On July 22, 2014 the Government of Alberta passed the long awaited regulation to support the new Employment Pension Plans Act (the Act) that was enacted through Bill 10 in 2012. The new Employment Pension Plans Regulation (the Regulation) and the Act come into force on September 1, 2014.
Key highlights of the Act and Regulation are:
This Communiqué provides more detail on items of particular interest.
Vesting of benefits for all service is immediate and the minimum spousal pre-retirement death benefit for all service is increased to 100% of the member’s benefit. As a result of the changes to vesting, locking-in is also changing. The unlocking permitted for small pensions is now solely based on the 20% of YMPE (Year’s Maximum Pensionable Earnings) threshold for commuted values. The small benefit test based on 4% of the YMPE for annual pensions has been eliminated. Plans must now permit unlocking in specified circumstances including shortened life expectancy and non-residency.
Commuted value payments must be calculated at the time of termination of membership and a recalculation must be done if the commuted value is not paid within 180 days of termination. The recalculation must be done as of a date that is not more than 30 days before the date of payment or transfer.
All benefits (including optional form pension amounts and commuted value payouts) must not differentiate based on the gender of the member.
For marriage breakdowns involving a lump sum settlement, the total entitlement to be split with the member’s former spouse is now based on the commuted value as if the member had terminated membership on the date of the marriage breakdown (or, in other words, the regular termination commuted value payout basis).
Plans may elect to introduce phased retirement in accordance with the rules established under the Income Tax Act and the Regulation.
On plan windup, commuted value transfers may be made to retired members in specified circumstances with the Superintendent’s approval (for example, if the administrator is not reasonably able to purchase an annuity that provides the same type and amount of benefit).
The Act and Regulation require a written governance policy to be developed for all types of pension plans. The governance policy must contain the following:
In addition, an annual assessment must be done to ensure the plan is being administered, funded, and invested in accordance with the plan document, governance policy, funding policy (if applicable) and investment policy.
The Act and Regulation permit plan designs that share risk with plan members (either through contributions or benefits). Target benefit plans permit benefit reductions when the plan’s liabilities exceed the assets and contributions coming into the plan are insufficient to eliminate the unfunded liability. In such plans, all members bear risk through the potential of benefit reductions. Jointly sponsored plans share risk through contributions from active members. Under this type of plan, active members contribute based on a specified share of the funding obligation, including a share of any unfunded liability contributions.
Written funding policies for benefit formula based plans must be developed and reviewed annually and must contain the following:
Sponsors of plans containing defined benefit formula provisions (other than target benefit) may establish solvency reserve accounts within the plan to hold solvency deficiency special payments. When the plan’s solvency ratio exceeds 105%, the plan sponsor can withdraw up to 20% of the accessible solvency surplus each year for the next three years (until the next required valuation).
Target benefit plans must contain prescribed levels of margin (called PfADs), based on the risk factors and investment policy of the plan. Plans will be permitted to phase into these levels of PfADs over the three year period following conversion to a target benefit plan. Stress testing for target benefit plans will also be required to be included in valuations filed with the Superintendent.
Valuation filing dates will be extended to 270 days following the plan year end.
Plan sponsors will have more flexibility in determining the groups covered by their pension plans, with the removal of the prescribed eligibility classes. Employees who earn more than 35% of the YMPE over a two year period who otherwise meet the plan’s eligibility criteria must still be permitted to join.
Plans with optional participation may introduce auto-enrollment, provided the employee is provided with the timelines and conditions for them to opt out, in writing.
Plan sponsors who offer investment choice to members of defined contribution plans must now provide a default fund which is either a balanced fund or a target date fund taking into account the member’s age.
Enhanced member disclosure based on the type of plan will be required. In addition, new disclosure requirements apply for retired members, marriage breakdowns, phased retirement and whenever benefits or member contributions are changing.
While the Act and Regulation largely come into effect September 1, 2014, some changes are not in force until the end of 2014. Plan administrators and plan sponsors are being given time to make the necessary changes to their plan documents, policies and procedures. The following table summarizes the key deadlines: