The government of British Columbia has extended the period over which pension solvency deficiencies can be funded by five years to assist plan sponsors registered in the province in managing the financial pressures of funding their plans in the current low interest rate environment.
Michael J. Peters, acting superintendent of pensions at the Financial Institutions Commission of B.C., says some internal analysis conducted by FICOM highlighted a disconnect in the province’s funding rules. “The median going-concern funded ratio for plans registered in B.C. was 124 per cent, while the median solvency ratio was 85 per cent” he says.
“Solvency, as evidenced by the changes in Quebec and that Ontario is consulting on, is obviously a concern for all regulators and policymakers. So we thought, working with our policy folks, this could be a good short-term measure that we think will have meaningful results in reducing the solvency payments with only a marginal increase in the risks to member benefits.”
Read: Quebec shakes up pension landscape with shift to going-concern funding
According to Peters, FICOM estimates annual pension payments will be reduced by about 47 per cent due to the change. “In the longer term, the greatest factor in security of benefits for the plan members is the continued operation of the company to continue funding its defined benefit plan, so by easing the immediate burden we’re giving improved longer-term stability to the employers.”
Under current legislation, a solvency deficiency must be amortized over a period not exceeding five years. The legislation further requires that each solvency deficiency be funded separately and may not be combined with any other solvency deficiencies. The amendment to the regulation permits an administrator, on submission of written election to the superintendent, to consolidate all existing solvency deficiencies into one new solvency deficiency at the review date, and allows for the new solvency deficiency to be amortized over a period not exceeding 10 years.
Read: Pension solvency funding a growing challenge as B.C. deficits mount
The amendment is available to all defined benefit pension plans registered in the province but they can only elect it once in a three-year cycle, between Dec. 31, 2015 and Dec. 31, 2017. For plan sponsors that have already made payments on the basis of a five-year amortization, the amendment also allow for a fresh start.
“What you do is, ignoring all of the other valuations, you bring all the solvencies forward to the review date and your 10-year amortization payments will be based on the aggregated amount outstanding as at Dec. 31, 2015,” says Peters. “If they have made payments on the basis of the five-year schedule and there are other solvency deficiencies in existence, then they can essentially view the payments already made as prepayments, and they can reconfigure them so they can meet the requirements of the 10-year amortization period.”
Read: 2016 Top 100 Pension Funds Report: Solvency reform on the agenda
Solvency reform has been a hot topic across Canada’s provinces this year. A proposal that includes eliminating solvency funding for certain defined benefit pension plans is on the table in Saskatchewan, while Ontario has proposed enhancing the existing going-concern funding rules while doing away with the solvency requirement. On Jan. 1, Quebec became the first province to move to going-concern funding by removing the requirement to fund private defined benefit pension plans on a solvency basis.
Peters says B.C. is watching these developments closely. “We have had discussions with our policy folks but we haven’t received any direction from any of our higher authorities – the minister, the deputy minister – as to if and when consultation will take place. I’m not aware of anything at this point in time.”
For more information about the amendment, email FICOM or call 604-660-3555.