The federal government has amended the Pension Benefits Standards Regulations, 1985. The changes came into effect on July 1, 2010, subject to one exception noted below.
According to the Regulatory Impact Analysis Statement, the amending regulations are part of the federal government's measures for strengthening and improving the legislative and regulatory framework respecting federally regulated private pension plans on a permanent basis. The impact statement specifically refers to the temporary solvency funding relief measures and special regulations which point to such need.
The amending regulations contain 3 key amendments:
- new solvency funding rules;
- new solvency margin requirement for contribution holidays; and
- the removal of quantitative limits on resource and real property investments by pension funds.
New Solvency Funding Rules
Under the new rules, "average" solvency ratios over 3 years replace "current" solvency ratios in determining minimum solvency funding requirements in respect of a defined benefit pension plan. To implement this new funding model, annual filing of valuation reports is required. The "current" solvency ratio rule still applies for other purposes.
The 5-year target period for funding solvency deficiency remains unchanged. Pension plans are required to remit, on a quarterly basis, 20% of the solvency deficiency each year in which a solvency deficiency exists. When subsection 2(2) of the amending regulations comes into force on January 1, 2011, remittances are required to be made on a monthly basis.
To ensure a smooth transition, the Amending Regulations contain a number of transitional rules including rules for the first actuarial report filed after July 1, 2010 and rules to deal with pension plans which are subject to the temporary solvency funding relief rules introduced in 2006 and 2009.
The Superintendent of Financial Institutions has issued directives to clarify the requirements of filing actuarial valuation reports as a result of the amending regulations. These directives include extending the time for filing actuarial reports, for a plan year ending December 31, 2009, to September 15, 2010 and confirming that re-filing is not required for reports filed prior to July 1, 2010 unless a pension plan wishes to use the new funding rules under the amending regulations.
Under the amending regulations, an employer's funding obligations in respect of the normal cost of a defined benefit pension plan and in respect of amounts required to be paid to a defined contribution provision may be reduced by the lesser of the going concern excess and the amount by which the solvency assets exceed the solvency liabilities multiplied by 1.05. This new provision will operate as a restriction on an employer's ability to take contribution holiday by imposing a 5% solvency margin as a pre-requisite. This restriction does not require the funding of the 5% solvency margin but it requires the employer to continue to make contributions even if the solvency ratio exceeds 1.0 (but is less than 1.05).
Removal of Quantitative Investment Limits
The 5%, 15% and 25% quantitative investment limits in respect of real property or Canadian resource properties in section 10 of Schedule III to the Pension Benefits Standards Regulation, 1985 are removed.
More changes are expected in the near future to improve the legislative and regulatory framework. The federal government has emphasized achieving a balance between the interests of plan sponsors (e.g. more flexibility in investment and managing funding obligations) and member benefit security. It is likely that this same focus will remain a major consideration for future changes.
The changes will result in additional costs to plan sponsors in two respects. They are not permitted to take contribution holidays before the 5% solvency margin is achieved and they will incur additional compliance costs for the annual valuation reports filing. However, the new "average" solvency funding requirements will provide some relief.
For plan sponsors who have filed their actuarial reports prior to July 1, 2010, they need to consider whether they would like to use the new funding rules. If so, they need to re-file their actuarial reports prior to December 31, 2010.
The change in the investment rules will not only affect federally regulated private pension plans; it will also affect pension plans governed by the provincial pension legislation which has adopted the federal investment rules (e.g., British Columbia and Alberta). There will be no change in Ontario, Nova Scotia and Newfoundland and Labrador without conforming changes to the investment rules in those provinces. Administrators of pension plans which are affected by this change should review the statements of investment policies and procedures of the plans to determine whether it is appropriate to amend the statements to reflect the change. Although the impact statement contemplates that there will be more changes to the investment rules (e.g., modification of the 10% rule), it is unlikely that all quantitative limits (particularly the 30% voting share rule) will be eliminated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.