Will you be ready in time? | Adoption of a formal funding policy

Legislation¹ now requires all Quebec defined benefit pension plans to have a formal funding policy in place. What are the implications for pension plan sponsors and their employees?

A funding policy defines the pace at which benefits will be funded, taking into account legal requirements and the ability to pay of those who fund the plan.

Although the details on the timeline and content of the funding policy are not yet known (they will be included in draft regulations expected to be published soon), pension plan sponsors in Quebec, in collaboration with the different participating entities, can already begin the thinking process that will provide the basis for the development of their funding policy.

With almost 25 years of experience in developing funding strategies, Normandin Beaudry’s experts are prepared to support their clients in completing this analysis.

We are proposing a simple method for complying with this new requirement and optimizing its impact. This approach includes confirming the funding strategy and drafting the funding policy document.

The roles and responsibilities of the various entities involved in the funding and management of the plan (sponsor, unions, members and pension committee) should be defined at the onset of the process. The funding strategy will reflect the vision of the parties involved with respect to the fundamental characteristics of the plan’s funding, taking into account their risk tolerance. It will also identify the preferred tools to ensure the objectives are met.

Once the funding strategy has been developed, the official funding policy can be drafted. The policy should:

• Define the funding goals for the plan (e.g.: long-term stability of pension contributions or long-term management of plan maturity)
• Define the risk tolerance of those who fund the plan (employer and active members)
• Identify the main funding risks (e.g.: volatility of financial markets, inflation, longevity risk)
• Offer strategies to be implemented to achieve these objectives (e.g.: smoothing of plan assets, margin in actuarial assumptions, annuity purchase strategy)
• Set out the rules to be followed to regulate the use of surplus assets and the management of deficits
• Set out the governance rules in relation to the review, monitoring, application and appropriate communication of the funding policy’s key elements

The adoption of a formal funding policy will allow for the objectives of the entities responsible for funding the pension plan to be clearly identified and will result in a disciplined approach to pension plan funding, in the interests of those who fund the pension plan and those who benefit from it.

¹ Act to amend the Supplemental Pension Plans Act mainly with respect to the funding of defined benefit pension plans (Bill 29)

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