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The October 21, 2009 edition of the Gazette Officielle du Québec contained a revised version of the Regulation to amend the Regulation respecting supplemental pension plans (Revised Regulation). The Revised Regulation replaces a draft regulation published on April 1, 2009 (April Regulation), and is intended to provide the details needed to implement the solvency and funding provisions introduced in 2006 by An Act to Amend the Supplemental Pension Plans Act, particularly with respect to the funding and administration of pension plans (Bill 30). The Revised Regulation will come in force on the same day the solvency and funding provisions of Bill 30 take effect, which is January 1, 2010.
It is important to note that the Revised Regulation does not address temporary solvency relief. A draft solvency relief regulation was introduced in May 2009, and the final regulation is expected to be released this fall. However, plans that avail themselves of temporary solvency relief will be subject to the immediate application of the funding and solvency rules in Bill 30, including those set out in the Revised Regulation.
The Revised Regulation contains several changes from the April Regulation, made in response to stakeholder consultations and submissions. A number of these changes, and their implications for plan sponsors, are outlined below.
Solvency and Funding Measures
Actuarial Valuations
The Revised Regulation modifies the information that needs to be disclosed in actuarial valuation reports. The report must disclose the maximum reduction of a letter of credit (LOC) amount to which the pension committee may agree. Also, the Revised Regulation clarifies the calculation of the penalty for late filing of actuarial valuations, and how actuarial liabilities should be broken down when being disclosed.
A new provision is also included regarding actuarial certifications in the case of a partial actuarial valuation. However, while the French text states that the actuary’s certification must be based on a “prudent” estimate, the English text refers to a “conservative” estimate. The use of different terms, both of which are subjective and each of which have different meanings, could create confusion for actuaries and administrators. It is hoped that clarification of this issue will be forthcoming.
A final area of change is the revocation of the requirement to use the current specified forms for annual information statements. However, despite the revocation of these forms, it appears that the requirement to provide annual information statements remains, and it is possible that this may be clarified with the introduction of new forms in the future.
Letters of Credit (LOCs)
The April Regulation introduced provisions for plan sponsors to utilize an irrevocable LOC for up to 15 percent of solvency funding liabilities. The Revised Regulation provides additional details on LOCs, permits the LOC to be reduced over time, and requires the pension committee to agree to reduce the amount of the LOC if the employer pays an amount “at least equal to” the amount of reduction requested or if it exceeds a minimum surplus as defined in the Revised Regulation. The ability to reduce the LOC may provide greater flexibility to plan sponsors to modify the amount of the LOC from time to time. Also, the Revised Regulation clarifies that the pension committee must agree to cancel a non-compliant LOC where the employer provides a new LOC or pays an amount equivalent to the LOC.
Reserve and Provision for Adverse Deviation (PfAD)
One of the key features of Bill 30 was the introduction of the PfAD, a funding reserve required to be included in actuarial valuations. The April Regulation outlined the formula for the calculation of the PfAD, and the Revised Regulation added further details and revised, to some extent, the PfAD formula by eliminating the duplication of the required PfAD in respect of retired members’ liabilities. Moreover, the Revised Regulation requires the pension committee to establish a policy to determine the level of PfAD applicable to the liabilities of members eligible to retire instead of simply deciding on this issue from time to time as stipulated in the April Regulation. Finally, the Revised Regulation modifies the meaning of fixed-income securities and requires additional information to be disclosed in the valuation report if (and only if) a PfAD is calculated.
Pension Valuation and Partition
In addition to the funding measures, the April Regulation contained provisions addressing the partition of benefits following the breakdown of a marriage, civil union or common-law relationship. The Revised Regulation includes modifications from the April Regulation adjusting the terminology used in the French and English versions to enhance the consistency and clarity of terms.
Next Steps
Plan sponsors with Québec-registered plans will need to amend their actuarial valuation processes, implement PfAD calculations, and determine their interest and/or need in acquiring an LOC. Also, pension committees will need to establish a policy on the desired PfAD level in respect of the liabilities for plan members eligible to retire. While the Revised Regulation is not effective immediately in theory, it must be applied immediately for those sponsors who utilize the temporary solvency relief measures. This means they will be required to apply various elements earlier, such as the new valuation rules, the new immediate funding of amendments for insolvent plans (below 90 percent) as well as requirements for annual valuations and PfADs.
Please contact Leanne Hull, Roxanne Poulin or your Watson Wyatt consultant for additional information.
For other information about Watson Wyatt research and services: call 1-866-206-5723 or email infocanada@watsonwyatt.com.
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