The Expert Committee on the Future of the Quebec Retirement System, known as the D'Amours Committee, issued its report on April 17, 2013. The Committee's initial mandate was to study the plans overseen by the Régie des rentes du Québec (the Régie) and sponsored by public-sector employers, i.e., mainly university and municipal pension plans. However, the Committee's mandate was broadened to cover the other components of the Quebec retirement system, including the retirement plans which provide defined benefits (DB) and are offered by private-sector employers.
In this bulletin, we will summarize the recommendations of the D'Amours Committee specifically aimed at registered pension plans sponsored by private-sector employers.
1. A new "enhanced funding" method
The Committee recommends that all pension plans overseen by the Régie be subject to a single valuation method to be used to determine the funding requirements for both past and future service. The Committee recommends the application of a so-called "enhanced funding" method in order to assess pension plan funding. According to the Committee, this method would paint a better picture of the financial condition of a pension plan than the funding test currently used.
Based on the Committee's recommendations, the funding rule would essentially be based on a going-concern valuation but would use new rules to define the discount rate. The "enhanced funding" method would be used to determine the contribution for current service and the funding deficiency. The deficiency would initially be amortized over a 15-year period, which would be gradually reduced to 10 years over the five years following the implementation of the rule. The deficiencies and the amortization payments would be consolidated every year, but the amortization payments could not be reduced until the funding deficiency has been reduced. Under the "enhanced funding" method, the market value of the assets would have to be used and asset smoothing would be permitted over a maximum period of three years.
Annual valuations would be required except for fully funded and fully solvent plans.
2. Using the solvency rule given the use of surplus assets
Funding of solvency deficiencies would no longer be required; however, a solvency valuation would still be performed to determine the ability to use surplus for contribution holidays or to fund benefit improvements. During the life of a plan, surplus assets calculated on a solvency basis could be used to take a contribution holiday, fund a plan improvement or make refunds to the employer, provided the actuarial assessment confirms the existence of surplus assets on a solvency basis. Contribution holidays and the funding of benefit improvements from the surplus would still be subject to the funding of provision for adverse deviation (PFAD) and a requirement that the plan be funded in accordance with the new "enhanced funding" valuation.
3. Calculating the transfer value
The Committee recommends establishing a new method to calculate the transfer value that better reflects the financial reality of the plan and ensures greater equity between members who remain in the plan and those who transfer the value of their benefits following termination of employment. The Committee has asked the Régie to initiate discussions with the Canadian Institute of Actuaries in order to assess the formula and its application. Among other things, the Committee has proposed a new, two-tier formula with different discount rates for the first 10 years and for subsequent years that would apply to non-indexed benefit plans. The new methodology would also be used to establish solvency liabilities for active and deferred members.
4. Provision for adverse deviations
According to the Committee, the provision for adverse deviations should be increased from 7% to 15% of the plan's solvency liabilities. The Committee recommends that the provision for adverse deviations continue to be based on the plan's actuarial gains.
5. Risk disclosure
The Committee is of the opinion that the provisions of the Supplemental Pension Plans Act (the SPPA) should be amended in order to ensure greater communication of the level of risk relating to the plans as well as risk disclosure and management. More specifically, the Committee recommends that employers be required to establish a funding policy setting out the objectives to be achieved taking into account various factors, including the security of the benefits provided for in the plan. Moreover, the pension committee should have an assessment prepared that would permit the different risk levels relating to or that may relate to the plan to be quantified in accordance with a procedure to be determined by regulation. Such an assessment would be carried out for the first time at the end of the five-year restructuring period to which the Committee refers further on in its recommendations and at least every six years thereafter. According to the Committee, a stochastic analysis would be the best tool for large plans in order to evaluate funding or sustainability risks.
6. Cost sharing
According to the Committee, the SPPA should be amended so as to expressly provide that the cost of a pension plan may be shared by the employer and active members with respect to the cost of current service, any deficiency for future service from the date on which the measure is introduced, or any deficiency related to past service. With respect to the private sector, it would be left to employers and employees to negotiate an acceptable arrangement but the Committee is of the opinion that the SPPA should limit the portion payable by active members to 50% of the costs attributable to them.
In order to avoid intergenerational transfers, the Committee recommends that the SPPA should allow the cost of the deficiency to be shared by not only active members but also retirees, but only with respect to deficiencies arising from service accumulated after the introduction of the new measure.
The Committee recommends making it compulsory to establish a policy to ensure that members know the rules that apply in the event of a plan improvement or a reduction of the benefits in connection with contributory pension plans.
Lastly, the Committee recommends that employers remain responsible for paying the total amount of the debt in the event that the plan is terminated (essentially the solvency deficiency) and for paying the amount required to pay the remaining benefits payable in the event of an individual transfer of a member's benefits.
7. Employer refunds
The Committee recommends that employers be allowed to be refunded from the surplus assets for the amount it paid as amortization payments in respect of a funding deficiency, if the conditions provided for in order to use the surplus assets are met. For contributory plans, the refund to the employer from the surplus assets should reflect the cost actually borne by the employer.
8. Purchasing annuities for retirees
According to the Committee, the purchase of guaranteed annuities from an insurer in order to pay part or all of the pensions of retirees and beneficiaries should be permitted during the life of the plan. If an employer wishes to adopt this approach, the Committee recommends that the purchase of the annuity would need to comply with an annuity purchase policy that must be adopted in co-operation with the pension committee. The Committee further recommends that employers be bound to pay the amount required to restore the solvency or "enhanced funding" ratio of the plan if the purchase of annuities would reduce it.
9. Pension fund division
The Committee recommends that pension funds, which are currently undivided, be divided into two accounts for actuarial valuation purposes, one of which would cover the portion of the assets reflecting the benefits of retirees. In effect, this would permit separate determinations of solvency and funded ratios. According to the Committee, this approach would ensure a better match of the assets and liabilities attributed to retirees. In light of such additional protection afforded to retirees, the Committee recommends abolishing the fairness principle inherent in the SPPA with respect to any modifications funded with surplus assets.
10. Withdrawal of an employer from a multi-employer pension plan
The Committee recommends that members affected by the withdrawal of an employer from a multi-employer pension plan should no longer be allowed to retain their benefits under the plan. The benefits of so-called "orphaned" members should thus be paid at the time of withdrawal so as to prevent future liability for a deficiency relating to such benefits from being divided up among the remaining employers. As far as "orphaned" members who currently have benefits in a negotiated contribution multi-employer pension plan are concerned, the Committee recommends that such benefits should be payable in proportion to the degree of solvency of the plan.
The Committee further recommends that the Régie attempt to develop measures to restore the financial condition of negotiated contribution multi-employer pension plans that would take their characteristics into account.
11. Pension plan restructuring
The Committee recommends that the parties to a pension plan, i.e., the employer, active members, non-active members and retirees, should have the option of agreeing on certain measures that would reduce the cost of their pension plan and secure the accrued benefits accumulated. A period of five years would be allowed for such negotiation. Each year, the Régie would report on the changes made to the pension plans and the variation of the funded status of the plans during such period.
As for the negotiations between employers and active or non-active members, the Committee recommends that it be possible to reduce or suspend vested benefits and, in addition to what is already permitted with respect to bridging benefits, to modify the pension indexation and the various subsidies. The Committee further recommends with respect to such members that the employer and the members should have the option to agree not to take the wage development for any service years preceding the modification into account if a final salary pension plan is converted into a career salary pension plan.
The Committee recommends that the restructuring measures should cover the pension indexation, but that the indexation of pensions in payment should be reduced or suspended only if less than 30% of retirees object to the change.
12. Collective bargaining and member consultation
Where a plan covers unionized employees, the Committee recommends that the employee organization be permitted to negotiate reductions in the benefits for any service preceding the effective date of the collective agreement. With respect to non-unionized employees, reductions or suspensions of benefits should take effect only if they are subject to a consultation process and if less than 30% of active or non-active members object to it. In order to prevent a plan from being terminated following restructuring once the solvency rate is restored, the Committee recommends that benefit reductions be cancelled if a plan is terminated within a period of 10 years following restructuring.
13. Unilateral changes
Starting from the fourth year of the five-year period following the implementation of the "enhanced funding" method, the Committee recommends that employers should have the option of unilaterally modifying or eliminating the indexation of the benefits for past service. This option would apply to active members as well as retirees and beneficiaries. However, it should not affect benefits already paid and would apply only if the following conditions are met:
- unilateral reduction of the indexation would apply in the same manner to current and future retirees with respect to past service;
- any changes made to the indexation should not reduce the funding deficiency by more than 50%; and
- the employer must have contributed financially to the plan in order to reduce the deficiency by the same percentage as the one arising from the reduction.
Moreover, in order, once again, to prevent a plan from being terminated following restructuring, the Committee recommends that the benefit reductions be cancelled if the plan is terminated within a period of 10 years of being restructured.
14. Members who are less than 55 years old
The Committee recommends that it no longer be permitted to offer subsidized early retirement benefits for future service to members who are less than 55 years old. The Committee further recommends abolishing the additional pension benefits arising from the test provided for in section 60.1 of the SPPA.
The government has already indicated that the parliamentary committee will start reviewing the recommendations of the D'Amours Report on June 10, 2013, and that the committee is expected to deliver its report on September 17. It thus remains to be seen which of the modifications recommended will be adopted and integrated into the Quebec legislative framework.
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