British Columbia’s amended definition of provision for adverse deviation will provide additional flexibility to the province’s target-benefit pension plans, according to experts.
The changes to the PfAD’s definition lowers the minimum funding requirement to 7.5 per cent and allows a supplementary percentage identified by the target-benefit plan administrator or board as appropriate to achieve the expectations for the PfAD.
All plan funding policies and actuarial valuation reports where the effective dates are on or after Dec. 31, 2022 are expected to reflect the new definition. Administrators are expected to file a copy of the funding policy with the valuation report.
Since 2015, when the province introduced target-benefit provisions into its Pension Benefits Standard Act, stakeholders have raised concerns about the initial size and volatility of the PfAD funding requirements due to fluctuation based on interest rates and asset allocations. Stakeholders also said the formula unfairly penalized plans that adopt certain investment strategies due to asset classification. Target-benefit plan administrators, in particular, found the previous PfAD regime made it challenging to plan on a long-term basis and reduced their flexibility to make appropriate decisions based on the unique characteristics of their plans.
Greg Heise, a partner at George & Bell Consulting Inc. and a member of the working group that helped develop the amended PfAD definition, believes the changes will provide added flexibility and allow plans to adapt to changing circumstances. He says the working group, the regulator and the government didn’t want to constrain plan administrators’ investment strategies.
“What I love about these new rules is they allow each plan with its unique set of circumstances to develop their own unique solution. The old rules . . . very much changed the PfAD depending on the asset mix. We don’t have that now in B.C. That will be left up to the plan sponsor or board to decide, so that problem has, for the most part, been addressed.”
Euan Reid, a principal at Eckler Ltd., agrees, noting the amended PfAD definition addresses concerns raised by the industry that the PfAD was too high, volatile and inflexible. “I would expect to see PfADs that are lower and more predictable going forward and reflect individual plans’ different circumstances.”
However, he adds there’s still uncertainty in what exactly that will look like, since regulators won’t know until the changes are put into practice. “The regulations and the guidance . . . give plans lots of flexibility in what we do, but exactly what approaches will be acceptable to the regulator? We won’t know until plans start submitting new funding policies and filing valuations with the new PfAD included. There’s lots of work to be done interpreting these guidelines and figuring out which approaches are going to be best for each plan’s circumstances.”
Still, Reid believes the amendments offer a good opportunity for pension plan sponsors, trustees and their advisors to reflect on the specific risks they’re facing and to consider how their investment strategies interact with their funding strategies.