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Normandin Beaudry

Bill 102, an Act Respecting the Funding of Certain Pension Plans

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There, in black and white

NB Bulletin Vol. 8 N. 8, May 2005

As a result of the stock market collapse in the early 2000s and the lowering of interest rates over the last few years, certain pension plan sponsors are experiencing increased pressure in terms of the funding of their defined benefit pension plans, particularly with respect to solvency rules.

On May 5, 2005, the Government of Québec introduced Bill 102 (an Act Respecting the Funding of Certain Pension Plans), which aims to ease, for the short-term, the burden associated with the funding of pension plans, while protecting the security of benefits promised to members. This bill proposes temporary measures that will apply for the next five years and may be replaced by new and permanent funding rules thereafter.

The bill provides two separate measures that apply only to the first full actuarial valuation of a pension plan carried out after December 30, 2004. The first measure allows for the consolidation of solvency deficiencies and the second allows for the relaxation of amortization requirements for the consolidated deficiencies.

Consolidation of Solvency Deficiencies

Under this measure, the unamortized portion of the solvency deficiency from previous actuarial valuations may be combined with the solvency deficiency resulting from the new valuation, and amortized over a period of five years. The pension committee who decides to have an actuarial valuation completed must notify the employer in writing within 10 days of this decision (30 days after the date of assent of this Act if the valuation has already been requested). Within 30 days of notification, the employer may send a written instruction to consolidate the solvency deficiencies and, if it so chooses, to set an earlier valuation date than the one selected by the pension committee (subject to certain restrictions).

The employer may also decide to request an actuarial valuation. The employer may, therefore, instruct the pension committee to consolidate the solvency deficiencies and set a date for the actuarial valuation (no more than 90 days before the date the written instruction is sent to the pension committee).

Comments

As the measure aims solely to consolidate solvency deficiencies, its effect will be limited for plans whose special amortization payments are largely determined by the going concern funding status of the plan.

Employers and pension committees of pension plans that will be required to file an actuarial valuation as at December 31, 2004, or those who have already requested the preparation of an actuarial valuation, must ensure that they are able to send out the required written notices as soon as the bill has received assent.

Relaxation of Amortization Requirements Linked to Solvency Deficiencies

This second measure allows for the amortization of the consolidated solvency deficiency over a period of ten years as opposed to five years. The special amortization payments required for the first five years will be determined as if the amortization period was ten years. The balance of the solvency deficiency remaining after five years will be considered a new deficiency at that date.

To benefit from this measure, the employer should have requested consolidation of the solvency deficiencies and should meet one of the following four conditions:

  • be a municipality or municipal body;
  • be an educational institution at the university level;
  • provide an appropriate guarantee such as a letter of credit:

The amount of the guarantee should correspond to the cumulative difference between the special amortization payments normally required and those authorized by the proposed measures. Other details related to the terms and conditions of the guarantee will be prescribed by regulation. 

  • obtain the consent of members and beneficiaries:

To obtain consent, each of the members and beneficiaries must be personally notified in writing and a notice must be published in a daily newspaper. Members and beneficiaries will be given 30 days to express their opposition and will be deemed to have consented unless 30% or more of each of the groups (group of active members and group of retirees and beneficiaries) have expressed their opposition. If all active members are represented by one or more unions, the consent of these unions will supersede the consent of the active members.

Comments

Because these measures will apply to only one actuarial valuation, the choice of a valuation date may become an important decision factor.

With the exception of the municipal and university sectors, employers and pension committees that plan on taking advantage of this measure should examine the different options to determine which condition (guarantee or consent) to favor.

Public Consultation

The Government of Québec also announced that it has mandated the Régie des rentes du Québec to hold, in the near future, a public consultation on the long-term funding principles for pension plans which should lead to the establishment of new and permanent funding rules.

We will be keeping a close watch on developments related to pension plan funding and will be sure to keep you informed.

 

Please feel free to contact us for additional information.

514.285.1122
 
630, René-Lévesque Blvd. West, 30th floor
Montreal, Quebec, H3B 1S6