Toronto ON M2N 6L9 Re: Proposed Financial Statements Guidance Note ooi

October 25, 2012
Financial Services Commission of Ontario
5160 Yonge Street, Box 85
Toronto ON M2N 6L9
Attention: Pension Policy Unit
Re:
Proposed Financial Statements Guidance Note ooi
We appreciate the opportunity to comment on proposed Financial Statements Guidance Note ool (FSGN­
ool). We broadly support the proposals to clarify the disclosures expected by the Financial Services
Commission of Ontario (FSCO) in the financial statements filed by pension plans that are registered with
FSCO.
In our review of this guidance, we noted that significant effort may be required by both the management of
the pension plan and the auditors in order to meet the disclosure requirements outlined by FSCO. For
many pension plans, these disclosures are significantly different from those that have historically been
presented in their financial statements. The successful implementation of this guidance may require
management to gather and analyze information that is not presently available. Additionally, there may be
situations where the quality and consistency of information received is inconsistent or require significant
management analysis. This may take significant time and effort by both management and the auditors to
resolve. FSCO may wish to consider requiring the guidance be effective for years beginning on or after
January 1, 2013 instead of 2012 so that management and the auditors have the opportunity to effectively
and efficiently identify and resolve any such issues.
As noted above, compliance with this guidance may result in significant effort on behalf of the
management of the pension and the auditors. This will result in both internal costs and the audit fees
increasing, which in many cases would be costs borne by the pension plan.
We also believe it is important, however, that the scope of the guidance be very carefully considered. Some
of the proposed disclosure requirements could have an impact on how certain pension plans govern
themselves as opposed to only requiring additional disclosures. The proposed guidance affects pension
plans of many sizes and governance structures. A "one size fits all" approach may have unintended
consequences.
The following are the areas where we believe the proposals should be clarified. We have also provided to
you some of our thoughts for consideration.
Statement of Pension Obligations
In example 1 of the appendix, a sample auditor's report is shown. The following are two areas on which we
request clarification:
PricewaterhouseCoopers LLP
PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J oB2
T. +1 416 863 1133, F. +1 416 365 8215, www.pwc.com/ca
"PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member
firm of which is a separate legal entity.
Name of the Entity
The name of the entity in the example report is "Fund of the Pension Plan for Employees of XYZ
Company". The auditor's report for a pension plan that prepares its financial statements on a fund basis is
prepared in accordance with CAS 800 - special considerations - audits of financial statements prepared in
accordance with special purpose frameworks (CAS 800). CAS 80o contains specific guidance on how an
auditor's report should be presented and clearly shows that the auditor's report and the financial
statements should be using the legal name of the entity. In the example provided, the words "Fund of has
been inserted in front of the legal name of the pension plan. This would appear to be contrary to the
Guidance within CAS 8oo. In addition, please note the term "pension fund" was a defined term in Part V
of the Handbook of the Canadian Institute of Chartered Accountants (CICA Handbook) but it is no longer
included in Part IV of the CICA Handbook.
Basis ofAccounting
The example auditor's report states that the "financial statements have been prepared by the
administrator based on the financial reporting provisions of Regulation 909 and Section 76 of the Pension
Benefits Act (Ontario)". Section 76(1) states that "the administrator shall file financial statements for the
fund or plan as at the plan's year end" and therefore implies that financial statements prepared on a fund
basis would be acceptable for filing with FSCO. However, Section 76(6) clarifies that "the financial
statements should be prepared in accordance with generally accepted accounting principles" and Section
76(8) then clarifies that "the financial statements and the auditor's report shall be prepared in accordance
with the principles and standards set out in the Handbook of the Canadian Institute of Chartered
Accountants" (CICA Handbook). Thus, compliance with Section 76 of Regulation 909 would require the
preparation of financial statements in accordance with the CICA Handbook in addition to the regulatory
disclosure requirements outlined in Section 76 of Regulation 909.
The section of the CICA Handbook that is applicable to pension plans is Part IV - Pension Plans (Section
4600). Section 4600 requires the preparation of financial statements on a plan basis of accounting
(including the recognition and disclosure of pension obligations) and does not contemplate or permit the
preparation of financial statements on a fund basis of accounting. As such, the literal reading of the
financial reporting provisions of Section 76 of Regulation 909 is that financial statements are to be
prepared on a plan basis of accounting and accordingly include pension obligations (i.e. in accordance
with Section 4600). Therefore, it would not be appropriate to state that the financial statements are
prepared in accordance with Section 76 of Regulation 909 when the financial statements do not meet all
the requirements of Section 4600. In prior years, FSCO issued FSCO Policy F1oo-1o2 - Requirement to
File Pension Plan or Pension Fund Financial Statements to provide administrators guidance on preparing
financial statements for filing with FSCO. One of the key elements of this guidance was an explicit
statement that FSCO would accept financial statements prepared on a fund basis of accounting. Given that
FSCO issued such guidance is evidence that the requirements of Section 76 have not historically been
viewed as explicitly allowing for financial statements to be prepared on a fund basis of accounting.
A potential solution would be to modify the example opinion to state that the financial statements have
been prepared in accordance with the basis of accounting disclosed in note 2 to the financial statements.
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The example of the basis of accounting note states that the financial statements have been prepared in
accordance with the accounting policies noted below. It would be difficult to include disclosures on all
accounting policies a fund would need to comply with. The basis of accounting note would usually refer to
an existing accounting framework and include the policies that allow for a choice. In this case it might be
more appropriate to refer to the basis of accounting as being Part IV of the CICA Handbook and to disclose
the differences. It would still be appropriate to state that this is materially different from Part IV of the
CICA Handbook. The note also states "to comply with guidance provided by FSCO"; it might be more
appropriate to provide more detail when referring to the guidance.
Ideally, if the basis of accounting was explicitly included in a specific guidance it would be possible for the
preparer of the financial statements to refer to the specific guidance in the financial statements and for the
auditor to refer to the same guidance in the auditor's report. This would be consistent with the approach
that has been followed by the Regie du rentes du Quebec.
Capital Management
Statement of Investment Policies and Procedures (SIP&P) Information
This guidance has clearly stated that FSCO expects the disclosure of the certain information from the
SIP&P and actual returns on investments within the capital management note. Certain pension plans are
very similar in nature to public companies and publish their financial statements publicly. The
information contained within the SIP&P is treated by these pension plans as confidential and competitive
in nature. These pension plans may not wish this information to be publicly available. Should the pension
plan refuse to disclose this information in the financial statements, the auditor would need to consider
whether a modification to the auditor's report would be required. A potential solution could be a
requirement to provide this information to FSCO in an annual filing that would not be publicly available.
Financial Instruments: Disclosures
Disclosures Related to Pooled Funds
While not explicitly stated in the guidance, example 4 of the appendix illustrates that FSCO is expecting
pension plans to provide financial instrument risk disclosures related to the underlying investments held
within pooled funds. Historically, the prevailing view has been that the financial instrument risk analysis
be performed at the pooled fund level as opposed to looking through to the underlying investments. While
many larger pension plans may manage their financial instrument risk in this nature, many smaller
pension plans do not. FSGN-ooi states that "there is no need for the development of a new set of data and
statistics" which presumes that all pension plans are managing the financial instrument risk by looking
through the pooled funds to the underlying assets.
Many smaller pension plans do not have the staff and resources available, or the in-house expertise in
investment management, to manage the financial instrument risks in the manner contemplated by this
guidance. These smaller pension plans usually hire an investment manager, who does have the resources
and expertise, to manage the financial instrument risk on their behalf. From a governance perspective,
these pension plans focus their review of the performance of the investment managers, and the pooled
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funds that they are invested in, at a macro level. The analysis is usually performed at the pooled fund or
asset classification level. They typically do not look through pooled funds to the underlying investments.
Section 4600 refers to IFRS 7 with respect to disclosures related to financial instrument risk. IFRS 7.32
states "the disclosures required by paragraphs 33-42 focus on the risks that arise from financial
instruments and how they have been managed". The guidance contemplates requiring pension plans to
analyze and disclose the financial instrument risk in a manner that may be inconsistent with how it is
monitored and managed internally. We do not believe this was the intent of this guidance.
As a result, certain pension plans will likely need to modify how they are monitoring and managing
financial instrument risk strictly to meet the requirements of this guidance. This will not necessarily be a
simple task. The level of effort and work will be driven by the number of pooled funds that they are
invested in the availability of audited financial statements for each pooled fund and the consistency and
quality of the information provided within those financial statements. Additionally, if this analysis is done
merely to meet FSCO disclosure guidance, the disclosure may imply that the pension plan manages its risk
in this manner. We believe that this type of analysis should only be included in the financial statements if
the pension plan actively manages its financial instrument risk in this manner. A requirement of this
nature would impose unnecessary costs, internal and external, on pension plans that do not presently
manage financial instrument risk in the manner contemplated while providing minimal benefits.
Another area to consider is the impact of non-conterminous year ends. There are many situations where
the year-end for the pension plan and the pooled funds are different. This would result in the information
required to comply with this guidance either not being available as at the pension plan's year end or being
unaudited. This will pose significant challenges to both the plan's management and to the auditors. The
auditor would need to perform additional audit procedures over the investments of the pooled funds,
which would be costly for the pension plan. In some cases, the auditor may not be able to perform this
work, resulting in the auditor's report including a modification with respect to this matter.
Definition of Levels in Fair Value Hierarchy
In example 4 of the appendix the concept of the fair value hierarchy is introduced. The definitions that are
used do not appear to match those included in IFRS7. In particular, the definition of Level 1 and Level 2
appears very similar and maybe difficult for the users of the financial statements to differentiate between.
We recommend that the definitions be amended to reflect the contents of IFRS7.
Defined Contribution Pension Plans
The guidance related to the FSCO's expectations related to financial instrument risks has noted that "only
the first three bullets are required for defined contribution plans where members direct the investment
decisions for the assets in their accounts." The three items noted are:
•­ for those investments that are financial instruments - a table presenting each type of investment
assets and liabilities classified in the three-level measurement hierarchy of IFRS 7, paragraph 27;
•­
when a plan has in interest in a master trust - the fair value hierarchy table presents each type of
investment assets and liabilities of the whole master trust, along with the plan's position (total dollar
amount or percentage) in the master trust;
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•­ for all investments that are not financial instruments - a description of how fair value have been
determined;
The next requirement, which appears to not be required for defined contribution pension plans, is "
a description of the nature and extent of risks arising from financial instruments to which the plan is
exposed at the end of the period, and how the administrator manages those risks". This implies that FSCO
does not require disclosures related to financial instrument risk in the financial statements of a defined
contribution pension plan. The guidance note should clarify that this is the intent of the guidance.
Should you have any questions on our comments please do not hesitate to contact Michael Walke, Chief
Accountant (416) 815-5011, Sean Cable, Partner, National Accounting Consulting Services at (416) 814­
5831 or Grahame Keir, Senior Manager, Pension Group at (416) 687-8910.
Yours very truly,
Michael Walke
Partner
National Accounting Consulting Services
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