Mercer Canada | Amendments to Bill 57

Communiqué

Quebec Adopts Amendments to Funding Rules for Private Sector Pension Plans

REVISED¹ – December 1, 2015

 

Some major changes have been made to Bill 57

The Act to amend the Supplemental Pension Plans Act mainly with respect to the funding of defined benefit pension plans (the “Act”) was passed by the Quebec National Assembly on November 26, 2015. This occurred after the tabling of Bill 57, introduced on June 11, 2015 by the Quebec Minister of Labour, Employment and Social Solidarity. The new Act aims primarily to amend funding rules applicable to registered pension plans in the private sector in Quebec, effective January 1, 2016. The Act features some significant changes from what was contained in Bill 57; these amendments were made following the special consultations that took place in October 2015.

Our Communiqué dated June 12, 2015 focused on the version of Bill 57 tabled on June 11, 2015. In this Communiqué, we will summarize the main provisions of the Act while highlighting the changes made to Bill 57. Some details still need to be clarified in the regulations under the Act.

This Communiqué will be of particular interest to stakeholders in registered defined benefit pension plans in the private sector in Quebec. It may also be of interest, however, to registered plan sponsors outside Quebec to the extent that certain minimum benefit standards affect Quebec participants.

General principles

For an ongoing pension plan, funding of a solvency deficit will no longer occur. Instead, funding will be based on an “enhanced” going-concern valuation, which will include a stabilization provision. The stabilization provision will be funded by special amortization and current service contributions, and by actuarial gains. The stabilization provision target level will be based, among other things, on the pension fund’s investment policy.

Contribution holidays and the use of surplus assets to fund plan improvements will depend on the funded level of the plan. Even though funding of the solvency deficit will no longer be required, the solvency valuation will still need to be performed and reported, and the solvency financial position could have an impact on the use of surplus assets while the plan is ongoing.

The obligation for the plan sponsor to fund any deficit at plan termination still applies.

The stabilization provision and required contributions

The target level of the stabilization provision will vary as provided by regulation, according to a scale based, among other criteria, on the target asset allocation in the investment policy.

Stabilization contributions may be required in respect of past service and current service. The funding requirements will therefore include the following types of contributions:

  • Basic current service contributions, which are required according to the usual principles;

  • Current service stabilization contributions, which are required and which will equal the stabilization provision target level multiplied by the basic current service cost;

  • Technical amortization payments, which are required to amortize going-concern deficits (i.e. when total assets are less than going-concern liabilities) over 10 years, subject to transition rules;

  • Stabilization amortization payments, which are required if the level of the stabilization provision as a percentage of going-concern liabilities is more than 5% below its objective, will be determined by amortizing the shortfall compared to the target level less 5% (the “stabilization actuarial deficiency”) over 10 years, subject to the transition rules, with actuarial gains to fund the remainder;

  • Improvement amortization payments intended to amortize deficits due to plan improvements over 5 years, including the related stabilization provision;

  • Special improvement payments equal to the value of the improvements including the related stabilization provision, required at the time of a plan amendment when the plan’s funding level is below 90%;

  • Special annuity purchase contributions which are required for the complete settlement of benefits under an annuity purchase policy, defined in the regulation.

Special annuity purchase contributions were not specified in Bill 57. The determination of these contributions will depend on the requirements defined by regulation.


The regulation defining the stabilization provision target level has not yet been issued. In the course of its analysis, the “Comité consultatif du travail et de la main-d’oeuvre” (CCTM) referred to work performed by the Canadian Institute of Actuaries in relation to the introduction of a scale for similar purposes under the new Alberta pension plan legislation. Therefore, the scale for determining the stabilization provision target could reflect the following parameters:  

Percentage invested in non fixed income assets

Stabilization provision target level

Stabilization provision level below which stabilization amortization payments are required

Stabilization provision level above which surplus utilization measures may apply

0%

5%

0%

10%

20%

10%

5%

15%

40%

13%

8%

18%

50%

15%

10%

20%

60%

17%

12%

22%

80%

20%

15%

25%

100%

25%

20%

30%

 

 

The Act specifies that one of the criteria for establishing the stabilization provision scale will be the investment policy target asset allocation. It will be interesting to see if other criteria will also be considered and what the terms and conditions will be.

 

 

Actuarial valuations

The technical amortization payments and stabilization amortization payments mentioned earlier will be redetermined at each valuation.

Actuarial valuations will generally be required every three years. However, if the degree of pension plan funding is below 90%, or if surplus assets are used for the payment of employee or employer contributions, an annual valuation will be required. In order to confirm that an annual valuation is not required, a notice must be sent no later than April 30 to the Régie des rentes du Québec in respect of the financial position of the plan at the end of the prior year.

The criterion triggering an annual valuation instead of a triennial valuation was changed to 90% on a going-concern basis rather than 85% on a solvency basis.

As an example, for a plan with a target asset allocation of 50% in equities, the following could apply (absent any plan amendment):

 

Level of funding on going-concern basis

 

Under 100%

100% to under 110%

110% to under 120%

120% or more

Basic current service contributions

Regular current service cost

Regular current service cost

Regular current service cost

In accordance with surplus utilization measures

Current service stabilization contributions

15% of total current service cost

15% of total current service cost

15% of total current service cost

In accordance with surplus utilization measures

Technical amortization payments

Deficit over 10 years

-

-

-

Stabilization amortization payments

10% of liabilities amortized over 10 years

Shortfall compared to 110% of liabilities, amortized over 10 years

-

-

 

Only stabilization amortization payments may be replaced by letters of credit, up to 15% of the plan’s going-concern liabilities. These letters of credit (as well as existing letters of credit upon transition to the new rules) will be considered in determining the going-concern financial position.

Notional accounting (special monitoring) in respect of employer contributions will also include contributions made in excess of the minimum required.

A notional accounting in respect of the technical amortization payments and stabilization amortization payments made by employees is now included.


A notional accounting (special monitoring) will be maintained in respect of the technical amortization payments and stabilization amortization payments made by the employer, accumulated with interest. A similar accounting must be established if technical and stabilization amortization payments are required from employees (employee amortization payments). During the life of the plan, these amounts will be used first for taking a contribution holiday (employer and employee, as applicable), irrespective of plan rules, subject to the surplus utilization rules described below.

Transition rules

An actuarial valuation will be required for all plans as at December 31, 2015.

To ease the transition to the new funding rules, for purposes of determining the technical amortization payments and the stabilization amortization payments, the 10-year amortization period will be set at 15 years on December 31, 2015, decreasing gradually each year over a 5-year period to attain 10 years on December 31, 2020. In addition, if the total annual contribution required from the employer, excluding the basic current service contributions, in 2016, 2017 or 2018 exceeds the amount which would have been required in 2016 in accordance with the rules that existed on December 31, 2015, this difference will not be payable in 2016, and only 1/3 of the difference will need to be contributed in 2017, and 2/3 in 2018.

Use of surplus assets

Use of surplus assets in an ongoing plan will only be allowed if the target level of the stabilization provision has been exceeded by 5% and the degree of solvency is at least 105%.

If the above conditions are met and continue to be met after any use of surplus:

  • The value of employer and, if applicable, employee contributions included in the special monitoring is applied first to a contribution holiday, irrespective of plan terms.

  • An amount of up to 20% of the surplus remaining after the application of the  contributions included in the special monitoring for the purposes of a contribution holiday may be used to improve benefits, used to take an employee contribution holiday or remitted to the employer.

  • If the text of the plan so provides, the appropriation of surplus assets in excess of the contributions included in the special monitoring is not limited to 20% for purposes of a contribution holiday.

The employer may use surplus assets in excess of the contributions included in the special monitoring to take a full contribution holiday if the plan so provides. This is one of the main amendments to Bill 57.

Plan provisions in respect of the use of surplus assets during the life of the plan (in excess of the contributions included in the special monitoring, whose use is governed by law), which are in force as at December 31, 2015 shall continue to apply on or after January 1, 2016.

Plan provisions relating to the use of surplus assets at the termination of the plan or during the life of the plan, which are in force as at December 31, 2015, continue to apply. They do not need to be amended or confirmed.

In the event of termination of the plan, the right to surplus assets up to the amounts of employer and, if applicable, employee contributions included in the special monitoring has been confirmed. The sharing of the remaining surplus assets, if any, will be subject to the terms and conditions of the plan. For this purpose, the plan provisions in effect as at December 31, 2015 will continue to apply on and after January 1, 2016.

This constitutes a major change to Bill 57, which provided that such provisions were to be amended or confirmed by January 1, 2017.

Actuarial valuation basis

The going-concern valuation will be based on appropriate methods and assumptions. The Act does not address whether or not the going-concern discount rate should include a margin for adverse deviations.

For purposes of the going-concern valuation, it will be possible to use a smoothed asset value.

Policies

The entity which has the power to amend the plan will need to establish a written funding policy and provide it to the pension committee. This policy should be reviewed on a regular basis.

An annuity purchase policy may also be implemented. For a plan that has established a satisfactory annuity purchase policy, annuities can be purchased during the life of the plan, with a discharge of obligations in respect of the members and beneficiaries affected by the purchase without obtaining their individual consent.

If annuities are purchased, the affected members and beneficiaries will retain their right to participate in any eventual allocation of surplus assets upon plan termination for a period of three years. Furthermore, if the plan is terminated without being solvent and the employer has become bankrupt or insolvent, the said members would retain their status as members under the plan for the same period and could therefore see their pensions reduced.

If a plan is terminated with an unfunded actuarial liability and if the employer is insolvent, the annuities purchased in the previous three years under the annuity purchase policy could be reduced.

Other measures

  • The legislation does not change the basis for computation of commuted values. However, in the event of cessation of active membership, rights will be settled in proportion to the plan’s degree of solvency, without any residual entitlement if the degree of solvency is less than 100%. However, a plan may continue to provide for the payment in full of pension benefits. Members who do not have the option of leaving their entitlements in the plan must have their benefits paid in full. In addition, if the degree of solvency exceeds 100%, the entitlements will be limited to 100% of the commuted value unless the plan provides that the 100% ceiling does not apply.

  • The additional benefit can be eliminated for past and future service if the plan is amended to this effect prior to January 1, 2017.

  • The 50% (excess contribution) rule continues to apply. In the case of a member who contributes toward amortization payments, the test allows these contributions to be treated separately, while maintaining the requirement that a member’s current service contributions cannot account for more than 50% of the value of benefits.

  • A plan merger will not be authorized by the Régie unless the absorbing plan’s degree of solvency after the merger:

    • Is at least equal to 85% (100% if both plans are sponsored by the same employer); or

    • Is not more than 5% below the degree of solvency of each of the two plans prior to the merger.

  • New rules apply to the withdrawal of an employer from a multi-employer plan when there are no more active members.

  • Provisions in respect of a plan that terminates with insufficient assets have been amended. The possibility to transfer pensions in payment to the Régie has now been made a permanent feature of the law, and the Régie must administer the related assets for 10 years and purchase annuities with an insurer no later than by the end of this period. However, the Régie will purchase a reduced annuity if the fund cannot cover the full amount (no government guarantee of full payment).

  • Municipal and university plans are specifically excluded from the application of the Act, except where specifically provided by regulation and for the obligation to establish a funding policy.

  • Different provisions apply to multi-employer plans.

  • The possibility of paying variable benefits under a defined contribution component has been added, subject to the terms and conditions provided by regulation.

A series of new provisions not provided in Bill 57 have been added, including:

  • New restrictions on plan mergers based on the degree of solvency;
  • Rule on employer withdrawals from multi-employer plans;

  • Transfer of sums to the Régie for insolvent plans;

  • Exemption of municipal and university plans.

Commentary

The Act constitutes a major reform of the funding rules applicable to private sector pension plans in Quebec, especially the elimination of the requirement to fund plans on a solvency basis. The amendments made to Bill 57 are a welcome addition and have eliminated controversial provisions such as:

  • Those with respect to the use of surplus assets, whether during the life of the plan or at plan termination. The requirement to confirm or agree on new provisions prior to January 1, 2017, irrespective of existing provisions, would have proven to be problematic, to say the least.

  • The right to surplus assets up to the amount of contributions included in the special monitoring in the event of plan termination has been confirmed.

  • A contribution holiday funded by surplus assets (in excess of the amount of contributions included in the special monitoring) is allowed, if so provided under plan provisions.

These changes were among those recommended by Mercer in the position paper we submitted to the government. Some provisions that appear to limit the flexibility sought by the Act have nevertheless been retained, such as the types of contributions included in special monitoring in respect of employer contributions, the current service stabilization contribution which is not adjusted based on a plan’s financial position and the restricted use of letters of credit, among other things. The position of the Régie des rentes du Québec in respect of the use of margins for adverse deviations in the discount rate (in addition to the constitution of the stabilization provision) has still not been confirmed.

The new rules will result in a reassessment by plan sponsors of risk management measures. We expect that given the significant levels of the stabilization provision, and the fact that contributions will be less sensitive to movements in interest rates, many plans will review their investment policy.

We believe that this reform represents a meaningful development as it addresses many of the concerns of the groups that participated in the discussions to ensure the sustainability of existing defined benefit plans. Eliminating solvency funding sets a precedent in Canada. It will be interesting to see whether this reform will inspire lawmakers outside Quebec who are confronted with similar issues regarding the sustainability of defined benefit pension plans.

  1. This revised version of the Communiqué is further to a discussion with the Régie des rentes du Québec on the interpretation of a provision of the Act regarding the adjustment of the current service stabilization contribution based on a plan’s financial position.  This revised version reflects the Régie’s interpretation.

Mercer publishes the Communiqué as a general summary and commentary on topical issues. The information in the Communiqué in no way constitutes specific advice and should not be used as a basis for formulating business decisions. To determine what implications the information contained in the Communiqué will have for your company, please contact your Mercer consultant. Reproduction of the Communiqué is permitted if its source is acknowledged.