Canada: COVID-19 Pensions Update: Federally Registered Pension Plans

Pension regulators across Canada have been taking steps to address the impact of COVID-19 on registered pension plans, including deadline extensions, restrictions on portability transfers and certain exceptions for plans that temporarily reduce contributions. In this update we take a closer look at the various relief and restrictions applicable to federally registered pension plans subject to the Pension Benefits Standards Act, 1985 (Canada) ("PBSA") and Income Tax Act (Canada)("ITA").

Funding Relief for DB Plans

On April 15, the federal government announced that it would provide immediate, temporary relief to sponsors of federally regulated, defined benefit ("DB") pension plans. As previously reported, the proposed relief is expected to take the form of a moratorium, through the remainder of 2020, on solvency payment requirements for defined benefit plans.

Regulations under the PBSA are necessary to effect the relief. Though the relief was announced to be effective "immediately", regulations were not in place to relieve employers of April's solvency special payment due April 30.  In addition, on April 30 the Office of the Superintendent of Financial Institutions ("OSFI") updated its FAQs to specifically state that "[u]ntil these special regulations are in force, the normal solvency funding requirements under the [PBSA] continue to apply."

Regulations are expected shortly.  Based on information publicly available, it is not clear what, if any, relief will be available to employers for April's contribution, whether the relief will cover December 2020's payment due in January, and what other nuances will be included.

Reducing Contributions for DC Plans

The Canada Revenue Agency ("CRA") recently announced relief from the 1% minimum contribution requirement that applies to defined contribution ("DC") pension plans. This change applies to all registered DC pension plans in Canada.

Generally, in order to meet the conditions for registration under the ITA and the regulations thereunder, contributions to a DC pension plan must be "determined in a manner acceptable to the Minister".  CRA Newsletter No. 91-4R, Registration Rules for Money Purchase Provisions specifies that the "acceptable" minimum contribution for an employer under the terms of a DC pension plan is 1% of the total pensionable earnings of all active members participating under the DC provision. This minimum contribution rule applies only to a registered pension plan in which members' benefits are provided exclusively on a DC basis.

The Minister of National Revenue announced on May 5, 2020 that the 1% minimum contribution rule will be waived for the remainder of 2020 if the plan is amended to suspend accruals under the plan for the remainder of the year, meaning that no employer or employee contributions will be made to the plan following the plan amendment. The plan amendment must be submitted to the CRA Registered Plans Directorate in order for the relief measure to apply.

Nothing in the PBSA prevents an employer from amending a DC plan to reduce of contributions to zero.  Such an amendment may be made on a prospective basis only, meaning that the effective date of the amendment must be on or after the date that the amendment is adopted. As with all amendments, the administrator must file the amendment with OSFI and provide a written explanation of the amendment to affected plan members and beneficiaries. It should be noted that, technically, OSFI would be entitled to terminate a plan where employer contributions cease or are suspended; however, we would expect OSFI to exercise considerable restraint in this regard where contributions are intended to resume once business operations normalize.

As a preliminary step, employers considering a reduction or suspension of DC pension plan contributions should also review any applicable collective agreements and evaluate the constructive dismissal risk associated with reducing employees' overall compensation.

Restrictions on Commuted Value Transfers and Annuity Purchases

Effective March 27, 2020 OSFI implemented a full freeze on portability transfers (also called commuted value transfers) and annuity purchases, meaning that transfers and purchases are not permitted without the consent of the Superintendent. The basis for the freeze provided by OSFI is that financial market conditions related to the COVID-19 crisis have negatively affected the funded status of pension plans and such transfers could impair their solvency. In addition, OSFI received early feedback from some plan administrators that portability transfers could impair the liquidity of some plans. 

Except as noted below, the freeze applies to all transfers under s. 26 of the PBSA, including:

• Portability transfers and annuity purchases resulting from a member's cessation of employment;
• Portability transfers and annuity purchases related to the wind-up of a plan, including where the Superintendent has already approved the termination report;
• Buy-out annuity purchases effected on or after March 27, 2020 (for any buy-out annuity purchases in progress, OSFI should be contacted as soon as possible);
• Portability transfers and annuity purchases related to divorce, annulment, separation, or breakdown of a common-law partnership; and
• Pending transfer deficiency payments still owed to former members.

The freeze does not affect payments or transfers that occur under other sections in the PBSA such as:

• Pension payments to retirees and other beneficiaries;
• Small benefit commutations;
• Non-locked-in pension benefits where a member has not been a member for a continuous period of at least 2 years;
• Shortened life disability payments;
• Death benefits payable to the estate of a member;
• Withdrawal of a member's additional voluntary contributions; and
• Payment of the commuted value of a remaining guarantee period to a beneficiary following the death of a member.

Exceptions to the Portability Freeze

On May 7, 2020, OSFI adjusted its portability policies by revising the Directives of the Superintendent pursuant to the Pension Benefits Standards Act, 1985 (the "Directives") to permit portability transfers and annuity purchases under section 26 of the PBSA in the following two circumstances: 

1. Portability Transfers for Eligible Plan Members who have achieved Early Retirement Age

Portability transfers are considered to have "automatic" consent from the Superintendent if the following requirements are met:

• Member is of at least Early Retirement Age: The member must be within 10 years of "pensionable age" (i.e. within 10 years of meeting their plan's requirements for an unreduced pension);
• The Plan Allows for the Transfer: Federally registered pension plans may allow members who are within 10 years of pensionable age to elect a portability transfer but need not do so. Many do not.  For automatic consent to be granted, the plan must permit the transfer in the first place;
• Locked-in Vehicle: The transfer must be made to a locked-in vehicle such as a life income fund, restricted life income fund or locked-in registered retirement savings plan.
• Partial Commuted Value Transfer (Limited by "Transfer Value"): The amount of the initial transfer cannot exceed the "transfer value" (i.e., the commuted value of the pension benefit multiplied by the plan's "transfer ratio"). The transfer ratio must be determined based on the lower of a projection dated no earlier than March 31, 2020, and the last filed valuation.
• Full Commuted Value Transfer Supplemented by Remitting Transfer Deficiency: If the plan's transfer ratio (determined as above) is less than one, the full commuted value can be transferred if the employer remits to the pension fund the amount by which the commuted value exceeds the transfer value. This amount is the "transfer deficiency".
• Subsequent Transfer of Deficiency: Any transfer deficiency must be transferred on the earlier of: (i) five years from the date the commuted value of the pension benefit was calculated; or (ii) the date on which the solvency ratio of the plan is determined to be one, based on an actuarial report with a valuation date no earlier than March 31, 2020. The transfer deficiency must include interest at the prescribed rate.

Portability transfers to other pension plans and annuity purchases for eligible members who are within 10 years of the applicable pensionable age continue to require the Superintendent's consent.

2. Portability Transfers for Federal Members in Multi-jurisdictional Plans

With respect to federally regulated employees participating in multi-jurisdictional plans, OSFI has acknowledged that issues of fairness may arise related to differences in portability restrictions between provincial and federal members participating in the same plan.  OSFI has revised the Directives to allow portability in accordance with the provincial portability restrictions for federal members in provincially registered multi-jurisdictional plans and encourages plan administrators of federally registered multi-jurisdictional plans to contact their OSFI Relationship Manager to determine which portability restrictions would be appropriate to apply to federal members to ensure fair treatment of federal and provincial members.

Consent Process

During the temporary freeze period, administrators may request the Superintendent's consent portability transfers or annuity purchases covered by the freeze. A request for consent may be made on behalf of a single member or a group of members. We understand that requests may also be made for terminations that have already occurred and for a methodology on which future terminations and transfers may be processed. To request consent, plan administrators are instructed to contact their OSFI Relationship Manager or send an email to [email protected]

OSFI has indicated that requests for consent must clearly demonstrate that the proposed transfer(s) or buy-out annuity purchase(s) do not unduly impact the security of the benefits of the remaining members and other beneficiaries of the plan. Additionally, the plan administrator should provide details of the proposed transaction(s), a recent estimated solvency position of the plan, and the rationale for the proposed transaction(s), including any special circumstances that require consideration by the Superintendent. OSFI has stated that where consent is provided, it will likely impose conditions on the transfer or annuity purchase related to the recent estimated solvency level of a plan.

Though there in no explicit requirement for administrators to request Superintendent consent to make portability transfers, OSFI's FAQs suggest that, in situations of members' financial hardship, administrators ought to make such a request if they are satisfied that such transfers would not materially impair the solvency of the pension fund. This is somewhat troubling in that OSFI's expectation in this regard implies a duty or ability on the part of administrators to assess members' individual financial circumstances and to determine if such circumstances amount to hardship.  Administrators would not generally be in a position to make this determination. OSFI suggests that administrators use the criteria set out for financial hardship unlocking to assess financial hardship for this purpose.

Filing Deadlines and Extensions

OSFI has extended the deadlines for certain actions and annual filing requirements under the PBSA, as detailed in the following table.

OSFI has indicated as of early May 2020, that it is not considering extending deadlines for individual statements, including those prescribed upon termination of employment, retirement or death of a member. Guidance from OSFI states that requests from plan administrators facing challenges complying with the prescribed timelines will be considered on a case-by-case basis. 

Electronic Communications

Electronic communications, including sending electronic member statements, is difficult under the PBSA due to the requirement for administrators to receive (and log) each member's positive consent to receive communications electronically.  In addition, because the member statement must be sent to the member and his or her spouse (a requirement unique to the PBSA), OSFI takes the position that the PBSA requires that the spouse must provide separate positive consent to receive the member statement by electronic means.  Administrators who have, until now, handed paper member statements out at work addressed to the member "and spouse", may not even have the spousal contact information needed to request the spouse's consent, or the ability to store contact details and email addresses for spouses, let alone the resources to keep such information up to date. 

Though it was hoped that OSFI would relax the requirement for positive consent or the requirement to receive the spouse's separate positive consent, such relief has not been forthcoming due to OSFI viewing itself limited by the wording of the PBSA.  We are aware of efforts to flag this issue to Finance in the hopes that, with whole workforces working at home, member statements may be emailed this year.

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.