New draft regulations published in Quebec this summer address policies around annuity purchases for defined benefit pension plans for the first time.
Industry stakeholders have been expecting the province’s regulations, which are currently under consultation, since Jan. 1, 2016, when Quebec implemented legislative changes that replaced its solvency regime with enhanced going-concern funding rules and required all pension plans to have a written funding policy, says Tina Hobday, a partner at Langlois Lawyers LLP in Montreal. “These changes will bring Quebec several steps closer to fully implementing the shift that began with Bill 29.”
She notes the draft regulations would establish the requirement for funding policies, as well as rules around annuity purchase policies and additional mandatory content for annual meetings and member statements.
Read: New pension funding rules take effect in Quebec
If the regulations become reality, employers will have to establish policies around annuities that address the content of a purchase and, for the first time, allow plan members to buy products separate from the plan. “Right now, it’s possible to purchase insured annuities, but they’re still included in the plan. So down the road, if an insurer were to go bankrupt, then the retirees would still be the responsibility of the plan,” says Serge Charbonneau, a partner in the pension consulting practice at Morneau Shepell Ltd. in Montreal. “Some sponsors like purchasing it but they want to cut loose. This is brand new, and we have rules to proceed with that.”
As for the funding policy, it must describe the type of pension plan and its demographic characteristics; deal with the funding objectives with regard to variations to and the level of contributions and benefits; and identify the main risks related to plan funding. It must also provide specifics about the funding goals, particularly with regard to the determination of the value of the liabilities and assets and the measures used to quantify and manage the risks related to plan funding.
Read: A look at Quebec’s pension solvency changes one year on
“It’s good governance, because it’s going to document how the risks are being managed by the plan,” says Charbonneau, noting that type of governance is already in place in Alberta and British Columbia. “And now Quebec says, ‘Here’s what we want the employer to adopt, and it’s going to help better manage funding risks.’”
The draft regulations also address variable benefits under defined contribution plans for the first time. They state that where a pension provides for the payment, as a life income, of variable benefits under a defined contribution plan, the following rules will apply: for each fiscal year, the member or spouse sets the income received as variable benefits; the minimum income paid is the amount prescribed for a registered retirement income fund; and the maximum income paid is in line with the rules applicable to a life income fund.
Furthermore, the draft regulations state that, where a plan pays variable benefits as temporary income, special rules apply depending on whether the member is at least 55 years old but less than 65 or where the person under 55.
“That’s a big step, and it’s been in discussion for many years,” says Charbonneau. “It’s being looked at in Ontario and it’s already in place for federal plans. But not many plans have gone ahead to put it into place so far. Everybody wants it, but there were no rules in place and now Quebec spells it out. I think that’s a really good development.”
Read: Administrators will need to revisit governance policies under Ontario’s latest pension changes
In other pension news, the Financial Services Commission of Ontario has proposed amendments to the province’s regulation on the superintendent’s consent for annuity purchases on plan windup.
Under the amendments, plan administrators that are purchasing life annuities to settle benefits in connection with a pension windup will require prior approval from the superintendent. Also, the superintendent would be able to defer approval for up to 10 years after the approval of the windup report. In addition, the administrator must purchase a life annuity within 60 days of either the superintendent’s approval or receipt of an individual’s election.
The amendments also state that where the superintendent believes an annuity purchase would adversely affect the financial position of the pension benefits guarantee fund, the regulator may defer approval. In addition, the superintendent would have the authority to allocate payments from the fund to pay a claim in one or more instalments.
The amendments are open for comments until Sept. 8, 2017.
Read: Ontario announces long-awaited DB solvency reforms
And, finally, Nova Scotia has introduced temporary solvency relief for defined benefit plans. Pensions registered in the province with actuarial valuation dates between Dec. 30, 2016, and Jan. 3, 2019, will be able to amortize any new solvency deficiency over 15 years as opposed to the standard five-year period. Also, if a pension plan has an existing solvency deficiency that’s currently being amortized over no more than a five-year period, it can consolidate it with a new shortfall and amortize the amount over 15 years.
The move marks the third time the province has offered temporary solvency relief since the 2007/08 financial crisis, says Paula Boyd, Nova Scotia’s superintendent of pensions. She notes there are a number of reasons for the latest round of relief, including low interest rates and changing demographics.
“With those kind of continued pressures, organizations and the economy today, particularly in Nova Scotia but also in other parts of the country, are finding things very tough. So with the goal of encouraging people to maintain their pension plans, we want to provide them with a little more flexibility, so that it’s not the pension plan that ends up being a driver in the lack of success of an organization.”
Read: 2017 Top 100 Pension Funds Report: The evolution of DB