Bill 57 receives royal assent

Following the parliamentary committee sessions that took place on October 27 and 28, 2015, Bill 57, An act to amend the Supplemental Pension Plans Act mainly with respect to the funding of defined benefit pension plans (Bill 57), received royal assent on November 26, 2015.

Last June, we issued a bulletin presenting the key measures of Bill 57 and their impacts on pension plans. This bulletin presents key details and outlines the main differences in comparison with the bill. It is important to note that several of the measures introduced will be clarified in the implementing regulations that will be published at a later date.

A full actuarial valuation must be completed every three years, or annually if the plan’s funded ratio is below 90%. The solvency actuarial valuation is thus no longer used to determine the frequency of actuarial valuations.

The stabilization provision target level will be determined using a scale prescribed in the regulations. This scale could be based on the proportion of assets invested in variable-income securities, but also on other criteria that remain to be specified.

In addition to employer amortization payments, employer contributions made “in excess of the required contributions” will also be recorded in a banker’s clause.

A plan may provide that active members fund a portion of the technical deficiencies and stabilization deficiencies. In this case, employee contributions for deficiencies will also be recorded in a separate banker’s clause. Priority regarding the use of available surpluses is therefore given to employee and employer banker’s clauses, in proportion to their respective accumulated balance.

The implementing regulations to be published will specify the funding requirements in relation to annuity purchases used as final payment of benefits. When these requirements are not met, a special annuity purchase contribution will be required. The basis for determining this special contribution will also be clarified in the regulations.

A partial actuarial valuation as at the annuity purchase date (first payment) must be completed within four months of the agreement with the insurer.

Finally, Bill 57 provided that the members and beneficiaries affected by a payment through an annuity purchase would retain their surplus entitlement in the event of termination of the plan within three years of the annuity purchase. It also specifies that members and beneficiaries also retain their status as members or beneficiaries under the plan during this time period in the event of employer bankruptcy and plan termination.

While the plan is ongoing, the “available surplus” must be used first to grant an employer and employee contribution holiday, if applicable, up to the balance of the respective banker’s clauses.

The conditions regarding the use of the “available surplus” proposed by Bill 57 were adjusted accordingly, and the pension committee’s obligation to issue a notice on any use of surplus assets was eliminated.

The obligation to change or confirm clauses on the use of surpluses in the event of termination by January 2017 was eliminated, as well as the default provisions set forth by Bill 57.

In the event of termination of the plan, the surplus after the payment of all accrued benefits is used first to repay the employer and employee banker’s clauses, if applicable.

The surplus balance, if applicable, is then used in accordance with the plan provisions in effect as at December 31, 2015.

The Bill also stipulates that a plan can provide for the payment of 100% of the entitlements for members whose active membership ends even if the solvency ratio is below 100%. In this case, the balance must be paid to the plan by the employer immediately or within five years of the payment to the member.

Bill 57 announced the elimination of the additional pension benefit. This benefit was introduced in 2001 in all pension plans in Quebec to provide partial coverage against inflation before retirement for members who were receiving a transfer value. The Bill stipulates that plans providing for indexing of the deferred annuity can eliminate the portion equal to the additional pension benefit.

The internal by-laws must provide for the measures to be taken to manage risks. They must now also provide for the measures to be taken to quantify risks.

Following numerous requests made during the parliamentary committee sessions, the Bill reinstates, for retirees affected by a plan termination, the option of entrusting the administration of their pension to the Régie des rentes du Québec. In the event of plan termination or the withdrawal of an employer participating in a multi-employer pension plan, resulting from an employer bankruptcy, retired members could entrust the administration of their pension to the Régie. However, it is specified that no guarantee applies and that the pensions could be reduced based on the assets available at the time of the annuity purchase at the expiry of a maximum period of 10 years.

With these important changes to the funding rules for pension plans, including the elimination of solvency funding, risk management will play a key role in pension plan management in the years ahead.

Several things must be clarified by the regulations that should be published shortly. However, we already know that the different pension plan stakeholders must take action in the coming months. More specifically, they must:

• Have an actuarial valuation prepared as at December 31, 2015, taking into account the funding policy.
• Amend the internal by-laws to add the quantification of risks, after first completing the critical reflection process.
• Amend the investment policy to reflect the funding policy.

• Establish the plan’s funding policy.
• Amend the plan text to provide for the elimination of the additional pension benefit (or its equivalent), to introduce the concepts of banker’s clauses and to include separate sections on surplus provisions.
• Determine the payment conditions for termination of active membership.

The Normandin Beaudry consultants will continue to monitor developments relating to Bill 57 and will notify you as soon as the regulations have been published. Please feel free to send us your questions.