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Normandin Beaudry

Member-funded pension plans

LinkedIn

There, in black and white

NB Bulletin Vol. 10 N. 2, March 2007

On February 28, 2007, the Gazette officielle du Québec published the Regulation to amend the Regulation respecting the exemption of certain categories of pension plans from the application of the Supplemental Pension Plans Act. This new regulation, which comes into effect on March 15, 2007, provides for creation of member-funded pension plans (MFPPs).

This bulletin describes the key features of an MFPP.

Definition

An MFPP is a defined benefit plan with a career average earnings or flat benefit formula without automatic indexation in which the risks of plan funding are borne entirely by the members. Employer contributions are set in advance and do not vary in case of actuarial deficit.

Actuarial deficits incurred while the plan is in force are funded by active members. Asset shortfalls on plan termination result in a reduction of the pension payable to members and beneficiaries. On the other hand, surplus assets while the plan is in force or on its termination are used to increase benefits or give members a contribution holiday, subject to certain constraints. In other words, employee contributions fluctuate depending on actuarial deficits and surpluses.

Establishing and amending an MFPP

The decision to set up, amend or terminate an MFPP must be made jointly by the employer and each association certified to represent plan members. MFPPs cannot be established by converting a traditional pension plan.

An amendment cannot be registered if it would place an MFPP in a deficit position on a going concern or a solvency basis. In addition, amendments or employee contribution holidays will not be approved unless pensions have first been indexed.

Benefits payable

Rules governing payment of retirement benefits under an MFPP are identical to those under a traditional plan-apart from the rule that the employer’s contribution must be at least 50%, which does not apply to an MFPP. In addition, in case of termination of membership, the value of transferable entitlements will be adjusted upward or downward depending on the pension plan’s degree of solvency, whether it is more or less than 100%. Degree of solvency must be estimated at least annually, at the end of the fiscal year.

Going-concern and solvency valuations for an MFPP

Like traditional plans, MFPPs are subject to going-concern and solvency actuarial valuations. The going-concern valuation of the MFPP must include an assumption that the plan will provide pension benefits for members and beneficiaries indexed based on annual increases in the Consumer Price Index, to a maximum of 4%. This provides a cushion against a possible deficit (which would mean increasing employee contributions).

Comment

The MFPP is not really an alternative to the traditional defined-benefit plan for the following reasons:  

  • It requires termination of the existing plan (which can have a negative financial impact on an employer whose plan is in a deficit position).
  • Given the required MFPP funding cushion, the parties must contribute more to maintain the current benefit level, making it a less efficient option.
  • It does not offer the options for end-of-career human resources management available in traditional plans (an employer subsidized early retirement program, for example).

The MFPP is, however, an alternative to defined contribution plans. It is also a solution for employers who do not offer a pension plan. For employees with a defined contribution pension plan, the MFPP replaces individual investment risk with a group funding risk, adding a cushion to mitigate the volatility of contributions and a guarantee that members can use any surpluses. We are of the opinion, however, that it is important to make sure employees are well-informed of the underlying risks and possible impacts on their retirement income before considering to introduce a plan of this type.

 

Please feel free to contact us for additional information.

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