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Normandin Beaudry

Draft Regulation respecting the funding of pension plans of the municipal and university sectors


There, in black and white

NB Bulletin Vol. 13 N. 1, January 2010

Municipal edition

New permanent financing rules came into effect in Quebec on January 1, 2010, for all pension plans ("Bill 30"). However, for municipal and university sector pension plans, a highly anticipated Draft Regulation was recently published in order to detail the application of Bill 30 as well as certain rules specific to these sectors.

From the outset, we note that the Draft Regulation carries forward the provisions in the Agreement on a new fiscal and financial partnership with the municipalities the ("Fiscal partnership") that, namely, excludes municipalities as well as universities from the obligation to fund any solvency deficiency since January 1, 2007, and forbids the use of smoothed value methods to assess the plan's assets.

Permanent financing rules

The financing process was extensively reviewed for the municipal and university pension plans. The funding valuation will continue to guide these plans' financing. However, it has undergone significant changes including the creation of a reserve within plan assets. This new financing process can be illustrated as follows:

The new going concern funding process is summarized as follows:

  • For funding purposes, plan assets would be valued at fair market value and separated between:
    • A reserve that would be constituted from amounts equivalent to actuarial gains up to a certain limit, namely an amount equal to the provision for adverse deviation ("PAD") and would accrue at the rate of return of the pension fund. The reserve would be used to finance up to 50% of the amortization payment related to a technical deficiency (i.e. a deficiency that is not related to a plan improvement). Accordingly, an amount equal to the released amortization payment would then be transferred from the reserve to the general accoun
    • A general account that would correspond to the plan's assets, less the reserve.
  • The funding deficiency would correspond to the excess of the funding liability over the value of the general account. When a funding deficiency would exist, amortization payments would be required to the pension fund. Subject to the transitional provisions, any technical deficiency would be consolidated at each actuarial valuation made as from 2012 (i. e. the unamortized portions of existing deficiencies are combined with the new deficiency) and this consolidated deficiency would be re-amortized over a 15-year period. Moreover, the plan improvement deficiency would be amortized over a maximum of five years (introduced by the Fiscal partnership).
  • Under the current rules, actuarial gains must be used to reduce amortization payments. According to the Draft Regulation, actuarial gains would first be used to constitute the reserve. When the reserve would be fully constituted up to the PAD, the actuarial gains would reduce any existing amortization payments by first eliminating the latest scheduled payments.
  • Just like plans in the private sector, a PAD would be calculated and would depend on the risks inherent in the investment policy. However, for the municipal and university sectors, the PAD would serve as a limit for the reserve as well as a constraint in using an ongoing plan surplus to improve the plan or to grant an employer contribution holiday.
  • A solvency valuation would still be required but a solvency deficiency would not be financed, as opposed to the private sector.
  • A complete actuarial valuation would still be required every three years. However, a partial valuation would be required annually to confirm an employer contribution holiday (introduced by the Fiscal partnership). Changes were also made to the date at which a partial valuation related to a plan improvement would be required.


  • Through the reserve mechanism and the PAD, the proposed measures would increase plans' financial security by delaying the use of surplus for plan improvements or contribution holidays.
  • The reserve and the consolidation of deficiencies at each valuation date would stabilize the required amortization payments. However, the amount of these amortization payments would depend on realized actuarial gains.
  • Actuarial deficiencies would occur earlier than they would under current rules since the financial position of the plan would be established without the portion of assets dedicated to the reserve.
  • Plans with negotiated agreements on the allocation of ongoing plan surpluses must analyze the effects of the Draft regulation on these agreements. Discussions may be required.
  • For plans having issued redeemable bonds (issued pursuant to the adoption of Bill 54), the government's intention is that any actuarial gains revealed in an actuarial valuation would be allocated as follows: 25% allocated to the bonds' capital redemption and 75% allocated to the reserve or the reduction of amortization payments.
  • The PAD level would be tightly dependent on how plan assets are invested in relation to its liabilities. Thus, for plans with an investment policy that is not matched with the plan's characteristics, the PAD level would be higher and vice-versa. Considering the PAD's interactions with financing issues will require specific training for plan committee members.
  • The significant challenges that face all pension plan stakeholders reinforce the need for plan committees to closely supervise their plan's financial position. Complementary analyses to triennial actuarial valuations, including more frequent financial forecasts, may be necessary.

Short-term relief measure

The municipal and university sectors will also benefit from a relief measure following the impacts of 2008's financial crisis, similar to the private sector.

The only relief measure proposed would be a reduction in the amortization payments normally required for years 2009 to 2011 by 66 2/3% for the municipal sector and by 80% for the university sector. This reduction would be intended solely for amortization payments related to any new technical deficiency determined by a complete actuarial valuation made between December 30, 2008 and December 31, 2011. The employer would be required to provide written instructions to the plan committee of its intention or not to apply the relief measure.



  • To take advantage of the relief measure in 2009, an actuarial valuation would have to be prepared on December 31, 2008.
  • Since the relief measure would only be applicable to new deficiencies, an employer would need to accept an increased contribution to benefit from the measure. In this context, it is not necessarily advantageous for all plans to anticipate the valuation date for the sole purpose of taking advantage of the relief measure sooner.

Transitional provisions

The following provisions are proposed to allow for transition from the current applicable rules to the new rules proposed by the Draft Regulation:

  • Deferral of the consolidation of deficiencies to the first actuarial valuation after December 30, 2011.
  • Specific restrictions and rules for the consolidation of certain deficiencies created before December 31, 2008 for municipal sector plans only.
  • Redeemable bonds issued by certain municipalities and invested in the pension fund before December 31, 2009 could be replaced at maturity by similar bonds. Thus, maturity of these bonds would be extended 10 more years.
  • The deadline to file an actuarial valuation to the Régie des rentes du Québec between December 30, 2008 and September 29, 2009 would be extended to April 30, 2010. The government may, however, decide to further extend this deadline.

Please feel free to contact us for additional information.

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