Staff Report #2 – 2023 Pension Fund Audit and Plan Enhancements

Staff Report #2

March 27, 2024

To All Commissioners

Re: 2023 Pension Fund Audit and Plan Enhancements

Recommendation

That the report be NOTED and FILED.

Background

2023 Pension Fund Audit

An audit of the pension fund applying to the pre-February 1, 1989 pension plan benefits and the preparation of the related report and financial statements has historically been a requirement of the Pension Benefits Act 1987.

In December 2019, changes to the Ontario General Regulation under the Pension Benefits Act increased the threshold of assets triggering the filing of an auditor’s report for pension plans from $3 million to $10 million. Given the assets as at December 31, 2022 were $6.0 million, Manulife indicated the pension plan was deemed to no longer require an annual financial audit. Manulife had indicated they are able to complete the financial forms necessary to file the annual information return with the Financial Services Regulatory Authority (FSRA), replacing the financial audit, a practice consistent in supporting other pension clients whose assets are below the threshold. At its April 13, 2023 meeting (Staff Report #2 – 2022 Draft Pension Fund Audit), the Commission directed administration to discontinue the pension audit consistent with revised pension regulations and to further work with Manulife to complete the necessary annual financial reports required by FSRA.

KPMG were notified that a pension audit was no longer required and in early 2024 administration began work with Manulife to complete the necessary reports to file with FSRA. When beginning the work, Manulife made note of an amendment to the pension regulations now requiring the inclusion of retirees’ insured pensions in both the assets and liabilities of the plan when doing their previous actuarial valuation. When a member of the plan retires, plan assets are used to purchase an annuity from an insurance company, necessary to fulfill the obligations of their pension. The actuarial valuation completed by Manulife as at January 1, 2022 was the one completed under the new regulations and included an additional $5.2 million in assets and corresponding liability pertaining to these annuities. Even though the assets reported in the financial statements were below the threshold, Manulife wanted to confirm with FSRA whether or not this additional asset should be included when comparing to the threshold. After a somewhat lengthy correspondence, FSRA did confirm that these assets are in fact included when applying the threshold, and thus an audit is required.

Given that it had been communicated to KPMG that a pension audit was not required for 2023, their audit schedule did not include the time required to complete this work when it was later deemed necessary. KPMG are currently reviewing their upcoming work commitments and have yet to confirm a timeline of when they are able to complete the audit, noting they have many pension audits to complete prior to the June 30th deadline. Manulife has indicated that a request for an extension can be filed with FSRA and would be suitable in this scenario if KPMG are unable to complete the audit for the June 26, 2024 Commission meeting.

Actuarial Valuation & Plan Enhancements

As noted above, the most recent actuarial valuation for funding purposes was completed as at January 1, 2022. This valuation showed the fund as having an excess going concern surplus of approximately $5.2 million with $5.6 million calculated as the solvency excess. Since the ratio of solvency assets to solvency liabilities is more than 85%, the next actuarial valuation of the plan will be required no later than January 1, 2025 or in the event of a prior plan change affecting the cost of the plan, in accordance with the minimum requirements of the Ontario Pension Benefits Act. The report validates the stability of the plan and its ability to meet its future obligations to retirees.

The Commission also directed administration at its April 13, 2023 meeting to review potential pension enhancements with Manulife and provide a report back with recommendations. Manulife was approached to recommend and cost enhancement scenarios consistent with the plan and indicated an updated actuarial valuation was required prior to costing in order to ensure solvency in the plan as well as a current valuation being a requirement of FSRA when making plan changes. The process to provide an updated actuarial valuation as at January 1, 2024 is currently underway and Manulife anticipates its completion by the end of April, including costing estimates for enhancement options. Details will be provided in a future report to the Commission with recommendations.

Recommended by:

Mike Gregor, Director of Finance

Joanne Galloway, Director of Human Resources

Concurred in by:

Kelly S. Paleczny, General Manager