Bill 68 – New retirement solutions in Quebec
On October 7, the Government of Quebec presented Bill 68, An Act mainly to allow the establishment of target benefit pension plans, to the National Assembly. This bill opens the door to more innovative retirement solutions for Quebecers.
Bill 68 introduces a new type of pension plan, the target benefit plan (“TB plan”), which can be offered to Quebec workers by employers. This new plan type has the following key features:
- As in a defined benefit plan, the pension benefit is defined according to a predetermined formula.
- The employer’s financial responsibility is limited to the payment of the agreed upon contribution.
- The total funding cost, less the agreed upon employer contribution, is the the plan members’ and beneficiaries’ responsibility. This means that if the agreed upon contributions are not enough to cover the entire funding cost, the pension and any other related benefits, could be adjusted as a result, even for retirees.
This approach encourages risk pooling between active members and retirees, particularly investment and longevity risks. Although the pension can vary over time, the retiree at least has the assurance that they will receive it for the rest of their life.
This type of plan already existed in Quebec for certain companies in the pulp and paper industry. These companies would have until the end of 2023 to make their plan compliant with the new measures proposed by Bill 68.
Bill 68 contains several measures to regulate the management of TB plans, including restrictions on the types of benefits offered. As such, a TB plan would not provide:
- a pension based on an average of the latest or best career salaries;
- indexation of pension benefits during retirement;
- early retirement conditions based on years of service or membership to the plan; and
- conditional benefits upon termination of the plan.
Bill 68 also provides several measures regarding the funding and management of a TB plan’s surplus assets. Essentially, the rules would first have to be outlined in the TB plan’s provisions so as not to leave the pension committee any discretion as to their enforcement.
As such, detailed provisions relating to “recovery of the plan’s financial situation,” the “restoration of target benefits” and “the appropriation of surplus assets” should be explicitly agreed upon to guide the actions taken by the pension committee depending on the circumstances.
Finally, under Bill 68, a defined benefit pension plan cannot be converted into a TB plan. Similarly, a pension plan might not have simultaneously defined benefit provisions and target benefit provisions. However, it might be possible to convert a defined contribution plan into a TB plan.
Bill 68 also provides a new option for defined contribution plans and voluntary retirement savings plans (VRSP).
These plans may stipulate that, upon the request of a non-active member, some or all of the amounts he or she has accrued in the plan be used to pay variable payment life pensions.
The amounts identified as such by the member would be transferred to a “variable payment life pension fund” and converted into a pension amount that will be paid for the rest of the member’s life. The pension amount may vary depending on how the fund’s experience is impacted by, among other things, the returns on the assets and the mortality experience of all members who receive a pension from this fund. Such a fund should, however, meet certain conditions that will be specified by the regulations to be developed by the government.
This new option is especially interesting because it encourages risk pooling upon retirement, which eliminates the risk that the member outlives their savings. Combined with other options offered by defined contribution plans or VRSPs, this approach offers significant flexibility to optimize decumulation of the funds accumulated in these plans upon retirement.
According to Bill 68, defined benefit plans, just like TB plans, would have the ability to set more than once a year the solvency ratio for the payment of members’ benefits.
A similar measure has been mandatory since April for defined benefit plans as part of the pandemic context. The government had made a regulation to withdraw it at the end of the year. With Bill 68, each plan could choose the rule that best suits its environment.
Pension and Savings consultants will continue their analysis of Bill 68 and will keep you informed of any developments. Feel free to contact us with any questions you may have regarding Bill 68.