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Over the past year, several Canadian jurisdictions have implemented changes to pension funding rules in an effort to address the negative market conditions that have adversely affected many pension plans. Quebec and Nova Scotia have joined these jurisdictions to provide temporary relief to pension plan sponsors. Each province has introduced slightly different types of relief, with different criteria for plan sponsors. Details of the relief provisions offered by Quebec and Nova Scotia are outlined below and a snapshot of relief provided across the country is included in Appendix A.
Quebec
On November 11, 2009 the Gazette Officielle du Québec included the final version of Regulation respecting the measures to reduce the effects of the financial crisis on pension plans covered by the Supplemental Pension Plans Act (Revised Regulation). The Revised Regulation replaces the draft regulation published on May 6, 2009 (May Regulation). The Revised Regulation comes into force on November 26, 2009, but will be effective retroactive to December 31, 2008.
Relief for Sponsors
While the Revised Regulation does not differ in substance from the May Regulation, the information has been reorganized, simplified and clarified. All of the relief offered in the May Regulation is included in the Revised Regulation, meaning that sponsors have the option of implementing smoothing over a period of up to five years, consolidating prior deficiencies and utilizing an amortization period of up to 10 years, up to the end of the plan year following December 31, 2017. The Revised Regulation continues to require that plan sponsors calculate a financial crisis amount and a financial crisis deficiency (FCD). It also includes a new section on the calculation of the amount of pension that must be guaranteed by an insurer in respect of assets administered by the Régie when an employer that is a party to a multi-employer pension plan withdraws or when a plan is terminated.
Rules for Valuations
Key information on the timing of valuations has been identified in the Revised Regulation. Specifically, valuations with a date after December 30, 2008 and prior to March 31, 2009 may be filed until December 31, 2009 and no penalty for late filing will apply to actuarial valuations whose date is prior to December 15, 2009. In order to complete these valuations, written instructions to the pension committee will be required from the employer, in the case of a single employer plan, or from the person or body empowered to amend the plan, in the case of a multi-employer plan. If asset smoothing is used, the written instructions must include the asset valuation method and the period used to level short-term fluctuations in the market value of assets. Similarly, written instructions from the employer to the pension committee will be necessary to apply the new Canadian Institute of Actuaries’ standard of practice for determining pension commuted values (normally only effective on April 1, 2009) retroactively to December 31, 2008.
Implications for Plan Sponsors
Consistent with the May Regulation, the Revised Regulation requires that a sponsor that takes advantage of temporary solvency relief immediately becomes subject to the permanent funding requirements of Bill 30 which include a provision for adverse deviation (PfAD), immediate funding of improvements where solvency levels are below or fall below 90%, and annual valuations. These Bill 30 provisions may deter some plan sponsors from seeking solvency relief.
While the Quebec relief does not require plan members’ consent, the relief is only available for the first complete actuarial valuation after December 30, 2008 and written direction from the employer to the pension committee is required for that valuation. The report on this actuarial valuation will have to be accompanied by a written document certifying that it complies with the instructions given to the pension committee or that no instructions were given.
Nova Scotia
On November 4, 2009, Nova Scotia’s Ministry of Labour and Workforce Development announced funding relief for private pension plans registered in the province. The funding relief was implemented through a revision of the Pension Benefits Regulation (Regulation), effective November 3, 2009 by Order in Council 2009-464 (OIC).
The regulatory revisions enable Nova Scotia plan sponsors to utilize a ten-year amortization period, as opposed to the regular five-year period, for a solvency deficiency identified in the first actuarial valuation report prepared between December 30, 2008 and January 2, 2011. Plan sponsors must comply with a number of conditions in order to take advantage of the relief, including notice to members and an objection process, both of which are described in detail below.
Notice to Members
The plan’s administrator must provide written notice to all members and former members, as well as their agents and any trade union, and any other persons entitled to benefits under the plan (Eligible Individuals). The notice must include a range of prescribed information, including the amount of special payments to be made if the relief is obtained and a statement that, if relief is obtained, the value of the plan’s assets during the 10-year amortization period “may be lower than they would be if the amortization period were not extended, and that the 10-year amortization period may also lengthen the time the solvency assets are less than the solvency liabilities.”
Objections
The notice to Eligible Individuals must state that they may object to the proposed extension by sending an objection to the administrator by a specified date, which must be at least 30 days after the date the notice is provided. If one-third of the Eligible Individuals object to the proposal then the extended amortization will not be permitted. For active members represented by a trade union, the union’s objection will be counted as a separate objection for each member it represents.
The administrator must provide the Superintendent of Pensions with a copy of the notice and other prescribed materials no later than 60 days after the date the written notice is provided. If less than one-third of Eligible Individuals object, and provided no payments to the plan are in arrears, the plan may move to the 10-year amortization schedule.
Limitations on Amendments and Benefit Improvements
A Nova Scotia registered plan that utilizes the 10-year amortization schedule cannot be amended in the first five years to decrease employee contributions. In addition, it cannot be amended to increase benefits unless sufficient contributions are made to fully fund the cost of the increase, where the proposed increase would affect the cost of benefits, the plan’s solvency or funding, or create an unfunded liability.
Finally, the temporary relief provided by the OIC is not available to a pension plan established after 2008, unless it was established following the merger or split of plans, at least one of which was established before 2009.
Implications for Plan Sponsors
The Nova Scotia relief is limited to an extended amortization period, and does not include smoothing or other types of solvency relief offered by some other jurisdictions. As well, the relief can only be implemented after members and former members are notified and given an opportunity to object. While the objection process is not as onerous as an obligation to obtain positive plan member consent, the process of notifying all plan members and collecting objections may be more cumbersome than many plan sponsors are willing to bear. A similar process was implemented in Ontario in June 2009, and to date few plan sponsors have availed themselves of this relief option. Accordingly, it remains to be seen how many plan sponsors will avail themselves of solvency relief in Nova Scotia.
Appendix A: Temporary Solvency Relief
|
|
Relief Options |
Conditions |
Fresh Start |
|
Federal |
1. Six-year funding (no buy-in or LOC) 2. 10-year funding: LOC 3. 10-year funding: buy-in 4. 10-year funding: agent crown corporations |
By 12/31/09 plans (other than agent crown corporations) must have either buy-in or LOC Buy-in established if less than one-third of members and beneficiaries (counted separately) object |
No |
|
Alberta |
1. Three-year solvency funding moratorium 2. 10-year amortization for new solvency deficiency |
Restrictions on benefit improvements Five-year funding for remaining deficit (for Option 1) |
No |
|
British Columbia |
Superintendent can provide case-by-case approval of relief; unlikely to approve amortization period extension beyond 15 years |
Superintendent to consider factors in PEN-09-001 |
Unknown |
|
Manitoba |
Consolidation of deficits with 10-year funding |
Buy-in established if less than one-third of members and retirees/beneficiaries (counted separately) object Restrictions on benefit improvements during relief period |
Yes |
|
New Brunswick |
Superintendent can extend amortization to date on or before 12/31/18 upon application |
Notice and opportunity to comment must be given to members and beneficiaries |
No |
|
Newfoundland & Labrador |
1. Consolidation of deficits with five-year funding 2. 10-year funding of consolidated deficits: buy-in 3. 10-year funding of consolidated deficits: LOC |
Buy-in established if less than one-third of members and retirees/beneficiaries (counted together) object Restrictions on benefit improvements during first five years of relief period |
Yes |
|
Nova Scotia |
10-year funding with buy-in |
Buy-in established if less than one-third of members, retirees and other entitled individuals (counted together) object Restrictions on plan amendments during relief period Not available to plans established after 2008 (except if created from a merger/split) |
No |
|
Ontario |
1. Consolidation of deficits with five-year funding 2. 10-year funding: buy-in 3. One-year deferral of catch-up payments |
Buy-in established if less than one-third of members and retirees (counted together) object Accelerated funding of benefit improvements |
Yes |
|
Quebec |
1. Consolidation of previous solvency deficits 2. Smoothing of assets over up to five years 3. Up to 10-year increase in amortization period |
Immediate application of Bill 30 provisions (including PfAD) Relief cannot reduce solvency payments below non-relief level |
Yes |
|
Saskatchewan |
Three-year solvency funding moratorium |
“Terminal funding” applies to plans receiving relief (subject to exceptions) Surplus assets identified in a going concern valuation cannot be used towards employer’s normal cost contributions during relief period |
No |
Please contact Leanne Hull, Roxanne Poulin or your Watson Wyatt consultant for additional information.
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