or be seen to involve, them in a conflict of interest. All members of the Tribunal should possess expertise in pensions or some closely related field.
In order to address the scheduling problems presently encountered by the FST, the Chair of the PTO should be permitted some degree of flexibility in assigning panel members.
Recommendation 7-28 — The Chair of the Pension Tribunal of Ontario should be allowed to sit alone to hear and decide cases relating to specific provisions, such as the enforcement of orders made by the Superintendent. In more complex matters that may require specialized actuarial or legal knowledge, the Chair may designate the two members with backgrounds in those fields to serve on a hearing panel. If in the opinion of the Chair both types of knowledge are required, all four members may be designated to serve.
Given its mandate and the reasons for its creation, the PTO should possess plenary powers to dispose of all cases before it. It should be able to dispose not only of applications to enforce orders of the Superintendent and appeals against such orders, but also all ancillary questions that might arise in the context of administering the PBA, such as the meaning and effect of plan documents. If experience demonstrates that some form of mediation might assist the parties more than formal adjudication of their differences, the PTO might appoint staff or, with certain safeguards, tribunal members.
Recommendation 7-29 — The Pension Tribunal of Ontario ought to have all powers necessary to dispose of matters before it.
During the Commission’s hearings, I was advised of several instances where pension issues arose for decisions in other forums, especially before the Ontario Labour Relations Board or labour arbitrators. While acknowledging that such bodies can assert jurisdiction over pension matters under present law, in the interests of ensuring that pension disputes are resolved in a consistent fashion by the tribunals best qualified to decide them, I believe that the law ought to be changed.
Likewise, an open-ended right of appeal to the courts would undo many of the positive effects of the new PTO. At the very least, it would tempt deep-pocketed litigants who are dissatisfied with its decisions to continue litigation to higher levels where their less-well-off opponents would be at a disadvantage. At worst, it would protract proceedings, expose them to the risk of disposition by non-expert judges, and diminish the chances that the PTO will be able to maintain the coherence and consistency of pension law — which is the objective of my recommendation that the law in this area should be codified.
Of course, any attempt to totally preclude review or appeal would likely fail on constitutional grounds — nor should egregious error by the Superintendent or the PTO be allowed to go uncorrected.
Recommendation 7-30 — The Pension Tribunal of Ontario should exercise exclusive and ultimate jurisdiction over all matters arising out of or incidental to the interpretation of the Pension Benefits Act. Decisions of the Tribunal should be final and binding, subject to appeal to the Divisional Court only if they involve a denial of natural justice, a misinterpretation of the applicable law so serious as to amount to jurisdictional error, or a violation of the constitutional rights of a party.
It is my hope and expectation that if these recommendations are implemented, over time the PTO will earn and enjoy the respect of the pension community; that it will become the sole source of authoritative interpretations of pension law; that it will develop a body of well-reasoned decisions for the guidance of the regulator and the stakeholders; and that it will be able to provide all parties with one-stop accessible, speedy, expert pension adjudication. This will surely constitute a significant contribution to the overall health of the pension system.
In previous chapters, I noted the need for the pension regulator to have recourse to a full array of remedial powers. In part, this reflects my belief that prosecution is often not an effective avenue of recourse — even when linked (as it now is) to the power of a convicting court to order various forms of monetary compensation to be paid to the plan. The criminal burden of proof is too high; judges are reputedly reluctant to convict in white-collar offences; and criminal courts lack expertise in pension matters. It would be far preferable, in my view, to equip the PTO with an appropriate array of remedial powers, leaving court prosecutions for the most extreme cases where there is a need to punish the offender and deter others, as well as to remedy the offence. These additional powers would complement the power of the PTO to enforce — as well as hear appeals from — orders made by the Superintendent.
Recommendation 7-31 — The Tribunal should have plenary power, upon enforcing or hearing an appeal from any order made by the Superintendent, to make any order required to secure compliance with the Pension Benefits Act, including but without limiting its general power, the power to:
- require the doing of any act required by the statute and the cessation of any act forbidden by it;
- order the payment of contributions, benefits or premiums wrongly withheld, together with interest thereon;
- require the disclosure of information and the provision of documents to the regulator, active and retired plan members, unions and representative organizations and others entitled to such information or documents; and
- impose administrative fines for non-compliance with the Pension Benefits Act.
Any order of the Tribunal may be registered in the Ontario Court of Justice and enforced as an order of that Court.