Proposed amendments to the Pension Benefits Standards Regulations, 1985 (solvency reserve accounts and multi-employer pension plans)

On September 14, the Department of Finance published a draft regulation to amend the Pension Benefits Standards Regulations, 1985 (the Regulations) applicable to federally regulated defined benefit pension plans. The proposed amendments are designed to allow the establishment of solvency reserve accounts and to ease solvency funding requirements for multi-employer pension plans. The publication of this draft regulation in the Canada Gazette is followed by a 30-day consultation period during which interested parties may submit their comments.

The establishment of solvency reserve accounts (SRAs) was the subject of a consultation conducted by the federal government in late 2020 and was subsequently introduced in the 2022 federal budget. The establishment of SRAs will make it easier for employers to recover certain amounts they have paid into their plan.

The proposed amendments to the Regulations are as follows:

• Establishing an SRA would be optional, with the SRA consisting of a separate or notional account within a plan.
  • In other words, a separate account could be created within a pension fund and eligible payments could be remitted into it and invested, or theoretical accounting could apply to these amounts, including interest (similar to the banker’s clause applicable to private sector plans registered in Quebec).
• The establishment of an SRA would require the plan text to be amended, and additional disclosures would apply to the actuarial valuation report and annual statements of all plan members.
• Eligible payments for an SRA would primarily consist in:
  • any special payments required under solvency funding requirements;
  • any contributions in excess of the amount required to meet minimum funding requirements.
• Strict rules would govern withdrawals from an SRA:
  • The SRA’s eligible surplus would be determined according to the most recently filed actuarial valuation report and would be the lesser of:
    • the amount of the going concern surplus exceeding a ratio of 105%;
    • the amount of the surplus on a hypothetical wind-up basis exceeding a ratio of 105%.
  • An employer would not be allowed to withdraw more than 20% of the SRA’s eligible surplus each year. However, no withdrawal would be permitted if the plan administrator deemed that the plan’s hypothetical wind-up ratio, at the time of withdrawal, would be significantly lower than that shown in the most recently filed actuarial valuation report.
  • In the event of plan termination, the employer would only be able to withdraw funds from the SRA once all obligations related to plan benefits have been fully paid.

The rules governing SRAs will apply once the amendments to the Pension Benefits Standards Act, 1985 (the Act) assented to in 2022 come into force.

With the exception of negotiated contribution plans, multi-employer pension plans are currently required to make solvency special payments when their solvency ratio is less than 100% (based on a three-year average). The draft regulation would lower the ratio from 100% to 85%. This measure would come into force on its date of registration.

Normandin Beaudry welcomes the proposed amendments to the Regulations. Following the example of other provinces that have established SRAs or similar mechanisms, this measure would mitigate some of the asymmetry associated with current funding rules by making it easier for employers to recover payments made to amortize an actuarial deficit once the plan’s financial situation is more favourable. This measure could also encourage employers to contribute more than the minimum funding requirements, knowing that these amounts would no longer remain trapped in the plan, and could thereby result in better pension benefit security for plan members. Nonetheless, the measure could raise questions on rules pertaining to surplus use and the order in which they should apply.

Despite the establishment of SRAs, the continuation of the solvency funding requirement for federally regulated plans means that minimum contributions will remain more volatile for such plans than for those exempted from this requirement, such as in Quebec, or Ontario (up to 85%). As a result, it will be important to monitor contribution variability as part of the risk management framework of these plans.

We will be keeping a close eye on the progress of this draft regulation. In addition to these changes, further amendments to the Regulations are also expected, particularly concerning buy-out annuity purchases and plan governance, as announced in various federal budgets published since 2019.

Would you like more information on this topic? Contact your Normandin Beaudry consultant or email us.