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Normandin Beaudry

Changes to funding rules for registered pension plans

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There, in black and white

NB Bulletin Vol. 13 N. 12, October 2010

The Canadian pension system has not undergone any major changes for several years. The system is founded on the model below:

The provincial and federal governments are currently examining our pension system with a view to finding a consensus on the changes to be made to it. Employer pension plans, including registered pension plans, figure among the retirement income sources. With less than 40% of employees in Canada covered under an employee sponsored registered pension plan, the goal is to offer all Canadian employees greater access to a pension plan that provides sufficient retirement income. While searching for a solution, the governments have begun making amendments to legislation governing employer sponsored registered pension plans.

Differences in legislation, particularly those concerning member rights, make plan administration complex when employees covered by the same pension plan work in different provinces. Employers have been long awaiting changes designed to standardize and simplify plan administration and provide funding relief, especially given the state of plan funding position over the past few years. The governments, however, are reluctant to provide permanent funding relief as they want to ensure that benefit security is not compromised.

Working toward uniform rights?

Important changes were recently made to legislation in Quebec, Ontario and Manitoba and to federal legislation. Some other provinces are also working on amendments to their legislation and are currently in the consultative stage. With the exception of Quebec's Supplemental Pension Plans Act, which was amended in 2001, no major changes have been made to this legislation in twenty years.

The changes affect member rights and pension funding rules. Outlined below are some of the changes that will make the rights of members similar to those adopted in Quebec in 2001.

  • The employer's share will be immediately vested. The share was previously vested after a two-year waiting period.
  • Partial wind-ups that add to the complexity of plan administration have been abolished.
  • Benefits whose value is less than 20% of maximum pensionable earnings (MPE) can be paid out at the time of termination of membership. Rules previously varied by province.
  • Manitoba is following suit of the other provinces by changing the death benefit after retirement to 60% of the pension (previously 66 2/3%) when there is no spousal benefits waiver.

Despite an effort to standardize minimum requirements regarding member rights, differences remain, including differences linked to excess contribution management, indexing before retirement in the event of termination of employment, the obligation to use or not use unisex factors and minimum eligibility requirements.

Some legislation still needs to be amended, and it is hoped that the amendments introduced will coincide with the recent legislative reforms.

Changes to funding rules

Pension plan funding must be carried out in accordance with the rules of the province of registration. Up until now, these permanent funding rules were fairly similar and the province of registration therefore did not have a major impact on the employer's minimum contributions.

The recent changes made to Quebec and federal legislation introduced different rules. Funding rules for Ontario have yet to be amended; however, according to the press release issued on August 24, 2010 by the Ontario government, the rules applicable in Ontario are expected to be different from the Quebec and federal rules. Manitoba is introducing very few funding changes for the time being.

Permanent funding rules for Quebec and federally regulated plans

   Quebec  Federal
Frequency of actuarial valuations   Annual if the plan is not funded and not solvent (otherwise every three years)
 
  Annual (every three years if the solvency ratio is above 120%)
Provision for adverse deviation applicable on solvency liabilities
 
  Unique to each plan but should be around 7%   A 5% margin is required only for a contribution holiday
Determining solvency contributions  Unconsolidated deficiency amortized over 5 years with interest  Consolidated deficiency amortized over 5 years without interest
 
    The deficiency is determined based on the solvency ratio at the time of the valuation
 
  The deficiency is determined based on the 3-year average solvency ratio
Determining going concern contributions  Consolidated deficiency amortized over 15 years  Unconsolidated deficiency amortized over 15 years
 
Threshold below which an immediate contribution must be made for amendments   Degree of solvency under 90%   Degree of solvency under 85% (to be confirmed by the regulations)

As regards funding rules in Ontario, the press release recently issued by the government outlines the following changes that are expected to be introduced in the fall:

  • Option of averaging solvency interest rates eliminated;
  • Requirement that the smoothed value of assets be no more than 20% of the market value of assets;
  • Option of not funding the indexing of going concern benefits eliminated (the option remains for the solvency basis);
  • Option of beginning deficiency amortization one year after the valuation date;
  • Margin of 5% of solvency liabilities required before a contribution holiday may be taken; and
  • Actuarial valuations continue to be performed annually if the plan is less than 85% funded and every three years otherwise.

In light of the changes made to Quebec and federal legislation and based on the changes proposed in Ontario, pension plan funding could vary throughout Canada according to the jurisdiction in which the plan is registered.

For illustration purposes, the chart below presents the amortization payments resulting from different funding measures adopted in Quebec and federally. These amortization payments are required to fund a $20 million solvency deficit as at December 31, 2009 for a pension plan registered in Quebec and a federally registered pension plan. There is no funding deficiency.

The solvency deficiency is projected based on an interest rate of 4.5% and assuming that there will be no gains or losses over the 5-year period.

For the same deficiency, the contributions become lower for the federally registered plan over a 5-year period owing to the calculation of the deficiency based on a 3-year average solvency ratio, the consolidation of the deficiency at each valuation and an amortization over 5 years without interest. 

The situation becomes complicated when the same plan covers employees in Quebec and under federal jurisdiction because there is no reciprocal agreement between Quebec and the federal government for administrating their legislation under this type of scenario. According to our discussions with the Office of the Superintendent of Financial Institutions that administers federal plans, federal rules would apply to this type of plan. The Régie des rentes du Québec indicated to us that it would analyze each case where this type of situation arose before issuing a decision. If the Régie des rentes du Québec also comes to the conclusion that Quebec rules must be adhered to, the minimum contribution would need to satisfy the requirements of both legislations simultaneously. The minimum contribution to be paid would thus be the maximum contribution between that determined in accordance with Quebec funding rules and that determined in accordance with federal funding rules. 

Contribution holidays 

Employers can exercise their right to contribution holidays if such holidays are permitted under plan provisions and agreements concerning the use of surpluses. Going forward, a certain margin will be required before contributions may be suspended. Contribution holidays are permitted in Quebec only if the provision for adverse deviation has been constituted. Federally and in Manitoba, the plan's solvency ratio must be above 105%, whereas in Ontario, since 2009, an actuarial certificate showing a sufficient funding excess must be filed within the first 90 days of the fiscal year before contributions can be suspended. According to the press release issued by the Ontario government, it also plans to require that the solvency ratio be above 105%. 

The employer can, however, continue to make contributions even if there is a surplus and the margin requirement is satisfied. However, the Income Tax Act imposes a limit on surplus amount over which employer contributions are not allowed. This limit was recently increased from 10% to 25% of the actuarial liabilities. This new cap will allow employees to keep more surplus in the plan than was previously permitted to help offset future bad times. 

Although efforts have been made to ensure that member rights are similar from province to province, some of these rights continue to differ. In addition, recent changes to funding rules appear to be driving toward funding rules that will vary based on province. We can expect to see more changes to pension plan legislation and the Canadian pension system in general introduced in the future. We must remain hopeful that these changes will facilitate the implementation of defined benefit or defined contribution plans that will guarantee adequate retirement income for a larger proportion of the Canadian population while being much less complex and expensive to administer. 


 

 

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