Canada: News From Quebec

Last Updated: July 7 2015
Article by Lorraine Allard

Most Read Contributor in Canada, September 2018

Since our last e-alert regarding Quebec's Bill 34, The Restructuring of Quebec's Multi-Employer Pension Plans, there have been further legislative developments affecting Quebec pension plans.

Bill 34

Bill 34, which amends the Supplemental Pension Plans Act of Quebec (SPPA), was adopted on April 2, 2015 with effect from December 31, 2014 and with a few amendments since it was introduced on February 18, 2015. It applies to multi-employer pension plans (MEPPs) which qualify as "negotiated contribution plans" in force on February 18, 2015. The following are key dates and time periods to remember (all with respect to MEPPs):

  • Actuarial valuations with an effective date of December 31, 2014 must be filed within six months after April 30, 2015 (i.e., by October 31, 2015). Other actuarial valuations must be filed within six months of their effective date.
  • Where an actuarial valuation with an effective date of December 31, 2014 reveals that the contributions provided for in the MEPP are insufficient to sustain current benefits, a recovery plan must be filed within 18 months after April 30, 2015 (i.e., by October 31, 2016), and an application to register the amendment set out in the recovery plan must be filed within 24 months after April 30, 2015 (i.e., by April 30, 2017). Where an actuarial valuation with an effective date on and after January 1, 2015 reveals insufficient contributions, a recovery plan must be filed within 18 months after the effective date of the valuation, and an application to register the amendment set out in the recovery plan must be filed within 24 months after the effective date of the valuation.
  • Unless the MEPP contained as of February 18, 2015 (or the MEPP was amended after April 2, 2015 to include) a provision allowing the reduction of benefits, members and beneficiaries will have to be notified of the recovery plan.1
  • If no recovery plan or amendment is filed within 60 months after the effective date of an actuarial valuation revealing insufficient contributions, the MEPP must be terminated.
  • Where an employer participating in a MEPP has no active members on December 31, 2014, the MEPP must be amended to allow for that employer's withdrawal as of December 31, 2014, and the benefits of the members and beneficiaries affected by the withdrawal must be paid to them by April 2, 2016.2
  • The benefits of orphaned members and beneficiaries (i.e., those whose employer withdrew from the MEPP prior to December 31, 2014) must be paid to them by April 2, 2016.3

Bill 57

Bill 57, An Act to amend the Supplemental Pension Plans Act mainly with respect to the funding of defined benefit pension plans, was introduced on June 11, 2015. This long-awaited bill constitutes another element of the implementation of the d'Amours report and, as its name implies, deals mainly with the funding of defined benefit (DB) registered pension plans and the use and ownership of surplus DB assets.

Bill 57 is highly technical in nature, and the following are some highlights.

New Funding Rules

As concerns funding:

  • Solvency valuations will continue to be required, but only in order to determine the frequency of actuarial valuations and whether the plan has a surplus.
  • Plan funding will, instead, be based on an enhanced going concern valuation which will include a stabilization provision.
  • Plans will be required to provide for the establishment of the stabilization provision whose target level will be determined by using a scale to be established by regulation. The target level will be set out in the investment policy.
  • Current service contributions will include the value of the stabilization provision. "Technical amortization payments"4 and "stabilization amortization payments" will be subject to monitoring, and surplus resulting therefrom may allow for a current service contribution holiday (regardless of the plan's terms) provided members are given notice of same.5
  • Plans with a solvency ratio of less than 85% will be required to file actuarial valuations annually. All other plans will be required to file actuarial valuations every three years and a notice confirming the plan's financial position in off-cycle years.
  • Funding deficits will be amortized over 10 years, except for deficits that began to be amortized prior to December 31, 2016 which will be amortized over 15 years but gradually reducing to 10 years by December 31, 2020.
  • Deficits caused by benefit improvements will be amortized over 5 years except where the plan's funded ratio is less than 90% in which case a "special improvement payment" equal to the entire cost of the improvement will be required immediately.
  • A letter of credit may be used to relieve the employer from having to make stabilization amortization payments, but the face value of all letters may not exceed 15% of going concern liabilities.

Surplus

As concerns surplus, Bill 57 lifts the moratorium on amending surplus provisions:

  • The plan may be amended to allow the employer to use surplus in an ongoing or terminated plan as permitted under the SPPA, subject to no more than 30% of the plan members and beneficiaries objecting to the amendment.
  • If the plan is not amended, there "must be included in the text of the plan" a confirmation to the effect that the plan's surplus provisions comply with the SPPA provisions in force on January 1, 2016.
  • Where the plan allows or is amended to allow the employer to use surplus, up to 20% of any surplus remaining after a current service contribution holiday is taken may be used to make benefit improvements or be withdrawn by the employer, and members must be given notice of same.
  • If surplus provisions are not amended or confirmed before January 1, 2017, the plan will be deemed to require that (i) while the plan is ongoing, an amount of surplus equal to the surplus used to take a contribution holiday or withdrawn must be used to pay for benefit improvements "in favour of the members and beneficiaries proportionally to the value of their benefits" on a going concern basis6, and (ii) when the plan is terminated, the surplus must be shared equally among the employer and the members and beneficiaries.
  • A plan is considered to have available surplus if (i) on a funded basis, assets are at least equal to 105% of liabilities increased by the stabilization provisions target level (the Minimum Funding Surplus), and (ii) on a solvency basis, assets are at least equal to 105% of liabilities (Minimum Solvency Surplus).
  • The maximum amount of available surplus is the lesser of the amount by which (i) on a funding basis, assets exceed the Minimum Funded Surplus, and (ii) on a solvency basis, assets exceed the Minimum Solvency Surplus.

Consequently, Bill 57 deletes the provisions of the SPPA dealing with the arbitration of surplus distribution on plan termination.

Benefits and Policies

Bill 57 also provides as follows with respect to benefit levels:

  • A plan may provide that the transfer of the commuted value of terminated members' benefits will be based on the solvency ratio.
  • A plan may be amended before January 1, 20177 to eliminate, on a retroactive basis, the indexation of deferred pensions provided under section 60.1 of the SPPA.8

In addition:

  • A funding policy meeting prescribed requirements must be adopted.9
  • If an annuity purchasing policy is adopted, payment of benefits in accordance with the policy "constitutes final payment"10 and members and beneficiaries whose benefits are annuitized following termination of the plan retain their surplus rights for three years.

Ontario Members in Quebec-Registered Plans

Quebec and Ontario have signed the Agreement Respecting Multi-Jurisdictional Pension Plans (Multi-Jurisdiction Agreement). The Multi-Jurisdiction Agreement applies to plans registered in Ontario or Quebec that have only members in Ontario and Quebec. It contains a Schedule listing the matters governed by the major authority's11 pension standards legislation. As concerns the matters that are dealt with in Bill 57, some are included in the Schedule. For example, the Schedule includes the amendment registration process, and requirements for notice of registration of amendments to members, as well as the following funding requirements:

  • requirements for contributions (including the type, the manner in which they must be made and the deadlines for making them);
  • minimum plan funding and solvency levels;
  • the ability to take contribution holidays; and
  • requirements for actuarial valuations (including filing deadlines and actuarial standards to be applied);

However, funding requirements when they arise in the context of a plan termination are excluded. In addition, the minor authority's12 pension standards legislation continues to apply to the determination of surplus ownership.

Since Ontario and Quebec are currently the only signatories to the Multi-Jurisdiction Agreement, any plan registered in Ontario or Quebec which has members outside of Ontario and Quebec must resort to the Memorandum of Reciprocal Agreement (Reciprocal Agreement). The Reciprocal Agreement is much more rudimentary in nature than the Multi-Jurisdiction Agreement. It simply states that the major authority exercises its own statutory functions and powers as well as those of the minor authority.

The following is a simplified and brief summary of how the new Quebec rules may apply in different circumstances.13

Quebec-registered plan subject to Multi-Jurisdiction Agreement

Quebec-registered plan subject to Reciprocal Agreement

Ontario-registered plan subject to Multi-Jurisdiction Agreement

Ontario-registered plan subject to Reciprocal Agreement

Bill 57 Funding Rules / Ongoing Plan

apply to all members

apply to Quebec members

do not apply to Quebec members (Ontario rules apply instead)

apply to Quebec members

Bill 57 Funding Rules / Terminated Plan

apply to Quebec members

apply to Quebec members

apply to Quebec members14

apply to Quebec members

Bill 57 Surplus Provision Confirmation / Amendment

apply to Quebec members

apply to Quebec members

apply to Quebec members

apply to Quebec members

Next Steps

Although it is very early days, particularly given that regulations are required to provide greater clarity and to make some of these changes operational, the sponsors and administrators of plans registered in Quebec or with Quebec members will want to start thinking of the following:

  • Investment policies: The target level for the stabilization provision will need to be set out in the investment policy. In addition, the advent of the concept of the going concern valuation enhanced by the stabilization provision may mean an increase in contributions and a decrease in sensitivity to interest rates which may result in decisions to revise portions of the investment policy.
  • Funding policies: A funding policy will need to be adopted.
  • Annuity purchasing policies: Pension committees wishing to take advantage of the discharge provided by Bill 57 will want to adopt an annuity purchasing policy.
  • Surplus provisions: A review of the historical surplus provision may be worthwhile as it may inform what, if any, amendment to those provisions the sponsoring employer may wish to make.
  • Multi-jurisdictional issues: Because Bill 57 deals with funding, plan administrator should start thinking sooner rather than later about how it is likely to apply to multi-jurisdictional plans.

In addition, sponsors and administrators of plans registered in Quebec in particular who have concerns about Bill 57 should make submissions to the government of Quebec should it hold public hearings.

Bill 58

Finally, pursuant to Bill 5815, also introduced on June 11, 2015, the Régie and the Commission administrative des régimes de retraite et d'assurances (which administers a number of public sector pension plans) will merge, and the Régie will be renamed Retraite Québec on a date to be determined.

Please call me with any questions you may have concerning Bills 34, 57 or 58. My colleagues and I can also help you with any other benefit-related questions or issues you may have.

Footnotes

1. The amendment set out in the recovery plan may not be made unless fewer than 30% of the members and beneficiaries object to it.

2. Unless they request that their benefits be maintained in the plan.

3. Unless they request that their benefits be maintained in the plan.

4. Past service contributions.

5. Surplus resulting from these payments appear to be available for contribution holidays despite the plan provisions.

6. Therefore, a contribution holiday or withdrawal where the plan terms do not reserve surplus to the employer will cost the plan an equivalent amount in benefit improvements. This will be a problem where the plan does not reserve surplus to the employer or allow for further benefit improvements because it already provides maximum benefits, and the tax rules prevent further contributions.

7. There are clearly situations, such as where a plan is bargained and the current collective bargaining agreement expires after 2016, where it will be very difficult to meet this deadline and so Bill 57 provides that the Régie des rente du Québec (the Régie) may agree to a later date.

8. Section 60.1 provides that a deferred pension must be indexed annually at 50% of the increase in the Consumer Price Index between the date of termination of employment and early retirement age. This benefit had been criticized in the D'Amours report as unfairly subsidizing employees who terminate employment prior to age 55 and targeted for elimination (in its recommendation number 17).

9. It is expected that the regulations will codify, at least in part, what appears in the CAPSA Guideline No. 7 Pension Plan Funding Policy Guideline.

10. We do not read this as necessarily giving the administrator a full release and discharge.

11. Essentially, the province of plan registration.

12. A jurisdiction other than the province of plan registration.

13. Because of the complexities involved in applying either of the Multi-Jurisdictional and the Reciprocal Agreements, legal advice should be sought before determining if and how a province's rules should apply in a given situation.

14. For plans registered in Ontario, the Financial Services Commission of Ontario's policy W100-103 "Filing Requirements and Procedure on Full or Partial Wind Up of a Pension Plan" applies whether the Multi-Jurisdiction Agreement or the Reciprocal Agreement apply. This policy provides that plan assets are to be allocated among the various jurisdictions and assets that are allocated to another jurisdiction should be dealt with in accordance with the requirements of that jurisdiction.

15. An Act to Group the Commission administrative des régimes de retraite et d'assurances and the Régie des rentes du Québec.

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