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Normandin Beaudry

Residual benefits due to pension plan insolvency


There, in black and white

NB bulletin Vol. 17 N. 5, May 2014

On April 30, 2014, the Régie des rentes du Québec (the “Régie”) issued a Newsletter Express on the amounts payable following the settlement of benefits under a partially solvent defined benefit pension plan. This document confirms a change in the interpretation of rules that could have financial impacts for plan sponsors.

Reminder of Applicable Rules

When the plan’s solvency ratio is below 100%, the member’s benefits must be paid in proportion to the ratio from the latest actuarial valuation report sent to the Régie at the time of payment. This rule does not apply to payable pensions nor to refund of basic or voluntary employee contributions.

The unpaid portion of benefits (residual benefits) must be paid to the member within a maximum of five years after the initial payment (or before if the member reaches the normal retirement age). However, residual benefits can be paid at any time before this deadline if an equivalent additional employer contribution is immediately made to the plan. In such cases, there are no residual benefits remaining under the plan and the change in interpretation issued by the Régie does not affect plan sponsors who adopt this procedure.

Change in interpretation

Previously, after the initial payment was made, if the plan’s financial situation was to improve (as confirmed in a subsequent actuarial valuation), a partial payment of residual benefits was permitted with no required additional employer contribution. This practice was based on the annotated version of the Supplemental Pension Plans Act.

In the Newsletter Express, the Régie confirms that, since January 1, 2010, even if the plan’s financial situation improves, the employer must still make an additional contribution to the pension fund to complete the payment of residual benefits. The additional contribution, determined at the time of the initial payment to the member, thus becomes an employer commitment that must be paid with interest, in addition to the amortization payments.

Summarized below are the impacts of this change in interpretation:

  • Financial statements

From an accounting standpoint, this contribution becomes a commitment and must be considered a contribution receivable. Residual benefits must also be considered benefits payable. Interest on these amounts will be recorded annually. 

  • Annual Information Return (AIR)

Because the AIR is completed using information contained in the financial statements, this change is also reflected in lines 362 and 373 of Appendix 3A. This year, the Régie also added to Appendix 5 a few questions on residual benefits to determine whether or not an additional contribution was made by the employer at the time of the initial payment and, if not, to validate the residual benefit amount to be paid during the fiscal year. We believe that it is important for plan administrators to ensure now that the required information is available

  • Actuarial valuation

The actuarial valuation report must indicate the amounts required for the payment of residual benefits under the plan’s funding requirements, in addition to the current service cost and amortization payments.

The Régie’s new interpretation eliminates any potential financial gain associated with deferring the payment of residual benefits that could be generated from an improvement in the plan’s financial situation. This potential financial gain was often a key factor in plan sponsors’ decision to wait to pay residual benefits even if this decision created an administrative burden (interest to credit, data maintenance, production of annual statements and annual AIR fees).

It may be appropriate to revise the administrative practice adopted, taking into account the Régie’s new interpretation. 



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