After the bill on the funding of municipal pension plans was assented to last December, the National Assembly continued its work, introducing An Act to amend the Supplemental Pension Plans Act mainly with respect to the funding of defined benefit pension plans (Bill 57) on June 11, 2015.
This bill focuses primarily on the funding of private sector pension plans, but also contains provisions applicable to all pension plans. Bill 57 implements some of the central recommendations outlined in the report prepared by the expert committee on the future of Quebec’s retirement income system (the D’Amours Committee), which aimed to foster the sustainability of private sector pension plans.
The provisions of Bill 57 stem from a consensus reached by the Comité consultatif du travail et de la main-d’œuvre (CCTM), which comprises representatives from the CSN, the FTQ, the Conseil du patronat du Québec and the Fédération des chambres de commerce du Québec. This consensus reflects a compromise between benefit security and cost affordability.
Summary of current funding rules
- Annual actuarial valuation when the plan is in a deficit position
- Funding using two bases of valuation: going concern basis and solvency basis
- Amortization payment equal to the higher of the payment required to amortize the funding deficiency over 15 years and the payment required to amortize the solvency deficiency over 5 years (10 years with the relief measures)
Bill 57 would come into force on January 1, 2016 and the key funding rules would be as follows:
- Elimination of the requirement to fund a plan on a solvency basis. This valuation basis would, however, be used for other purposes, including the use of surplus, the payment of benefits to members and the frequency of actuarial valuations.
- All private sector pension plans would be required to prepare an actuarial valuation as at December 31, 2015, and every three years thereafter (or annually if the solvency ratio is below 85%). An estimate of the financial position of the plan would, however, be required on an annual basis.
- Going concern funding would be the single funding approach and would now include the establishment of a stabilization provision for future service and past service.
- The stabilization provision is essentially a financial cushion established through actuarial gains and contributions. The provision is used to fund actuarial deficiencies and contribute to achieving greater funding contribution stability.
- The stabilization provision target level and required stabilization contributions would be determined in accordance with the investment policy, based on a scale prescribed by regulation.
- Funding contributions would be as follows:
- Current service contributions: Contributions required to fund benefits that accrue annually. It must be paid annually, except in the event of a contribution holiday.
- Current service stabilization contributions (SPCSC): Contributions corresponding to the current service cost multiplied by the stabilization provision target level. It must be paid annually, except in the event of a contribution holiday.
- Technical amortization payments: Contributions required to amortize the unfunded actuarial liabilities. Unfunded actuarial liabilities would be consolidated at each valuation and must be amortized over a maximum of 15 years (gradually reduced to become 10 years as at December 31, 2020).
- Stabilization amortization payments (SPAP): Special contributions required until the stabilization provision target level less five percentage points has been achieved. Special contributions would be established at each actuarial valuation so as to amortize the shortfall over 15 years (gradually reduced to become 10 years as at December 31, 2020).
- Technical amortization payments and stabilization amortization payments (SPAP) made by the employer would be recorded in a “banker’s clause.” The banker’s clause would allow the employer to have priority over the potential use of surplus assets up to the balance recorded.
The impacts of these new funding rules will vary greatly from plan to plan, depending on various factors, including:
- Financial position of the plan on a going concern basis;
- Financial position of the plan on a solvency basis;
- Investment policy;
- Maturity of the plan; and
- Level of caution or margin incorporated into actuarial assumptions.
These new funding rules should contribute to achieving greater contribution stability for all private sector pension plans. Two transitional measures will apply to minimize the impacts of the new funding rules in the short term. The first measure is a temporary increase in the amortization period for deficiencies, as previously highlighted. The second measure is the gradual introduction of new contributions required. If Bill 57 results in an increase in funding contributions, this increase will be phased in between 2016 and 2021.
When a plan is in a deficit position, the technical amortization payment and all stabilization contributions made will support the quick funding of the existing deficit. When the plan is balanced or in a surplus position, stabilization contributions will be used to gradually establish a financial cushion, which will contribute to achieving greater contribution stability and benefit security. This financial cushion can be used to absorb experience losses that would have otherwise resulted in deficits.
The graph below presents the financial position of a mature pension plan that is in balance on a going concern basis and that would have a stabilization provision of 15%. This graph illustrates contributions in accordance with current financing rules, which therefore vary depending on the financial position of the plan on a solvency basis. The dotted grey line indicates the contribution level that would ultimately be required for this plan under with Bill 57 (i.e. without taking into account the transitional measures).
If the plan’s solvency ratio is above around 90%, the contributions required under Bill 57 would be higher than the contributions currently required. This is because the stabilization contributions for this plan would be higher than the amortization payments currently required on a solvency basis.
The cost to fund plan improvements should be increased by the amount required to establish the resulting stabilization provision. The portion not funded by the surplus should be amortized over 5 years and special provisions could apply if the plan is in a deficit position.
Rules on the use of surplus, while the plan is ongoing and upon plan termination, would be completely revised as follows:
- During the life of the plan, surplus assets could be used only if the solvency ratio of the plan exceeds 105%.
- The maximum amount of surplus that could be used would be the lesser of:
- a. the portion of the going concern surplus exceeding 5% of the stabilization provision target level;
- b. the portion of the solvency surplus exceeding the ratio of 105%.
- Surplus available for use, up to the banker’s clause, would first be used to fund an employer contribution holiday. Up to 20% of any remaining available surplus could, in accordance with the plan’s provisions, be used each year to improve benefits or be returned to the employer.
- In the event of termination of the plan, member benefits would be paid and any remaining surplus would be distributed in accordance with the plan provisions.
- Legislative measures relating to the principle of equity among retired members and active members concerning the use of surplus would be eliminated.
It is our understanding that other provisions of Bill 57 would apply to all pension plans, including municipal and university sector pension plans. These provisions are as follows:
- The moratorium on the use of surplus in the event of termination of the plan would be lifted. Pension plan provisions relating to the use of surplus would need to be confirmed or amended by January 1, 2017. A consultation process involving members and beneficiaries would be prescribed.
- All pension plans would be required to have a funding policy whose content will be specified by regulation. Responsibility would lie with the party that has the power to amend the plan.
- To be discharged from any liability to retired members following an annuity purchase, a pension plan would be required to have an annuity purchasing policy whose content will be specified by regulation.
It is important to note that since the D’Amours Committee report was published, several plan sponsors have been waiting for a bill to be assented to permitting a complete transfer of responsibilities through an annuity purchase, as recommended by the committee. We believe that there could be a significant increase in the demand for annuity purchases after Bill 57 is assented to, which could create an imbalance between the supply and demand and become an issue for those who are late in making their decision.
Regulations must be published to clarify the technical details relating to the application of Bill 57, including the scale to be used for the stabilization provision in accordance with the investment policy and the content of funding and annuity purchasing policies. A parliamentary commission on Bill 57 should be held in the fall.
For plan sponsors, Bill 57 will lead to an analysis of the impacts on the funding of their pension plans. Given the close link between the funding, investments and benefits of a pension plan, the analysis should also cover this bill’s impacts on the investment policy and, for some sponsors, the benefits policy. The appropriate balance between these policies is essential for fostering the sustainability of pension plans.
Finally, the government should also introduce in the fall another bill specific to the funding of university sector pension plans.
The government also introduced a bill announcing the merger of the Commission administrative des régimes de retraite et d’assurances (CARRA) and the Régie des rentes du Québec. The new entity would be named “Retraite Québec“.
The Normandin Beaudry consultants will continue to monitor developments relating to these bills. Please feel free to send us your questions.