Canada: Solvency Reserve Accounts – Further Considerations For Alberta And BC Plans (Part I)

Last month Alberta Interpretive Guideline #07 dealing with Solvency Reserve Accounts (SRAs) was finalized. A draft of the Guideline had been released last November for industry/stakeholder comment.

In our December blog post on this topic, we recommended that defined benefit (DB) plan sponsors in Alberta and British Columbia should carefully consider taking advantage of recent (and in the case of BC forthcoming) legislation permitting them to establish SRAs as an effective way of funding their plans and avoiding "trapped capital" concerns that have historically discouraged full funding and undermined DB plan security. In this regard, sponsors have often been reluctant to fund their plans above the minimum statutory requirements for fear of creating future surpluses that may be subject to withdrawal or contribution holiday restrictions with adverse cash flow and accounting results.

In this two-part series following up on our earlier blog post, we examine several aspects of the SRA rules in greater detail and reiterate our recommendation that plan sponsors seriously consider establishing SRAs as the preferred vehicle in which to make their future plan contributions.

SRA Set Up

The final Guideline #07 was amended to replace the regulator's "recommendation" that SRAs be established under a separate trust agreement with the statement that SRAs "can be established" under a separate trust agreement to minimize any potential issues that could arise if the SRA were to be established under the same trust agreement as the balance of the plan. Nevertheless, we continue to strongly recommend that the separate trust agreement method be used to ensure that amounts contributed to the SRA are unquestionably recognized as being subject only to the SRA rules and are not subject to any restrictions on plan assets that may otherwise apply under the terms of the existing plan trust. We also recommend that appropriate language be included in both the plan text and the funding policy regarding the SRA.

SRA Withdrawals

In the November draft of Guideline #07, it appeared that Alberta intended to release additional separate guidelines dealing with SRA withdrawals. These references were deleted in the final version and we understand that the intention is to deal with any additional withdrawal guidance through amendment of Guideline #07 instead.

Under s. 65 of the EPPA regulations a withdrawal of surplus funds from an SRA in an ongoing plan is permitted (subject to the 20% annual maximum) when the solvency asset value exceed 105% of the solvency liability value, with Superintendent consent that has not been revoked and disclosure to members. Section 65 states that if "the Superintendent is of the opinion that it is appropriate to do so, the Superintendent may revoke his or her consent to a withdrawal of "actuarial excess" (surplus) and direct the administrator to cease" the withdrawal from the SRA. Of particular note is the requirement under s. 65(2)(f) that the withdrawal of the actuarial excess from an SRA will not result in the creation of an unfunded liability in any "component" of a plan, other than a divisional multi-employer plan or, in the case of a divisional multi-employer plan, the participating employer's share of any unfunded liability is zero and the withdrawal will not result in an increase in the participating employer's share of the unfunded liability to an amount greater than zero.

If the plan is terminating (or a participating employer is leaving an ongoing multi-employer plan), then the employer may, with Superintendent consent and in accordance with s. 66 of the EPPA regulations, withdraw surplus funds from the plan's SRA once all related benefits have been paid. The section requires Superintendent consent and that the Superintendent be provided with certain information.

A key objective of establishing an SRA is to eliminate any uncertainty over an employer's ability to take money out of the account to the extent it is not needed for pension funding or security, based exclusively on the prescribed quantitative and benefit payment tests. Given this objective, the Superintendent consent provisions of the SRA surplus withdrawal rules must be examined to consider whether they could be interpreted as introducing a discretionary unknown that could restrict or defeat an SRA withdrawal application which is otherwise in compliance with the quantitative and benefit payment rules in s. 65 and 66.

In both sections 65 and 66 the Superintendent's consent appears to be discretionary, subject we assume to the over-riding provisions of the EPPA (s. 54) to the effect that withdrawals can occur despite any wording in the plan text. Other than taking comfort from s. 54, however, an employer reading the regulations may be legitimately concerned over how the Superintendent's discretion could be exercised and whether any extraneous factors might creep into the process to cause a problem.

After reviewing this issue with the Alberta regulator, our view is that the current intention is to administer sections 65 and 66 as conferring a gatekeeper function on the Superintendent – that is, to treat the consent requirement as being in place to ensure administrator compliance with the prescribed actuarial and benefit payment requirements under the sections as opposed to conferring a broader discretionary power on the Superintendent. Hopefully, this will eventually be clarified in Guideline #07.

Multi-Jurisdictional Plans

How will the regulators (Alberta and eventually BC) deal with multi-jurisdictional plans which may either be registered with them as major authority, or where they may be the minor authority of a plan registered elsewhere? The regulatory view (with which we agree) is that since the SRA is part of the plan funding structure, the funding rules of the jurisdiction of registration would govern and apply to the entire plan. The SRA would not be split by jurisdiction. As a result, a plan registered in a non-SRA jurisdiction would not be permitted to establish an SRA relatedto Alberta or BC members and a plan registered in Alberta or BC could establish an SRA which applies to all members. This interpretation accords with the current multi-lateral/reciprocal arrangements in place among CAPSA members.

Proposed BC SRA Provisions

We believe that the BC SRA rules will be administered in a similar manner as the Alberta rules, however, we will have to wait and see once the BC pension reform legislation becomes law.

In Part II of this series we will consider sponsor versus administrator roles and who is authorized to establish and make withdrawals from an SRA.

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.

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