Draft regulation pursuant to the measures provided for in the Act mainly to allow the establishment of target benefit pension plans
On December 11, 2020, the Act mainly to allow the establishment of target benefit pension plans came into effect (Bill 68). The draft regulation published on September 22, 2021, aims to finalize the measures required for the establishment of such plans as well as their administration. This draft regulation also contains several clauses relating to defined benefit plans and negotiated contribution multi-employer plans to supplement or clarify legislative measures adopted in recent years. Finally, the regulation specifies the terms and conditions relating to the payment of benefits according to the degree of solvency, the process for the withdrawal of a participating employer from a multi-employer plan as well as the information to be provided on the statements sent to members in various situations.
Moreover, the draft regulation does not include any additional precision as to the compliance process of Bill 68 for target benefit plans for certain pulp and paper sector enterprises already in place. It should be noted that these plans have until December 31, 2023, to comply with Bill 68.
Comments on the draft regulation must be submitted in writing prior to November 7, 2021.
Target Benefit Plan
Since accrued benefits of a target benefit plan may be modified from the application of recovery measure, restoration of benefits or the appropriation of surplus assets depending on the financial health of the plan, the annual statements for a member of a target benefit plan must include, among other things, the following information:
- a description of what a target benefit plan is, including the fact that the benefits may be reduced in the event of insufficient contributions;
- a description of the risks incurred by the members and beneficiaries and of the means taken to manage those risks;
- a description of the benefit target;
- a description of the circumstances, set by the plan, giving rise to the application of recovery measures, the restoration of benefits and the appropriation of surplus assets;
- a description of any adjustments to the benefits following the application of recovery measures, restoration of benefits or appropriation of surplus assets.
The above information is in addition to the disclosure requirements already in place for annual statements sent to members of defined benefit plans.
In addition, the termination and retirement benefit statements sent to members must also inform them of several target benefit plan particularities, specifically that if the member's benefit remains in the plan, such benefit as well as its value, can vary according to the financial situation of the plan. They must also include the amount of lifetime pension established according to the benefit target and, when applicable, the amount resulting from the application of recovery measures, restoration of benefits and the appropriation of surplus assets. These requirements also apply when it comes to the value of the member’s pension and of any other benefits payable by the plan.
The regulation also stipulates the information to be sent to members in the event of plan termination or employer withdrawal.
The regulation consequently specifies a great deal of information that must appear on the member statements as well as in the summary of the plan provisions. Although the objective is to ensure that members have a good understanding of the rules and mechanisms surrounding target benefit plans, the fact remains that the volume of information to be transmitted pursuant to the regulation is considerable. Communication will therefore be a significant challenge for pension committees and board of trustees, one of whose responsibilities is to ensure that members understand the most essential elements of the plan.
Actuarial Valuation Reports and Benefit Calculations
In addition to the information to be provided to members, the regulation adds information to be included in actuarial valuation reports to properly document certain calculations or methods, specific to target benefit plans such as recovery measures, restoration of benefits and appropriation of surplus. One of the important elements of the actuarial valuation report will be to examine the sufficiency of contributions relating to service after the valuation date as well as for the service at the date of the valuation as this analysis will determine whether the plan’s benefits will require adjustments or not.
Elements of compliance regarding the specificities of target benefit plans are also provided in clauses dealing with benefit calculations and their value as well as those relating to the termination process and employer withdrawal.
Assumptions for calculating the value of benefits
The draft regulation is silent on the assumptions to be used in calculating the value of members' benefits in target benefit plans. The solvency assumptions must therefore be used, in accordance with the transitional rules of Bill 68. During discussions preceding the adoption of the Bill, a consensus seemed to be on using funding assumptions and on the desire to mirror as much as possible the standards enacted by the Canadian Institute of Actuaries.
A change in the assumptions applicable for calculating the value of benefit would require careful consideration which has probably not been possible within the current deadlines given the urgent need to publish this regulation for the target benefit plans already in place.
Other miscellaneous items
The guidelines regarding payments to members in the event of a withdrawal of a participating employer differ whether the plan allows for the member’s benefit affected by the withdrawal to be maintained in the plan. Upon the withdrawal of an employer from a plan that does not allow the benefit of the members to be maintained in the plan, the pension committee or board of trustees will have to settle the benefits of members and beneficiaries affected by the withdrawal. For members receiving a pension on the date of the withdrawal, payment can be made by transferring the value of the benefit to a life income fund (LIF) if the member requests so within the time limit provided, otherwise, an annuity must be purchased from an insurance company. The settlement of benefits for other members is processed through a transfer of the value into a locked-in retirement account (LIRA). On the other hand, if the plan allows the benefit of the members and beneficiaries to be maintained in the plan and if the member does not provide another choice within the prescribed time limits, the benefit entitlement will remain in the plan.
The regulation prohibits the plan from offsetting the reduction in a member's benefit because of a division of patrimonial assets or a seizure of benefits as is possible in a defined benefit plan.
The regulation introduces the concept of a negative benefit target in cases of division of assets, benefit seizure and phased retirement. The negative pension and the negative benefit target will evolve in the same proportions as the member's pension and benefit target to maintain the principle of equity.
The regulation also indicates the method to be used to determine pensions of members who buy back service, that is, it must be based on the funding assumptions and on the target level of the stabilization provision that are used in determining the current contribution.
The regulation does not include new information on the process to purchase annuities for retirees in an ongoing plan.
Negotiated contribution multi-employer plan
The draft regulation specifies, among other things, the following conditions when an employer withdraws from a negotiated contribution multi-employer plan:
- the method to determine the value that retirees from negotiated contribution multi-employer plans whose plan shows insufficient assets will be able to transfer to a life income fund (LIF);
- the method to determine the value of a benefit guaranteed by an insurer and that of a non-guaranteed benefit in cases of settlements as well as in situations where it is necessary to determine the market value of the asset;
- the content of the benefit statements sent to members or beneficiaries affected by the withdrawal of an employer, as well as the applicable deadlines for sending out these statements
Measures affecting all pension plans that must produce an actuarial valuation report
The draft regulation completes the provisions of the Act relating to defined benefit plans, negotiated contribution multi-employer plans and target benefit plans. Among these provisions, we find:
- the methods for establishing the degree of solvency more frequently than annually;
- the information to be added to the members' statement to specify whether or not the plan allows benefits to be reduced upon payment depending on the degree of solvency;
- the addition of securities with an R-2 (low) rating on the money market and BBB- on the bond market according to the DBRS rating scale, to securities considered as fixed income investments, for the purpose of calculating the stabilization provision;
- the amendment to the term "employer" by "the person or body empowered to amend the plan " in situations where the pension plan cannot be terminated unilaterally by the employer.
Measures affecting all plans
Annual statements for inactive members of any type of plan will now have to include new information. Notably:
- if the member is entitled to a bridging benefit, the amount of that benefit and the date on which it will cease to be paid;
- in the case of a joint and last survivor annuity, the amount of the annuity that will be paid when the member dies, or the method used to calculate such amount;
- if the pension is indexed, the method used to calculate the indexation and the time when it will be applied;
- in the case of a guaranteed pension the period of the guarantee;
- the description of the choices offered to the member and the resulting adjustments;
- the rules applicable to the transfer of the member's benefits to another plan.
Conversion methods with the arrival of Target Benefit Plans
Legislation allows a sponsor of a defined contribution plan, or a negotiated contribution multi-employer plan to convert their plan into a target benefit plan.
In a defined contribution plan, employees must agree to their obligations. Written approval by their accredited association is acceptable consent for employees covered by this association while for other members not covered by the accredited association, consent is deemed to be obtained if less than 30% object. The regulation specifies that only the benefit entitlement of the group or groups that have consented may be converted. It is therefore possible that only part of the plan may be converted. The benefit conversion will have to be made based on the plan's funding assumptions and the targeted level of the stabilization provision to determine the plan's benefits and targets.
For the conversion of a negotiated contribution multi-employer plan, members will need to consent to the recovery measures, restoration of benefits and appropriation of surplus mechanisms provided for in the new target benefit plan. In this case, the consultation process provides that the conversion of the plan cannot occur if more than 30% of the plan members object. Following the conversion, the target benefit will be set at the level of benefits accrued by the members before the plan conversion.
Finally, the regulation specifies the conversion terms from a target benefit plan into a defined benefit plan. It will not be possible to convert a target benefit plan without having restored benefits. Likewise, if a surplus of assets exists in the target benefit plan, it must be appropriated to the members in accordance with the plan provisions before the plan can be converted. It should be noted that legislation had already prohibited existing defined benefit plans to convert into target benefit plans.