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Superintendent's Message

In 2008-2009, the institutions and pension plans under OSFI’s oversight faced many challenges. Plunging stock markets, low interest rates, a recession, and other factors affected all banks, life insurance companies, property and casualty insurance companies and private pension plans. Because the Canadian financial system withstood the global financial market turmoil better than many others, OSFI fielded many questions from domestic and foreign journalists as well as other parties as to why Canada has faired relatively well. Our answer has been that the strength of the Canadian system is due to Canada’s overall policy framework, to the quality of OSFI’s supervision and regulation, to cooperation and communication among our Financial Institutions Supervisory Committee (FISC) partners, and to the risk management skills of Canada’s financial institutions. An especially important element of our success is OSFI’s clear mandate and accountability, as assigned to us by Parliament, which drives all of our activities and requires a focus on solvency. While recognizing that failures can occur, the OSFI mandate clearly emphasizes early intervention and the need to act expeditiously to limit the risk of failure.

Throughout 2008-2009, OSFI worked internationally with other members of the Basel Committee on Banking Supervision (BCBS) and the international Senior Supervisors Group. We participated in meetings of the Financial Stability Board (formerly known as the Financial Stability Forum) and the International Association of Insurance Supervisors. As part of our pro-active approach, we initiated annual risk management seminars for the Chief Risk Officers of various industry segments in order to communicate our expectations, share best practices and developments, discuss lessons learned and provide additional opportunity for dialogue with OSFI supervisors and regulators. We increased the number of OSFI staff with special knowledge of credit, market and operational risks. We also continued our practice of holding supervisory colleges; the first Financial Stability Board-sanctioned college took place in February. These colleges, which OSFI started hosting in 2005, provide the opportunity for information sharing between some of Canada’s major banks and the host regulators of the countries in which those banks do business.

While OSFI’s mandate, philosophy and independence are key elements in how we fulfill our role, our success would not be possible without OSFI’s greatest resource -- its people. This past year has called for unprecedented levels of dedication from all parts of our organization, and I would like to express my appreciation to OSFI’s employees for all their efforts.

SECTION I: DEPARTMENTAL OVERVIEW

Raison d’être

OSFI supervises and regulates all federally incorporated or registered deposit-taking institutions (e.g., banks), life insurance companies, property and casualty insurance companies, and federally regulated private pension plans.

OSFI safeguards depositors, policyholders and private pension plan members by enhancing the safety and soundness of federally regulated financial institutions (FRFIs) and private pension plans. The work of OSFI contributes to the confidence of Canadians in Canada’s financial system.

The Office of the Chief Actuary (OCA) is a separate unit within OSFI. The OCA provides high-quality, timely advice on the state of various public pension plans and on the financial implications of options being considered by policy-makers. The work of the OCA contributes to the confidence of Canadians in Canada’s public retirement income system. 

Responsibilities

OSFI's legislated mandate was implemented in 1996 and under the legislation, OSFI’s mandate is to:

• supervise federally regulated financial institutions and private pension plans to determine whether they are in sound financial condition and meeting minimum plan funding requirements respectively, and are complying with their governing law and supervisory requirements;
• promptly advise institutions and plans in the event there are material deficiencies and take, or require management, boards or plan administrators to take, necessary corrective measures expeditiously;
• advance and administer a regulatory framework that promotes the adoption of policies and procedures designed to control and manage risk; and
• monitor and evaluate system-wide or sectoral issues that may impact institutions negatively.

OSFI’s legislation also acknowledges the need to allow institutions to compete effectively and take reasonable risks.  It recognizes that management, boards of directors, and plan administrators are ultimately responsible and that financial institutions and pension plans can fail.

Strategic Outcomes and Program Activity Architecture (PAA)

Primary to OSFI’s mandate and central to its contribution to Canada’s financial system are two strategic outcomes:

The chart below illustrates OSFI’s framework of program activities and program sub-activities, which support each Strategic Outcome.  In accordance with Treasury Board’s Policy on Management, Resources and Results Structures, a separate program activity for Internal Services was created to facilitate government-wide reporting and cost analysis.  Consistent with the presentation of OSFI’s 2008-2009 Report on Plans and Priorities, the costs of OSFI’s Internal Services activities in this 2008-2009 Departmental Performance Report are allocated to each program activity to present the full program costs. 

Click on image to enlarge

Performance Summary

The tables below identify OSFI’s financial and human resources, planned and actual, for the 2008-2009 fiscal year.

2008-2009 Financial Resources (Millions)

Planned Spending	Total Authorities	Actual Spending
$93.7	$93.7	$90.8

2008-2009 Human Resources (Full-Time Equivalents)

Planned	Actual	Difference
471	480	9

OSFI’s total 2008-2009 spending of $90.8 million is $2.9 million (3.1%) lower than its planned spending of $93.7 million. The incremental cost of 9 additional Full-Time Equivalents (FTEs) was offset by significant savings as a result of the deferral to 2009-2010 of several large information technology projects.

The table below presents a summary of OSFI’s performance during the 2008-2009 fiscal year towards achieving its first Strategic Outcome.

Strategic Outcome 1: To regulate and supervise to contribute to public confidence in Canada's financial system and safeguard from undue loss.

Performance Indicators	Targets	2008-2009 Performance
Percentage of knowledgeable observers who rate OSFI as doing a good or very good job at contributing to public confidence in Canada’s financial services industry.	70%	A strong majority (88%) of Chief Executive Officers (CEOs of FRFIs) believe OSFI performs well in contributing to public confidence in Canada’s financial services industry. Source: Report on Financial Institutions Survey 2008 1
Percentage of estimated recoveries on failed institutions (amount recovered per dollar of claim).	90%	Total weighted average recoveries 2 were 99% at 2008-2009 year end, which meets the set target of 90%. Source: Canada Deposit Insurance Corporation, Agents, Liquidators
Percentage of estimated recoveries on pension plans that have terminated under-funded.	85%	Four pension plans terminated under-funded in 2008-2009. The current estimated recovery rate for these plans is 85%. Source: Internal data
Percentage of respondents that rate the assistance / presentations provided as relevant to their work.	80%	In 2008-2009, 86.8% of respondents rated the assistance / presentations as relevant to their work. Source: Survey of International Advisory Group (IAG) program participants 3

¹ OSFI provided The Strategic Counsel, an independent research firm, with a list of CEOs of federally regulated financial institutions. The research firm invited the CEOs to participate in either an online or a telephone survey, and 166 (61%) participated. OSFI does not know which CEOs participated. The report is available on OSFI’s Consultations and Surveys Web page.

² No financial institutions have failed within the 2008-2009 fiscal year.

³ Surveys are provided to workshop participants when IAG staff are the primary presenters. IAG delivered 25 such workshops in 2008-2009, with 853 participants. A total of 694 surveys were completed, for a response rate of 81.4%.

The table below presents OSFI's planned and actual spending by program activity for Strategic Outcome 1, and a comparison to actual spending in the previous year.

Program Activity	2007-2008 Actual Spending	2008-2009				Alignment to Government of Canada Outcomes
		Main Estimates	Planned Spending	Total Authorities	Actual Spending
1.1 Regulation and Supervision of Federally Regulated Financial Institutions	$72.8	$79.6	$79.6	$79.6	$77.1	Strong economic growth A safe and secure world through international co-operation
1.2 Regulation and Supervision of Federally Regulated Private Pension Plans	$5.8	$6.5	$6.5	$6.5	$6.2	Strong economic growth Income security for Canadians
1.3 International Assistance	$2.0	$1.9	$1.9	$1.9	$2.2	Strong economic growth A safe and secure world through international co-operation
Total (millions)	$80.6	$88.0	$88.0	$88.0	$85.5

Further discussion on links to Government of Canada Outcome Areas found in the 2008-2009 RPP.

OSFI’s actual spending in 2008-2009 towards its Strategic Outcome 1 was $85.5 million, $2.5 million, or 2.8%, lower than planned. The variance is primarily in the Regulation and Supervision of Federally Regulated Financial Institutions program activity, and is largely due to the deferral of several large information technology projects. The decision to defer these projects to 2009-2010 was based on two factors: the need for supervisory and regulatory resources to focus on global and domestic financial events, and the need to first complete the review and update of OSFI’s Information Management and Information Technology Strategy.

The increase in actual spending of $4.9 million, or 6.1%, from the previous year is mainly attributed to OSFI’s growth in Full-Time Equivalents (21 FTEs), and increases in professional services costs to address at-risk institutions and travel costs related to OSFI’s various international commitments.

The table below presents a summary of OSFI’s performance during the 2008-2009 fiscal year towards achieving its second Strategic Outcome.

Strategic Outcome 2: To contribute to public confidence in Canada's public retirement income system.

Performance Indicators	Targets	2008-2009 Performance
Actuarial reports fairly communicate the results of the work performed by the Chief Actuary and his staff.	Unanimous agreement	2008-2009 – N/A – no peer review in 2008-2009 Refer to the summary for Program Activity 2.1 below.
Adequacy of professional experience of the Chief Actuary and his staff. AND/OR	Unanimous agreement	The external peer review panel’s findings received in March 2008 report that work on the 23rd Actuarial Report (CPP) complies with all relevant professional standards and that the Chief Actuary and his staff have adequate professional experience. The next independent peer review is scheduled for 2010-2011. Source: Review of the Twenty-Third Actuarial Report on the Canada Pension Plan dated 19 March 2008, conducted by the CPP Actuarial Review Panel.
Compliance with Canadian and international professional standards.	Unanimous agreement

The table below presents OSFI’s planned and actual spending by program activity for Strategic Outcome 2, and a comparison to actual spending in the previous year.

Further discussion on links to Government of Canada Outcome Areas found in the 2008-2009 RPP.

Program Activity	2007-2008 Actual Spending	2008-2009				Alignment to Government of Canada Outcomes
		Main Estimates	Planned Spending	Total Authorities	Actual Spending
2.1 Office of the Chief Actuary institutions	$5.1	$5.7	$5.7	$5.7	5.3	Income security for Canadians
Total (Millions)	$5.1	$5.7	$5.7	$5.7	$5.3

OSFI’s actual spending in 2008-2009 towards its Strategic Outcome 2 was $5.3 million, $0.4 million, or 7.0%, lower than planned. The variance is mainly due to lower Human Resources costs as a result of unexpected vacancies during the fiscal year.

The increase in actual spending of $0.2 million, or 3.9%, from the previous year is due to planned increases in employee compensation, offset by a decrease in costs associated with the triennial review of the Canada Pension Plan in 2007-2008.

Contribution of Priorities to Strategic Outcomes

The table below presents a summary of status and contribution to strategic outcomes for OSFI’s operational and managerial priorities in 2008-2009.

Operational Priorities	Type	Status+	Links to Strategic Outcome(s)*
1.1 Regulation and Supervision of Federally Regulated Financial Institutions – This program activity contributes to the safety and soundness of the Canadian financial system through risk assessment and intervention, rule making and approvals activities. OSFI’s work in turn, contributes to public confidence in the system.	Ongoing	Successfully Met	Strategic Outcome 1
1.2 Regulation and Supervision of Federally Regulated Private Pension Plans – OSFI conducts risk assessments of pension plans covering employees in federally regulated areas of employment; provides timely and effective intervention and feedback; employs a balanced relevant regulatory framework; and manages a prudentially effective and responsive approvals process.	Ongoing	Successfully Met	Strategic Outcome 1
1.3 International Assistance – Through this program activity, OSFI provides technical assistance to help emerging market economies improve their financial institution supervisory systems. Canada has long recognized that upgrading the supervisory capacity of developing and emerging market regulatory bodies can help to enhance the overall stability of the global financial system.	Ongoing	Successfully Met	Strategic Outcome 1
2.1 Office of the Chief Actuary – This program activity contributes to financially sound federal government public pension and other programs through the provision of expert actuarial valuation and advice to the Government of Canada and to provincial governments that are Canada Pension Plan (CPP) stakeholders.	Ongoing	Successfully Met	Strategic Outcome 2
Management and Program Priorities	Type	Status	Links to Strategic Outcome(s)
A. Enhanced Identification of Emerging Risks – Improve OSFI’s ability to identify, monitor and report on emerging risks to Canada’s financial system and federally regulated financial institutions (FRFIs).  Achievements: The Emerging Risk Committee met weekly to discuss market developments and identify emerging issues for targeted work. Introduced annual Risk Management sessions with various industry segments to reinforce the need for strong risk management and to share lessons learned. Completed comparative reviews of key risk areas:  U.S. commercial real estate, liquidity risk management, structural interest rate risk in the banking book, securitization, and banks’ internal capital adequacy assessment processes. Through hiring and reorganization, increased resources allocated to higher risk institutions and products, and to the supervision of insurance conglomerates. Delivered focused training on structured products, liquidity management and trading operations to relevant employees to better prepare them to identify emerging risks. Held Appointed Actuaries Forum to review strengths and weaknesses of dynamic capital adequacy testing (DCAT) reports.	New	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes through earlier identification, monitoring, and reporting on emerging risks to Canada’s financial system and the federally regulated financial institutions and private pension plans that operate within it.
B. Institutional and Market Resilience - Participate in international discussions about key issues arising from global market turmoil. Work with Financial Institutions Supervisory Committee (FISC) partners on similar issues in Canada. Achievements: Continued participation in international discussions with the Financial Stability Board (FSB - formerly the Financial Stability Forum), the International Association of Insurance Supervisors and other organizations. Continued active participation in the Joint Forum 4, including a review of the use of external credit rating agencies by regulators (The related working paper is available on the Bank for International Settlements Web site: Stocktaking on the use of credit ratings) and a study of off-balance sheet vehicles to gain insight into the degree of risk transfer or capital relief achieved by such vehicles. Worked actively with other Basel Committee on Banking Supervision (BCBS) members to assess the drivers of the crisis in financial markets, and to develop and issue new rules for sound risk management and capital regulation (liquidity risk management, stress testing, economic capital modelling, and revisions to Basel II). Continued to participate as an active member of the Accounting Task Force of the BCBS to comment on key accounting standard setting initiatives, including: consolidated financial statements, financial statement presentation, reducing complexity on financial instruments accounting, and improving disclosures about financial instruments. Worked on developing “lessons learned” from the recent market events with the international Senior Supervisors Group, which published the report, Observations on Management of Recent Credit Default Swap Credit Events. Hosted a College of Supervisors for key foreign regulators of one of the major financial institutions (first college based on FSB recommendations). Continued work with the Financial Institutions Supervisory Committee (FISC) and enhanced quarterly reporting to FISC partners.	New	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes by enhancing OSFI’s ability to identify and respond to key issues arising from global economic events and developments in world financial markets, and preparedness for any domestic impacts.
C. Changes to International Financial Reporting Standards (IFRS) - Implement the move from Canadian GAAP to International Financial Reporting Standards (IFRS). Achievements: Developed, approved and implemented Project Charter for IFRS Governance. Completed policy analysis of key differences of concern between IFRS and Canadian GAAP for 20 IFRS standards having an impact on FRFIs. Made substantial progress in developing implementation options and preliminary recommendations for FRFIs in four key policy areas. Held IFRS forums for deposit-taking institutions, property and casualty insurers and life insurers, and education sessions for OSFI project team members. Implemented semi-annual IFRS Progress Reporting for FRFIs and analyzed initial reports. Completed work on Accounting Standards Impact Analysis for OSFI. Completed high-level business and systems impact analyses for OSFI.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes through OSFI’s understanding of the implications of the accounting changes on its supervisory and monitoring processes, and ensuing positions on policy, process and reporting changes.
D. Minimum Continuing Capital and Surplus Requirements (MCCSR) – Adjust the current MCCSR, by developing and agreeing on a capital framework for life insurance companies over the next four years. Achievements: Issued a draft capital framework and a market risk paper for standardized approach, both developed in conjunction with Assuris and the Autorité des marchés financiers. Continued to work with these stakeholders to develop a credit risk consultation paper. Continued to work with the life insurance industry through the MCCSR Advisory Committee (MAC) to develop and incorporate more advanced risk measurement techniques into the MCCSR.  Made a number of revisions to the MCCSR Guideline for life insurance companies, most significantly to the capital requirements for segregated funds guarantees and the treatment of negative reserves, mortality, and foreign exchange requirements.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes through a more risk sensitive capital framework for life insurance companies.
E. Financial Sector Assessment Program (FSAP)/ Financial Action Task Force (FATF) Reviews - Respond to suggestions or recommendations in the Financial Sector Assessment Program (FSAP) report and the Financial Action Task Force (FATF) report. Achievements: FSAP - Increased the number of supervisory staff and staff with special knowledge of credit, market and operational risks by hiring additional employees with current industry experience. Priorities A and B above cover the recommendations around monitoring the stresses in the global environment. Completed a multi-year project to develop a new risk assessment framework for pensions, which reflected FSAP’s recommendation that OSFI’s supervision of pension plans focus on inherent risks, the adequacy of controls and risk management.   FATF - Worked with a number of other stakeholders on evaluating Canada’s anti-money laundering/anti-terrorism financing (AML/ATF) regime in light of the FATF Mutual Evaluation Report. Accelerated the issuance of a revised and comprehensive Guideline on Deterring and Detecting Money Laundering and Terrorist Financing in December 2008 to meet a FATF follow-up deadline. Continued to play an active role in the work of the FATF.	Previously committed	Successfully Met	Strategic Outcome 1 This priority contributes through enhanced risk identification and monitoring of stresses in the global environment.
F. Basel II Capital Accord – Post-Implementation Phase - Monitor Basel II systems and review banks’ capital adequacy assessment processes and relevant policies. Achievements: Developed a monitoring framework and tracked the performance of risk rating systems for banks using the Internal Ratings Based (IRB) approach. Conducted cross-system supervisory reviews at IRB banks to assess ongoing adherence to Pillar 1 minimum requirements. Designed and implemented the interim IRB model modification framework to guide the supervisory review and approval of modifications to IRB risk rating systems. Performed cross-system reviews of Internal Capital Adequacy Assessment Process (ICAAP) at IRB banks and related risk measurement techniques, given the evolving nature of Pillar 2 and economic capital practices. Established a framework for the supervisory review of ICAAPs at standardised banks.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes through improved focus on the measurement of risks and their relation to the overall level of capital adequacy for deposit-taking institutions.
G. People - Ensure OSFI has the human resources available to fulfill its mandate, through better long-range, integrated planning. Achievements: Enhanced OSFI’s HR planning process to ensure key resources necessary to meet ongoing operational requirements and emerging risks are prioritized, skill gaps are identified, and action plans are developed and monitored on a quarterly basis at the sector level (semi-annually at the corporate level). Implemented targeted recruitment strategies, including development of a university recruitment program anticipated to start in the fall of 2009. Conducted a training needs analysis that enabled the delivery of training aligned with identified risks and priorities. Reviewed Executive group compensation to ensure continuing alignment with the market.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 and 2 This priority contributes by improving OSFI’s ability to attract, motivate, develop and retain employees with highly specialized knowledge, skills and experience to perform its work.
H. Pensions Systems and Processes - Enhance OSFI’s ability to perform as required in an increasingly complex pensions environment by enhancing OSFI’s pension system and processes. Achievements: Completed development of a new risk assessment framework for pension plans and began the process of enhancing the pension IT system to support the framework.  Pursued enhancements to a new automated system to support the pension approvals function.  Published additional approval instruction guides to the pension industry.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes through improved systems and processes to support the evolving supervisory and regulatory activities of the Private Pension Plans Division.
* See section II for how this priority contributes to a strategic outcome. + See section II for achievements towards this priority.

⁴ The Joint Forum — established in 1996 by the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors — works to achieve consistency of supervisory approaches on issues of common interest across financial sectors and national borders.

Risk Analysis

Key Risks and Threats

During the reporting period, the Canadian economy followed the US economy into a recessionary state.  The Canadian dollar depreciated significantly in relation to the US dollar during the reporting period, however this did not provide much of a boost to exporters because of the continued deterioration of economic conditions in the US and elsewhere.  While there have been signs of hope of a recovery in the near future, the recent strength of the Canadian dollar could represent significant downside risk.  Resurgence in exports is critical to the recovery and a prolonged appreciation of the Canadian dollar could have significant negative implications. Sustained slowing of Canadian consumer spending will add more to these recessionary conditions.

During 2008-2009, OSFI continued to promote sound risk management practices through its rule-making activities. We also continued to work with international bodies to develop international rules that may be applied to Canadian financial institutions. As part of its assessments of member countries required under Article IV of the Articles of Agreement, in March 2009 the International Monetary Fund recognized the benefits these activities have had for Canada during the global financial market turmoil. The IMF stated that our “strong regulatory and supervisory framework” was one of the three factors responsible for the resilience of the Canadian banking system compared to its global competitors. Further, in 2008, Canada was recognized as having the world’s soundest banking system by the World Economic Forum’s Global Competitiveness report. 

Enterprise Risk Management

The environment within which OSFI operates presents an array of challenges to the achievement of its mandate and objectives.  While many of these challenges are consistently present, the extent to which they present a risk to OSFI’s objectives varies, depending on economic and financial conditions and the financial industry environment.  OSFI’s ability to achieve its mandate depends on the timeliness and effectiveness with which it identifies, evaluates, prioritizes, and develops initiatives to address areas where its exposure is greatest. 

OSFI’s risk management process has undergone changes designed to make the process more dynamic and timely.  OSFI’s Enterprise Risk Management (ERM) framework has been updated to reflect a greater integration of ERM with the executive process of discussing and evaluating risks.     

OSFI’s ERM framework divides risks into external and internal categories. The external risk category consists of economic and financial conditions, the financial industry’s environment, OSFI’s legal environment and catastrophic events.  External risks arise from events that OSFI can potentially influence but cannot control, but must be able to monitor and react to in order to mitigate the impact.  The internal risk category consists of risks within our control that can broadly be categorized as people, processes, systems and culture. 

OSFI’s ERM program has identified several key risks to the achievement of its mandate and objectives. 

External Risks

Global Economies and the Industry

The risks posed by the current environment (both at the level of the economy and within the financial sector) feature predominantly.  Global financial events require that OSFI, like all financial sector regulators, be in a position to respond effectively to a constantly evolving economic and regulatory environment.  To ensure effective and efficient response, OSFI relies on the work of its Emerging Risks Committee and initiatives such as cross-sector reviews in high risk areas and stress testing exercises. 

Internationally, pronouncements by the G-20 leaders have resulted in a number of new committees (formed by the Financial Stability Board, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors and the Joint Forum) in which OSFI has chosen to participate, including procyclicality/capital buffers, leverage, external ratings, and securitization.    

Domestically, OSFI is participating in discussions with the Department of Finance regarding the adaptation of the G-20 recommendations. 

Capital Adequacy

OSFI is in the process of reviewing its Minimum Continuing Capital and Surplus Requirements (MCCSR) and the Minimum Capital Test (MCT) to reflect recent lessons learned and to take account of the direction of international efforts such as those of the International Association of Insurance Supervisors (IAIS) to develop new capital guidance.  As Canada has been at the forefront of insurance regulation, adjustments to the MCCSR and the MCT are necessary to ensure that Canada’s capital rules remain effective and among the international leaders in this field.  In 2008-2009, OSFI continued to participate in a number of IAIS initiatives.

Market events, coupled with the new international capital framework (Basel II) for banks, have required more focus on the measurement of risks and their relation to the overall level of capital adequacy.  As a result, policies to strengthen the resilience of banks to future stress are being developed.  Changes internationally will feature a combination of measures such as introducing standards to promote the build-up of capital buffers that can be drawn down in periods of stress, strengthening the quality of bank capital, improving the risk coverage of the capital framework and introducing a non-risk based supplementary measure. During 2008-2009, OSFI worked actively with other Basel Committee for Banking Supervision (BCBS) members to develop these measures as well as to issue new guidance on stress testing, liquidity management, assessing fair values and the range of practices on economic capital modelling.   These pronouncements from the BCBS during this period were developed with OSFI involvement.

Accounting

Canada is adopting International Financial Reporting Standards (IFRS) in 2011.  As a reliance-based regulator, it is critical that OSFI understands the implications of changes to financial statements to perform accurate risk assessments of financial institutions.  OSFI is in the process of assessing the effects on institutions of the move to IFRS and the need for new or modified guidance from OSFI.  OSFI continued to work closely with national and international organizations to present its views on these issues.

OSFI has been working diligently with the financial institutions that it regulates to ensure that they are ready to adopt the International Financial Reporting Standards.  Industry forums were organized by OSFI to facilitate consultations and information sharing.

In addition, OSFI has completed its first semi annual review of IFRS progress reports from financial institutions and provided the industry with feedback to help maintain momentum.

Internal Risks

People Risks

Given the increasing complexity and volatility of the economy, OSFI must have employees with highly specialized knowledge, skills and experience to ensure effective regulation and supervision of financial institutions.  Over the past year OSFI has focused on increasing the number of staff with special knowledge of credit, market and operational risks, and will continue to recruit and reassign staff to fill any identified gaps.  In addition, market conditions, normal turnover and retirement rates mean that a continuous learning environment is necessary to enable employees to meet the challenges of the constantly changing environment.  Attracting, motivating, developing and retaining skilled staff is and will continue to be a top priority for OSFI.  OSFI implemented targeted recruitment strategies, including significant hiring in the Supervision sector in Toronto.

Pension Systems and Processes

The sharp drop in equity values beginning in the second half of 2008 led to significant deterioration in the solvency position of federally-regulated defined benefit pension plans at year end 2008. As a result, the environment was challenging for a number of pension plans going into 2009.

In light of the global financial market turmoil and economic conditions, the Government of Canada provided pension plans with relief through the 2009 Solvency Funding Relief Regulations. In addition, the Government initiated a consultation on private pension issues, with one of its objectives being to review the solvency funding rules and table any necessary legislative changes by the end of 2009. OSFI is collaborating closely with the Department of Finance on this initiative.

Many of the gaps in systems and processes that were previously identified by the Pensions area have been or are in the process of being addressed.  This past year, OSFI completed the review of its pension risk assessment framework that was begun in 2006-2007.  In addition, initiatives are well underway to upgrade the systems that support Pension supervisory efforts. These initiatives will be implemented over the next few years.

Expenditure Profile

The table above presents a four year trend of OSFI's planned and actual spending, and actual full-time equivalents (FTEs). OSFI's human resources costs typically account for approximately 75% of its spending, which explains the correlation between the spending and FTE trend lines. In the latter half of 2006-2007, OSFI focused aggressively on filling vacancies and added resources in support of the New Capital Adequacy Framework (Basel II), Anti-Money Laundering/Anti-Terrorist Financing activities, international work on changes to accounting standards, and in the Private Pension Plans area. During 2007-2008, OSFI increased its FTEs by 2.9% from the previous year in order to direct more resources to enhancing the identification of emerging risks and to monitoring institutional and market resilience in response to the prevailing global economic and financial market events. OSFI further increased its staff complement by 4.6% in 2008-2009 to focus more effort on higher risk institutions and products, and the early detection of problem loan portfolios. OSFI strengthened its workforce in light of the continuing turmoil by hiring employees with current industry experience and special knowledge of credit, market and operational risks.

OSFI's total actual spending rose by 3.1% in 2006-2007, 1.4% in 2007-2008 and 5.9% in 2008-2009. During this period, OSFI also completed several major enabling technology projects in support of information management, Basel II, enhanced reporting and analytics (business intelligence), and commenced in 2006-2007 the first phase of its Pensions Processes and Systems Renewal Initiative. The first phase was largely completed during 2008-2009. The second phase of this project will begin in 2009-2010 and is expected to be completed in 2010-2011.

Voted and Statutory Items

This table summarizes Parliament’s voted appropriations, or funds, to OSFI. OSFI receives an annual parliamentary appropriation pursuant to section 16 of the OSFI Act to support its mandate relating to the Office of the Chief Actuary.

Voted and Statutory Items (thousands)

Vote # or Statutory Item (S)	Truncated Vote or Statutory Wording	2006-2007 Actual Spending	2007-2008 Actual Spending	2008-2009 Main Estimates	2008-2009 Actual Spending
30	Operating expenditures	$433	$603	$853	$582
Total		$433	$603	$853	$582

In this fiscal year, OSFI was granted $853 thousand (2007: $873 thousand) in the Main Estimates. Subsequently, OSFI was granted an additional $16 thousand related to adjustments for collective agreements, bringing the total year appropriation to $869 thousand. This parliamentary appropriation is to defray the expenses associated with the provision of actuarial services to various public sector employee pension and insurance plans, including the Canadian Armed Forces, the Royal Canadian Mounted Police, the federally appointed judges and Members of Parliament.

The actual spending in the table above is calculated using a modified cash basis of accounting, in accordance with Treasury Board’s Guide to the Preparation of Part III of the Estimates and the Receiver General’s Public Accounts Instruction Manual. OSFI, however, operates on a full accrual accounting basis according to Canadian Generally Accepted Accounting Principles (GAAP) for the private sector. This difference in accounting bases gives rise to variances between OSFI’s use of funds and appropriated funds. On the full accrual accounting basis, OSFI fully utilized its annual appropriations.

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