The new measures introduced in Bill 30 mean that Quebec plan sponsors will need to prepare for upcoming changes in pension plan funding and administration.

Quebec has recently implemented major changes to the way it deals with pension schemes. Bill 30, an Act to amend the Quebec Supplemental Pension Plans Act, was adopted in December 2006. The new measures pertaining to the funding and administration of pension plans in Quebec will also likely have an impact on the rest of Canada in the coming years.

New Funding Measures Effective Jan. 1, 2010

The funding measures outlined in Bill 30 clearly focus on the solvency of pension plans—the financial position of the plan assuming termination on the valuation date. Each year, a full actuarial valuation will be required unless the actuary can certify that the plan is fully solvent and funded, in which case, only a partial valuation will be necessary. A full actuarial valuation will still be required every three years. The rules that apply to the funding of actuarial deficits will be completely redefined. For solvency actuarial valuations, a provision for adverse deviation at a target level based on plan risks will need to be established, which will build up using actuarial gains. Contribution holidays will not be permitted until this provision has been accumulated.

Solvency deficits (resulting from solvency assets being less than solvency liabilities) will still have to be amortized over a period not exceeding five years. However, any existing schedule of payments to amortize a solvency deficit will be eliminated if and when the plan assets become greater than the liabilities—even if the provision for adverse deviation has not reached the target level—unless these amortization payments are in connection with a deficit created following an improvement to the plan benefits.

In the event that an improvement to the plan benefits reduces the solvency ratio (solvency assets over solvency liabilities) to a level below 90%, the amount required to bring the solvency ratio back to 90% will have to be paid immediately in a single payment. The payment will be limited to the value of the plan improvement. In addition, the total amount of one or several letters of credit, up to 15% of the solvency liabilities, will be allowed to form part of the assets of the plan for the purpose of determining its solvency level.

For funding valuations (the financial position assuming the perpetual existence of the plan), in order to simplify the monitoring of the underlying amortization payments, the actuarial deficits will be consolidated at the time of each actuarial valuation and the new deficit determined will be amortized over a period not exceeding 15 years.

Most of these new funding measures will take effect on Jan. 1, 2010, with some minor exceptions already in effect.

Improved Governance Structure

The new measures also aim to improve the governance structure of pension committees. As of December 2007, the governance practices of pension committees must be established by committee members in a specific document—the “internal bylaws”—which outlines the duties and obligations of pension committee members, delegates, representatives and service providers, as well as provisions for training the committee members and managing the risks identified.

In general, with respect to the operation and governance of the pension committee, the internal bylaws will prevail over the pension plan text. References can be made to certain aspects pertaining to the pension committee operations (e.g., the appointment of officers, quorums and voting) already covered in the plan text. However, the plan’s investment policy will prevail over the internal bylaws in case of discrepancy.

Responsibilities of Delegates, Representatives and Service Providers

Under the new measures, the liability of the pension committee members is limited if they support their decisions, in good faith, with the advice of an expert (as defined in the Civil Code of Quebec). The cost of the deductible under the liability insurance policy for pension committee members may now be paid directly from the pension fund. If members face damages while performing their duties, they will be compensated should they be deemed not at fault.

Discretionary Power

A discretionary power corresponds to the right to make a decision without the need for the pension committee’s approval. For example, an investment manager exercises discretionary power when making an investment decision. However, a trustee who makes pension payments to retirees in accordance with the instructions provided by the pension committee does not exercise discretionary power.

 

Pension committees may continue to delegate some of their responsibilities, and the new measures clarify the roles and responsibilities of delegates, representatives and service providers. Only those representatives and service providers who exercise a discretionary power belonging to the committee will have to assume the same duties and responsibilities as the pension committee would have assumed under the same circumstances. New service contracts may not limit the liability of delegates, representatives and service providers. Existing contracts that limit liability will be nullified if the clauses to that effect are abusive.

Introduction of an Equity Principle

Bill 30 also specifies the rules pertaining to the appropriation of surplus assets for the payment of additional benefits following plan improvements. Plan sponsors will need to apply an equity principle between active members, and non-active members and their beneficiaries, effective Jan. 1, 2010.

If a pension plan sponsor wishes to fund a plan improvement using surplus assets, the pension committee must notify every plan member and beneficiary in writing of this intention and describe the nature of the improvement. Members and beneficiaries may then notify the pension committee (again in writing) if they oppose the proposed appropriation of the surplus assets. If 30% or more of the members of a group (either active members, or non-active members and their beneficiaries) express opposition to the improvement, then the equity principle has not been respected.

Naturally, it would be preferable to seek a mutual arrangement rather than to improve the plan in spite of expressed opposition. However, should the plan sponsor decide to use the surplus assets to fund the improvement anyway, it will be required to prove that the improvement is equitable, in the event that those opposing the measures seek legal proceedings. In determining the equity of the allocation of surplus to a plan improvement, the plan’s history, the nature of the changes, the sources of the surplus, the past utilization of the surplus and the characteristics of projected and currently paid pension benefits will be taken into account.

Another Way to Look at the Equity Principle

In recent years, a large number of plan sponsors have expressed interest in liability driven investing (LDI). The LDI objective is to link the investment structure to the plan liabilities to better manage the risk of asset-liability mismatch (the risk of the asset and the liability not moving in the same direction) and to help control the volatility of funding and solvency ratios and required pension contributions. An extension of the LDI concept is to “virtually” separate the pension plan assets and liabilities between the active members and retirees. This strategy would isolate the specific investment risks to be managed for each of these groups—funding the pension deal for the active members and ensuring or securing payments after retirement for the retirees and their beneficiaries.

For retirees, one might ask whether it makes sense, as a fiduciary, to invest in something other than fixed income or similar investment instruments. The answer may be no—especially if we look at the investment approaches used by large insurance companies backing large blocks of group annuity business, since payments from a pension plan during retirement are quite similar to payments through an annuity. However, the plan’s asset allocation could be revised slightly to associate fixed income assets or related instruments with the retirees’ liability and the remaining assets with the active members’ liability. A portion of the excess returns would be associated with each group in relation to the type of investments appropriate for each group. Plan sponsors could then allocate a portion of the surplus created by the excess returns to finance the cost of the plan improvements for each group, in line with the equity principle. This strategy would also ensure that future discussions around the equity principle are grounded in a sound security principle for retirees, as small potential of surplus is connected with low risk of deficit.

What Plan Sponsors Should Do for 2010

First of all, sponsors should initiate the preparation of the internal bylaws document, if this has not been completed already. It is a great opportunity to establish a foundation for solid governance guidelines. The focus of this whole process should be the identification and management of the financial and administrative risks of a pension plan.

Of course, the internal bylaws, governance rules and plan risks should be periodically reviewed. For plan sponsors seeking additional information, here are some suggested readings on the topic: the collection Administering a Pension Plan Well by the Régie des rentes du Québec and the Guideline No. 4 – Pension Plan Governance Guidelines and Self- Assessment Questionnaire by the Canadian Association of Pension Supervisory Authorities.

Plan administrators should also review their liability insurance coverage and determine if the deductible should be paid by the pension fund. Service contracts should also be reviewed to evaluate the existence and reasonableness of clauses limiting liability. With respect to the funding of pension plans, plan sponsors that want to minimize the provision for adverse deviation will have to improve how they manage investment policy risks by applying the LDI concept. Regulations should soon confirm the position of the Régie des rentes du Québec on the approach that will be used to determine the appropriate level of this provision, but it will likely be based on a plan’s specific asset allocation and liability structure. Plan sponsors should also analyze the costs and availability of letters of credit.

Given the current financial situation of pension plans—most are in a deficit position—it is an excellent time to address the question of the allocation of surpluses. It is also an opportunity to establish the foundation of the equity principle between active members, and retirees and their beneficiaries.

 

Bill 30 At a Glance

Most of the new measures applicable to pension plan funding will take effect on Jan. 1, 2010, with some exceptions. The majority of the new measures affecting pension plan administration have been in effect since Dec. 13, 2006, except for the provisions pertaining to internal bylaws, which took effect on Dec. 13, 2007.

Funding Provisions

  • Annual actuarial valuation provision for adverse deviation based on plan risks
  • Amortization of solvency deficits over a period not exceeding five years
  • Immediate payment for improvements leading to a solvency ratio of less than 90%
  • Use of letters of credit as part of the assets
  • Amortization of funding deficits based on a consolidation of actuarial funding deficits at the time of each actuarial valuation, rather than having multiple amortization schedules

Plan Administration Provisions

  • Improved governance structures for pension committees
  • Introduction of internal bylaws to manage governance rules
  • Liability of committee members is limited if decisions are supported, in good faith, with the advice of an expert
  • Service providers cannot limit their liability if they exercise discretionary power
  • Liability insurance deductible can be paid from the pension fund

Bill 68 At a Glance

  • In support of phased retirement, Quebec has recently proposed Bill 68, which includes the following provisions.
  • Employees can continue to work and accrue new pension benefits while receiving a pension from the same plan. In doing so, employees will be considered active members, not retirees.
  • Plan administrators are not required to offer phased retirement—the employer and the employee must enter into an agreement.
  • Phased retirement will be funded by the plan, as opposed to by the employee through pension reduction.
  • Service may be credited based on the number of hours worked.
  • Maximum annual pension is limited to 60% of the pension the employee would have received had he or she retired.
  • Employees are not required to reduce their workload to be eligible for phased retirement.
  • If adopted, effective Jan. 1, 2009, old provisions regarding phased retirement will be replaced but will be maintained for existing agreements.

If the bill is passed, these measures will apply to private sector employees or employees of provincial corporations, municipalities and universities who are age 55 and older and eligible for an unreduced pension, or ages 60 to 64.

Before amending the pension plan text to allow for application of the proposed measures, it is important for all employers to understand employees’ expectations around phased retirement, assess their workforce requirements and identify the tools available to help them achieve these objective

 

René Beaudry is a partner and Jean-Grégoire Morand is a senior consultant with Normandin Beaudry. rbeaudry@normandin-beaudry.ca; jgmorand@normandin-beaudry.ca

For a PDF version of this article and the rest of the 2008 Quebec Report, click here.

© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the May 2008 edition of BENEFITS CANADA magazine.

 

Copyright © 2020 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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