Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Pension & Employee Benefits, December 2009
On January 15, 2009, the National Assembly enacted the Act to amend the Supplemental Pension Plans Act and other legislative provisions in order to reduce the effects of the financial crisis on plans covered by the Act (2009, c. 1) (the Act). The Act allowed the application of the revised actuarial standards that were to come into force on April 1, 2009 retroactively to December 31, 2008. The Act also referred to other specific relief measures relating to solvency valuations, namely:
- The ability to use asset smoothing in the context of a solvency valuation;
- The ability to consolidate certain solvency deficiencies; and
- The ability to amortize the payment of solvency deficiencies over a longer period of time.
On November 26, 2009, the Regulation respecting measures to reduce the effects of the financial crisis on pension plans covered by the Supplemental Pension Plans Act (the Regulation) came into force. The Regulation contains the required details pertaining to the application of the measures provided by the Act. Also, as the Regulation came into force very late, the Regulation extends the period for submitting actuarial reports dated between December 31, 2008 and March 30, 2009 to December 31, 2009.
The measures provided by the Act and the Regulation require that the greater of the following amounts be paid to the plan in respect of a solvency deficiency:
- The amortization payments required using the special relief measures; or
- The amortization payments required in accordance with the basic actuarial valuation determined without regard to the effect of the financial crisis on plan assets in 2008.
Amortization Payments Required Using Special Relief Measures
The amortization payments (special contributions) required will depend on which of the measure(s) provided by the Regulation will be used in respect of the pension plan. The authority to select one or more of the special relief measures rests with the plan sponsor or, in the case of a plan with multiple employers, the person with the power to amend the plan. Written instructions regarding the use of the special measure(s) selected must be provided by the decision-maker to the plan administrator. The various measures that could be used, individually or in combination, are:
Asset Smoothing It is usually forbidden to apply asset smoothing when calculating the solvency of a pension plan. The Regulation allows, exceptionally and for a limited period, smoothing of assets for purposes of solvency valuations. The smoothing cannot be made over a period of more than five (5) years and the method chosen in respect of the first actuarial valuation after December 30, 2008 shall be used for the whole period during which the special measures are applied.
Consolidation of Deficits The following deficits can be consolidated:
- Solvency deficits that exist as at the first actuarial valuation after December 30, 2008; and
- Deficits arising from amendments made before December 31, 2008 and reflected at the latest in the first actuarial valuation after December 30, 2008.
Extension of Amortization Period
The Regulation allows the amortization period in respect of solvency deficiencies to be extended, at the latest, until the end of the first fiscal year of the pension plan following December 31, 2017. This measure applies to the deficits determined in the first actuarial valuation after December 30, 2008 and to any other solvency deficit determined in the period during which the special relief measures are in effect.
Amortization Payments Required According to Basic Valuation
As mentioned above, the use of any special measure(s) provided by the Regulation cannot reduce the amortization payments (special contributions) required to a lower amount than the one that would have been required in the absence of the financial crisis. It is accordingly necessary to calculate what such payments would have been and to provide such information in the actuarial valuations submitted to the authorities. The Regulation provides that the amortization payments required according to the basic valuation correspond to the payments that would have been required if the new rules that will come into effect on January 1, 2010 applied, but without taking into consideration the special measures provided by the Regulation and without considering losses caused by the financial crisis in 2008.
The Regulation provides much awaited information to pension plan administrators and sponsors of pension plans registered in Quebec. Unfortunately, the application of the Act and the Regulation is made more complex by the amendments to the Supplemental Pension Plans Act by an Act to amend the Supplemental Pension Plans Act, particularly with respect to the funding and administration of pension plans in 2006, which introduced different rules pertaining to the solvency and funding of pension plans. As these new rules take effect on January 1, 2010, neither the actuaries nor pension administrators or plans' sponsors have had the chance to familiarize themselves with them but must now apply them in connection with the special relief measures.
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.