Much has changed for defined benefit (DB) plan sponsors in Quebec over the past year. Last fall, three wide-ranging regulatory documents were published in the province within just a few months: the Regulation pertaining to Bill 30, the Pension Funding Relief Regulation and the Regulation respecting the Municipal and University Sectors. Here are the details of these regulations and their impact on plan sponsors.
Bill 30 regulation
On Oct. 21, 2009, the Quebec government published a regulation primarily intended to complement the new funding standards for DB pension plans registered under the Supplemental Pension Plans Act. Bill 30, which was passed in December 2006, made substantial changes to funding rules for pension plans in Quebec, and the new funding rules apply to actuarial valuations conducted after Dec. 14, 2009.
Bill 30 introduced two new concepts relating to funding that could have a significant impact on employers: a provision for adverse deviation (PfAD) and the option for an employer to provide the pension committee with a letter of credit instead of making the amortization payments required to ensure plan solvency.
The final version of the regulation stipulates that the PfAD must be calculated using a formula that contains multiple variables. This formula is still based on a PfAD of 7%, which increases or decreases depending on the following:
• asset allocation based on the various investment categories;
• the ratio of DB obligations that are not guaranteed by an insurer to the total of the plan’s obligations; and
• the difference in duration between the term of retirees’ liabilities and that of the assets associated with this group of plan members.
Adopting this formula for calculating the PfAD instead of a fixed percentage sends a clear message: a plan that manages its asset/liability mismatch risks more effectively will have greater freedom when it comes to using any surplus.
With respect to the use of letters of credit, the fees charged by financial institutions for such instruments have increased significantly since the adoption of Bill 30, which makes this option less attractive than plan sponsors had anticipated.
