Bill 68, an Act Mainly to Allow the Establishment of Target Benefit Pension Plans
On October 7, Mr. Éric Girard, Minister of Finance, presented Bill 68 to the National Assembly.
The main purpose of Bill 68 is to allow Quebec workers access to a new type of pension plan when their employment terms provides for membership in such a plan. The main feature of a Target Benefit Pension Plan ("TBP") is to allow for a lifetime pension for which the funding risk rests entirely with the members. As such, pensions, including pensions in pay, could be reduced below the initially planned target. The only employer contributions allowed are those defined in the plan provisions.
Also part of Bill 68 are requirements to amend target benefit pension plans already in effect in the pulp and paper sector in order to bring them into compliance with most of the provisions applicable to a TBP.
In addition, the Bill includes the ability to convert a Negotiated Contribution Pension Plan into a TBP. A negotiated contribution pension plan is a plan where employer contributions are fixed, and pensions can be reduced.
A new option is also introduced in Bill 68 which allows for pension plans with a defined contribution component and for voluntary retirement savings plans (“VRSP”) to pay a variable payment life annuity (“VPLA”) during retirement.
Finally, Bill 68 proposes changes to the Quebec Pension Plan (QPP) for people receiving the Supplement for Handicapped Children.
The provisions of Bill 68 will be effective on the date Bill 68 receives assent, except for the amendments to the Act respecting the Quebec Pension Plan, which will come into force on January 1, 2020.
Target benefit pension plans
From the outset, it would be prohibited to transform past benefits from a defined benefit plan into target benefit provisions or to include target benefit provisions for future service in a defined benefit plan. A TBP will need to register as a new plan to be administered by a pension committee thereby eliminating the complexity of administering multiple components with disparate funding objectives.
The TBP would be regulated as to the benefits it can or should provide. So,
- It cannot provide benefits based on final or best average earnings;
- It cannot provide for automatic pension indexation during retirement;
- It cannot provide for early retirement benefits that depend on the number of years of service or the member’s participation;
- It cannot provide for contingent benefits on plan termination;
- It cannot provide for reciprocal transfer agreements with another pension plan;
- It must grant members who cease their active participation before retirement all early retirement and pre-retirement indexation benefits to which active member are entitled, if applicable;
- It does not have the obligation to provide a minimum benefit if the accumulated value of employee contributions is greater than the value of accrued benefits unless there is a benefit settlement.
Funding of the TBP would be framed in a similar way to the funding required for defined benefit plans in the private sector. Thus, the target level of the stabilization provision, which is determined by regulation, varies according to the risk characteristics of the investment policy and the pairing between them and the value of the plan's benefits, is added to the value of the benefits credited in a year to determine the total current service contribution. The benefit whose value is equal to the annual contribution defines the target benefit. This target can therefore change over time depending on the demographics of active members and the actuarial assumptions.
Unlike private sector defined benefit pension plans, no stabilization deficiency contribution can be established. However, if the assets of the plan are less than the value of the benefits for the service recognized at the date of an actuarial valuation, an amortization payment is established to fund this deficit over a maximum amortization period of 5 years.
If the employee and employer contributions provided for in the plan were lower than the contributions established by an actuarial valuation, the recovery measures provided for in the plan must be carried out without conferring any discretion to the pension committee regarding the election of the applicable measures. The TBP should provide for separate recovery measures depending on whether they relate to a contribution shortfall associated to service after the date of an actuarial valuation or to service recognized on that date.
A TBP should provide for one of the following restructuring measures, or a combination of them, in the event of a contribution shortfall relating to service after the actuarial valuation date:
- An increase in employee contributions;
- An increase in employer contributions;
- A reduction in the target benefit;
A TBP should provide for one of the following restructuring measures, or a combination of them, in the event of a contribution shortfall relating to service recognized on the actuarial valuation date:
- An increase in employee contributions;
- An increase in employer contributions;
- A reduction in benefits relating to service recognized on the date of the actuarial valuation, the value of this reduction must not reduce the benefits of inactive members and retirees in a proportion greater than that applicable to the value of the benefits for active members.
If an asset surplus is established during an actuarial valuation, the TBP could provide for the restoration of reduced benefits following the execution of a restructuring measure. This restoration must be provided for in the plan text without conferring any discretion to the pension committee as to the decision to restore benefits, the choice of benefits to be restored and the method of restoration. Surplus assets could not be used for other purposes until all reduced benefits are restored and only members and beneficiaries are entitled to surplus assets. Bill 68 provides for the portion of surplus assets that can be allocated and for the conditions and terms that must be respected.
Like defined benefit plans, the member with a vested right to a pension is entitled to the transfer of the value of the benefit. However, the settlement conditions will be different. The value of the benefit will be paid in proportion to the degree of solvency which may not be subject to a maximum. The portion of the value of the benefit that will not be paid when the degree of solvency is less than 100% will not be paid to the member under any circumstances. The actuarial assumptions to determine the value of the member's benefit and those provided to determine the plan's degree of solvency will be prescribed by regulation. In this regard, at this time we do not know if, with this upcoming regulation, the legislator will harmonize the assumptions with the changes to pension commuted values (Section 3500) of the Canadian Institute of Actuaries Standards of Practice applicable to TBP as of December 1, 2020. If this is the case, this would have a significant impact on the calculation of the value of the members' benefit and therefore, on the degree of solvency. For more information on the changes to Section 3500 of the Standard of Practice, please see our April and February 2020 publications.
Provisions applicable to the process of a plan termination or the withdrawal of a participating employer in a TBP
Bill 68 provides for a simplified process in the event of termination of a TBP or the withdrawal of a participating employer from such a plan.
Furthermore, in these cases, retiree and beneficiary benefits will be paid by the purchase of an annuity established with the value of their benefit adjusted according to the plan’s degree of solvency. However, upon request, retirees and beneficiaries may receive a transfer of that same value to a registered vehicle.
It should also be noted that a TBP with several employers would have the ability to offer retirees and beneficiaries of a withdrawing employer to continue receiving their pension from the plan.
Thus, these members’ benefit would not necessarily have to be settled as is currently the case for a negotiated contribution pension plan.
Municipalities, representative bodies of a municipality or supra-municipal organizations defined in the Act respecting the pension plan of elected municipal officers and universities
Bill 68 exempts TBPs from the application of certain articles of the Act to foster the financial health and sustainability of municipal defined benefit pension plans and of the Act respecting the restructuring of university-sector defined benefit pension plans to allow the implementation of a TBP or a member-funded pension plan (“MFPP”) for workers in these sectors. However, certain conditions must be respected, such as a maximum employer contribution equal to 55% of the total contributions established for the plan.
Provisions applicable to Target Benefit Plans already in effect in the pulp and paper sector
Target benefit plans already in effect in the pulp and paper sector under the Regulation respecting target-benefit pension plans in certain pulp and paper sector enterprises must be brought into compliance with the provisions applicable to TBPs no later than December 31, 2023. Corrective measures are planned should these plans not comply by December 31, 2023.
For these plans:
- It will be possible to retain provisions whereby the pension is based on final or best average earnings
- The automatic indexation of pensions, if applicable, is maintained for members who are in receipt of a pension at the time of the amendment
- A consultation process with members and beneficiaries is to be planned to for the approval of the changes required to comply with the new legislation.
- An actuarial valuation must be prepared at the end of the financial year in which it is brought into conformity with the new legislation by December 31, 2023 at the latest. Such valuation must be carried out in accordance with the rules applicable to TBPs.
The provision in Bill 68 stating that a plan cannot have both defined benefit and target benefit provisions does not apply to pension plans established pursuant to the Regulation concerning certain Papiers White Birch pension plans.
Provisions applicable to Negotiated Contribution Pension Plans
A Negotiated Contribution Pension Plan (“NCP”) may be transformed into a TBP in accordance with the terms and conditions prescribed by regulation.
An NCP which is transformed into a TBP and whose pension is based on final or best average earnings may retain these provisions. Provisions under which the NCP grants early retirement benefits which depend on the number of years of service or member’s participation may also be maintained. Finally, for members of such a plan who receive automatic indexation of their pension at the time of conversion, pension indexation would continue after conversion to a TBP.
A consultation process with members and beneficiaries is expected in certain circumstances when an NCP is transformed into a TBP.
Other changes to the SPP Act
Bill 68 will amend the Supplemental Pension Plans Act (“SPP Act”) in order to allow retirees and beneficiaries of a traditional defined benefit plan whose employer goes bankrupt while the plan is insolvent to opt for the transfer of the value of their pension to a registered vehicle.
Bill 68 also provides that a plan may establish the degree of solvency at intervals shorter than the plan’s fiscal year, in accordance with the rules to be provided by regulation.
Variable Payment Life Annuities for plans with a defined contribution provision and VRSPs
Bill 68 allows defined contribution pension plans and VRSPs to offer a member, who has ceased his active participation, variable payment life annuities from the plan. Some or all the amount that the member has accumulated would be converted into a life annuity. This annuity, which will vary according to the investment performance and the mortality experience of the annuitants, must meet the requirements prescribed by regulation, notably regarding setting the amount of the annuity, whether it increases or decreases.
Amendment to the QPP
Bill 68 also proposes changes to the Quebec Pension Plan to allow recognition of the periods during which a person receives, for a child under 18, the supplement for handicapped children requiring exceptional care.