The Financial Services Commission of Ontario is seeking comments on a proposed new risk-based investment-monitoring model for supervising defined benefit pension plans.

The consultation paper outlines the key features of the proposed model, which FSCO expects to implement for filings made for 2004 plan yearends. The proposed model emulates the three-stage selective review process that has already been implemented by FSCO for monitoring the funding of DB plans.

FSCO says that the proposed model would:

  • target its investment monitoring on the highest-risk plans, identified through predefined risk-assessment criteria;
  • require that plans file a standard form containing information currently found in the plan to identify the highest-risk plans;
  • be technology-dependent, and an electronic database and risk assessment system would be developed;
  • require that risk assessment be based on certifications from the plan administrator (and the plan auditor, for plans with more than $3 million in assets) of compliance with prescribed investment rules and the plan’s statement of investment policies and procedures; and
  • require that FSCO’s investment review of the plans focus on the process by which investment decisions are made and how investment risks are managed.



FSCO would conduct desk reviews of plans filtered out by the model. It notes that, while this part of the process is not yet fully developed, it is expected the desk review would entail an examination of the pension fund’s operation to determine if there are any material concerns with the pension fund investments. “The review would look for such things as non-compliance with prescribed investment rules, non-compliance with investment policies and imprudence in fund governance. It would also look at the interrelationship between plan assets and liabilities, and the funded position of the plan,” the paper says FSCO staff would then seek resolution of any material concerns.

In a letter to “pension stakeholders” FSCO says that it is committed to adopting a risk-based approach to pension supervision to try to improve the regulatory process and make the most effective use of its resources. The paper notes that FSCO regulates more than 6,200 pension plans (of which about 2,800 are defined benefit plans) — about five times the number of plans regulated by OSFI and about three times the number of plans regulated by Québec.

“The goal is to reduce the risk that members of a pension plan will not receive the benefits promised,” says Mathew Ou, senior policy consultant in FSCO’s Pension Division.

As an initial step, FSCO developed and implemented a risk-based monitoring program in 2000 that focused on the funding of defined benefit pension plans. But the equity market downturn since mid-2000 and the decline in long-term interest rates “have raised concerns about the financial health of employment-based pension plans and the security of retirement savings in general… Accordingly, FSCO believes it should extend its risk-based approach and complement its existing monitoring of pension plan funding with the monitoring of pension fund investment activity.”

In November 2002, FSCO established a project team to develop a risk-based pension investment-monitoring program. The regulator says that the primary objective of this program “would be to promote strong governance with respect to pension fund investments so as to enhance the benefit security for pension plan members”.

Comments are due by Aug. 30.