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Normandin Beaudry

Bill C-27: An Act to amend the Pension Benefits Standards Act, 1985

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There, in black and white

NB Bulletin Vol. 19 N. 17, November 2016

Bill C-27 (An Act to amend the Pension Benefits Standards Act, 1985) was introduced in the House of Commons on October 19, 2016. This Bill comes in response to public consultations on target benefit pension plans ("TB plans") launched by the Department of Finance Canada on April 24, 2014, and applies to federally regulated private pension plans. 

Bill C-27 provides a framework for the establishment, administration and supervision of TB plans. It also provides for the elimination of the boomerang risk associated with the purchase of buy-out annuities. 

Target benefit pension plans

The provisions of a TB plan fall somewhere between the provisions of a defined contribution plan and those of a defined benefit plan. On the one hand, like a defined contribution plan, this type of plan typically provides for an agreement on the contribution rate, allowing for a specified level of benefits to be offered. On the other hand, although it aims to provide defined benefits, unlike the traditional defined benefit pension plan, the TB plan generally allows for a reduction in accrued benefits if the fixed contributions are not sufficient to fund the plan.

Under the provisions of Bill C-27, employers who currently offer a pension plan to their employees will be able to offer all members and former members (i.e. retirees, members entitled to a deferred pension and members whose benefits have not been paid) the option of transferring their benefits to the TB plan. Their consent will however be required.

In addition, each TB plan must implement the following policies:

  • A governance policy for which the items to be included will be prescribed by regulation
  • A funding policy that sets out the following:
    • the plan's target benefit formula on the day on which the plan is established 
    • the manner in which pension benefits provided under the plan are currently determined, if different from the target benefit formula 
    • the employer contributions and, if any, the member contributions to the plan 
    • the objectives of the plan with respect to pension benefit stability
    • a deficit recovery plan; and 
    • a surplus utilization plan

With this change, the Department of Finance Canada is following the lead of British Columbia, Alberta and New Brunswick, provinces that have already incorporated TB plans into their legislation. Some sections of Ontario and Nova Scotia's legislation also provide for the option of implementing TB plans; however, these sections are not yet in effect. In Quebec, at the moment, only pension plans of employers operating in the pulp and paper industry have access to this type of plan. It should be noted that many of the features and conditions of the TB plan can vary from one legislation to another. 

Elimination of the boomerang risk 

An increasing number of pension plans are considering the option of purchasing annuities from an insurer to control longevity risks, managing other risks, such as interest rate risk and financial market risks, at the same time. However, in most pension legislation, it is not possible to manage all risks with an annuity purchase, even if buy-out annuities are purchased, because the legislation does not provide for the severing of the link between the member and the plan following an annuity purchase, except in the case of the termination of the plan.

Should the insurer go bankrupt, the risk that the plan would be responsible for paying the portion of pensions not covered by Assuris, the non-profit agency responsible for protecting insured Canadians in the event of the bankruptcy of their insurance company, remains. This risk is often called the boomerang risk. 

Bill C-27 provides for the elimination of the boomerang risk. 

To date, only the provinces of British Columbia and Quebec have amended their legislation to eliminate this risk. Alberta examined this option, but ultimately decided not to include it in its recent legislative reform. Ontario also explored this option in its consultation paper published in July 2016. 

In Quebec, the boomerang risk is eliminated only after a period of three years following the annuity purchase. Pension plans may not, however, purchase annuities that will eliminate this risk before the accompanying regulation is published.

Next steps

Bill C-27 is currently in the first reading stage at the House of Commons. Several steps must be completed before its final adoption. The final version of Bill C-27 could thus differ from its current version.

The Normandin Beaudry consultants will continue to monitor developments relating to Bill C-27 and will keep you informed. Please feel free to send us your questions.

 

Please feel free to contact us for additional information.

514.285.1122
 
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Montreal, Quebec, H3B 1S6