Member-funded pension plansLinkedIn
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.
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.
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).
The MFPP is not really an alternative to the traditional defined-benefit plan for the following reasons:
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.
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