Quebec Proposes Pension Funding Reform for Private Sector Plans

Following the release of the D’Amours Report in 2013, which provided recommendations on how to improve  Quebec’s retirement income system, the Quebec government was widely expected to  reform the funding of Quebec registered private-sector pension plans.

After nearly two years of consultation with various stakeholders (and a change in government), the Quebec government introduced Bill 57 in the National Assembly (An Act to amend the Supplemental Pension Plans Act mainly with respect to the funding of defined benefit pension plans), which includes the following amendments to the SPPA:

Solvency Funding:  The most significant change in Bill 57 is the proposed elimination of the requirement to fund a plan on a solvency basis. The solvency of a plan would, however, still have to be determined and used for certain purposes (e.g., limits on the use of surplus while the plan is ongoing and on transfers of commuted values out of the plan).

Funding on a Going Concern Basis: Going concern funding would be retained as the single funding approach for Quebec-registered plans. In addition:

  • asset smoothing would be allowed, but the averaging period could not exceed five years;
  • letters of credit would be permitted; and
  • a 10-year amortization period for deficits would apply (after a transition period during which the amortization period would gradually come down from 15 to 10 years).

Reserve Account: The trade-off for the elimination of the solvency funding requirements would be a new requirement to establish a reserve account (called a “stabilization provision“ in Bill 57). This reserve would be funded with actuarial gains, additional current service contributions and special amortization payments.  The target level of the reserve would be prescribed by regulation. It can be expected that the target level would vary based on the plan’s investment policy. A more “aggressive” policy would require a larger reserve. The target level would thus vary from one plan to another, but some actuaries anticipate that the new “stabilization contributions” could increase the current service cost of a plan by 13% to 17 % (although this increase may be offset in whole or in part by the elimination of solvency payments).

Funding Policy: Each plan would have to have a funding policy that meets the requirements prescribed by regulation.

Funding of plan amendments: Additional obligations arising from an amendment to a plan would be payable in a lump sum if the plan’s funding level is below 90%. Otherwise, such obligations would have to be funded over a maximum period of five years.

Use of Surplus While Plan is Ongoing: New limits on the use of surplus while the plan is ongoing would apply. The use of surplus assets would only be allowed if the plan is fully funded (on a going concern basis), the target level of the reserve account has been exceeded by five percent and the solvency ratio of the plan is at least 105%. The surplus would first be used to pay employer current service contributions. Up to 20% of any remaining surplus could, in accordance with the plan’s provisions, be used to pay additional obligations resulting from a plan amendment or be returned to the employer.

Use of Surplus on Plan Termination: The current surplus allocation regime on plan termination (i.e., sending a draft surplus sharing agreement to members for approval and going to arbitration if the agreement is opposed by more than 30%) would be replaced. Under the new regime, plans would have to be amended to specify how surplus is to be allocated on plan termination. The amendment would be subject to the approval of plan members (but it would be deemed approved unless 30% of members file an objection). If no amendment is approved by January 1, 2017, the surplus allocation rule would be deemed to be a 50/50 allocation. If a plan already contains surplus allocation rules, the pension committee would have to undertake a confirmation process (using the same 30% rule).

Actuarial Valuations: Actuarial valuation would have to be carried out every three years (rather than annually). However, an annual notice on the financial position of the plan would have to be sent to the Régie des rentes within four months of the end of every fiscal year of the plan. If the solvency ratio of a plan is less than 85%, a full actuarial valuation would have to be carried out. All plans would be required to prepare a new valuation as of December 31, 2015 in accordance with the new rules.

Additional Pension Benefit: The requirement to provide an “additional pension benefit”, which is a type of mandatory pre-retirement indexation for deferred vested members, would be eliminated.

Portability: The benefits of members whose active membership ends and who elect a portability option would be paid according to the solvency ratio of the plan, without residual benefits. This rule would not apply to members who are “forced out” of the plan.

Annuity Purchases: If a plan has an “annuity purchasing policy” that meets the requirements prescribed by regulation, payment of all or part of the pension benefit in accordance with that policy would constitutes a discharge. The affected individuals would, however, remain “plan members” for purposes of any surplus distribution upon plan termination within a three-year period following the payment.

A parliamentary commission is expected to take place in early September with the adoption of the bill to follow shortly thereafter. The effective date of these changes is set for January 1, 2016.

It is interesting to note that both the main unions and employers’ associations have, so far, responded positively to the new proposals.

We will continue to review the details of Bill 57 and report on its implications for employers and plan administrators in future posts over the coming months.