Federal solvency relief takes effect

Although the funding relief measures are welcomed by sponsors of federally regulated plans, they are relatively modest when compared to approaches taken in some other Canadian jurisdictions because of the prohibition against consolidation of deficits, the restrictions on the smoothing of assets and the requirements for either consent or letter of credit (LOC).

According to a Mercer Communiqué, for most employers this funding relief will depend on their ability to either obtain consent or to secure an LOC. For some plan sponsors these hurdles may be significant. As a result the measures may have a limited impact after 2009 in relieving funding pressures.

The regulations impose a deemed trust on the cumulative difference between the special payments if the smoothed value of assets had been capped at 110% of market value versus those required based on smoothed value of assets over 110% (and up to 115%) of market value.

If the plan is terminated, the amount is subject to the deemed trust coming due and payable by the plan sponsor to the plan.

The deemed trust will be eliminated no later than the end of the fifth plan year following the year during which the relief was implemented. If the LOC condition as described below is met, the deemed trust is eliminated

Under the regulations, a new solvency deficiency can be amortized over a 10-year period to determine minimum contribution requirements in the first year following the valuation date.

Employers will be entitled to use this measure in the first actuarial valuation filed with the Office of the Superintendent of Financial Institutions (OSFI) after June 12, 2009 (when the regulations came into force), provided the effective date of the valuation report is in the period beginning Nov. 1, 2008 and ending on Oct. 31, 2009.

The conditions for the continuation of the 10 year amortization schedule are identical to those that were required under the 2006 solvency funding relief to amortize solvency deficiency over 10 years.

Consent will be deemed to be obtained if no more than one-third of members and no more than one-third of beneficiaries who are not members object to the continuation of the 10 year amortization.

To satisfy the LOC condition an irrevocable LOC must be provided by the employer for a period of up to 10 years. The amount of the LOC corresponds to the difference between the value of future amortization payments based on the 10 year period and the value of future amortization payments based on the five year period.

The LOC would be triggered and become payable to the holder on default.

If this approach is selected, members of the plan must be informed in their annual pension plan statements of the amount of the initial solvency deficiency, the fact that the deficiency is being funded over 10 years and the aggregate face amount of the LOC.

If neither of the conditions outlined above are met by the end of the first year of funding relief, the pension plan would be required to re-amortize the remaining solvency deficiency which emerged in 2008 over the five plan years from 2010 to 2014.

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