On November 12, 2013, the Alberta government issued EPPA Update 13-01, in response to recent developments in the actuarial profession affecting defined benefit pension (DB) plans. The EPPA Update will be of interest to administrators of DB plans registered in the province of Alberta, particularly those which provide post-retirement increases to pensioners that are fully or partially indexed to the Consumer Price Index.

Specifically, in September 2013, the Canadian Institute of Actuaries published an Educational Note – Alternative Settlement Methods for Hypothetical Wind-Up and Solvency Valuations providing guidance to actuaries who decide to use an alternative settlement method as described in that educational note. The educational note further elaborates on an earlier educational note applicable to valuations with effective dates between June 30, 2013 and December 30, 2013.

As the educational note acknowledges that alternative methods may be permitted by law, regulatory policy, or guidelines, the EPPA Update establishes the position of the Alberta Superintendent of Pensions with respect to appropriate and available alternative settlement methods.

Four alternative settlement methods were identified in the educational note:

1. The purchase of a series of annuities over a period of a few years

2. The establishment of a replicating portfolio in trust to provide for the payment of pension benefits over an extended period of time

3. Lump sum payments to plan beneficiaries, or

4. An assumed modification to the terms of the benefit promise (e.g., substituting fixed rate increases for benefits indexed to CPI increases).

The EPPA Update confirms that of the four alternative settlement methods identified in the educational note, only one – Option 4: An assumed modification to the terms of the benefit promise – is acceptable to the Superintendent of Pensions, subject to the conditions outlined in the EPPA Update. The former three options will not be acceptable to the Superintendent.

Given that plan terms are not modified (retirees must continue to receive increases indexed to CPI, if this is what the plan terms require, notwithstanding the assumed modification for funding purposes), it will not be necessary for the actuary or plan administrator to notify members of the effect of the modification, though actuaries and administrators may choose to notify plan members.

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.