Plan sponsors and administrators finally have guidance on Quebec’s supplemental pension plan legislation, two years after initial amendments on Jan. 1, 2016.
The regulations, which came into force on Jan. 4, 2018, don’t differ significantly from the draft version circulated for consultation last summer. The key features address annuity purchases, funding policies and variable benefits.
With respect to annuity purchases, the regulations list the requirements governing annuity policies purchased to settle members’ benefits. Perhaps most importantly, employers won’t be released from their plan obligations following the purchase of an annuity unless they formulate a clear annuity purchasing policy that meets the regulatory requirements, including allowing plan members to buy products outside of the plan.
Previously, employers could purchase insured annuities, but the policies remained within the plan. The upshot was that employers were on the hook if something went wrong with the policies.
“Although the chances that an employer would be on the hook because the insurance company behind the annuities experienced financial difficulties has always been minute, there was always the chance that the obligation could come back at them,” says Serge Charbonneau, a partner in Morneau Shepell Ltd.’s pension consulting practice in Montreal. “So the ability to cut loose completely will come as a relief to many.”
Still, the rules are quite demanding. Employers will have to get actuarial valuations before each annuity purchase and make special annuity purchasing payments into the fund to maintain its solvency at the greater of its pre-purchase level or 100 per cent.
“The intention is to find a balance between the money used to purchase annuities and the plan’s funding level,” says Natalie Bussière, a pensions lawyer in Blake Cassels & Graydon LLP’s Montreal office. “But at least employers now have the rules that can help them decide, in conjunction with their funding policies, whether they want to go the annuity route.”
It helps considerably that the new regulations clarify the requirements for the funding policy that employers must set out in writing under the 2016 amendments. “Plan administrators will need to revise the funding policies that guide the pension committee in performing its funding-related duties,” says Bussière. “They will want to seize this opportunity to clearly define the funding strategies for their defined benefit plans going forward.”
That’s not to say that the regulations carve a path to an appropriate funding policy in stone. For example, while the policy must define the employer’s risk tolerance, it must also gauge employees’ tolerance to risk. “That’s odd because, although employees’ risk tolerance is relevant, it will vary between employees and it’s not at all clear just how the employer will make the determination,” says Charbonneau.
The regulations also prescribe rules for plans offering variable benefits, with distinctions drawn on whether the benefits are paid as life or temporary incomes. Additional disclosure requirements, including employers’ statements that specify minimum and maximum withdrawals, also attach to such plans.
Although variable benefits have been available in other jurisdictions, including at the federal level, for some time, they’ve been slow to catch on. “One of the problems is that there is still uncertainty about employers’ responsibility regarding these benefits, so employers have been shy about taking them on,” says Charbonneau. “Fortunately, regulators are working with [the Canadian Association of Pension Supervisory Authorities] on addressing these issues.”
Otherwise, not all jurisdictions have legislation in place to allow variable benefits. “It’s a problem for employers who have employees in different jurisdictions when they can’t implement a program across the board,” says Charbonneau.
Finally, employers and administrators should be aware that the new regulations have mandated changes to the contents of annual statements and to prescribed topics for annual meetings, which must now reflect the major changes wrought by the new supplemental pension plan regime.