A special notice from Eckler Consultants is reminding Ontario-based plan sponsors that if the plan’s transfer ratio has dropped by 10% or more and is below 0.9, they must get approval from the superintendent before allowing terminating members to transfer their commuted value or buy an annuity.

This new policy from the Financial Services Commission of Ontario (FSCO) applies to all defined benefit pension plans registered in Ontario.

The “transfer ratio” refers to the ratio of assets to liabilities, assuming the plan is terminated as of the day of calculation, Eckler says. In the past, most plans have calculated the transfer ratio only as part of the regular actuarial valuation (typically conducted every three years). FSCO’s new policy advises that the plan administrator should monitor the plan’s transfer ratio on a regular basis, and continue to check it every time a terminating member transfers funds out of the plan unless the calculation has been done within the last three months.

The administrator must complete a request for approval form before allowing any commuted value transfers. This form includes:
1. An actuarial certificate stating the:
• updated transfer ratio;
• date on which the transfer ratio was determined;
• market value of plan assets; and
• solvency liabilities of the plan as of that date.

2. The proposed treatment of the transfer deficiencies.

Eckler explains that FSCO foresees a one-week turnaround on requests for approval, and that administrators should not transfer any part of the commuted value until approval is granted.

“If FSCO determines that a transfer below 100% may be made, the administrator is obligated to pay the balance of the commuted value to the terminated member within five years from the date of the initial transfer,” according to the special notice. “Alternatively, the administrator may seek approval to transfer 100% of the commuted value, as long as the total of all transfer deficiencies since the most recently filed valuation date is less than 5% of the market value of the assets as of the date of the most recently calculated transfer ratio. The administrator may also seek approval to transfer 100% of the commuted value if a lump-sum contribution equal to the transfer deficiency is made to the pension fund.”

The notice adds that all plans must develop a process to monitor their transfer ratios, and plans that have not yet prepared an actuarial valuation reflecting the market losses in 2008 should take immediate steps to estimate their current transfer ratio.

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