Quebec: New rules for member-funded pension plans
A draft Regulation was published in the Gazette officielle du Québec on April 12, 2017 to amend some of the rules for Member-Funded Pension Plans (MFPP).
The amendments mainly introduce a solvency funding exemption and easing of pension indexation rules.
Like other defined benefit pension plans in Quebec, the MFPP will no longer be required to fund solvency deficiencies. The solvency ratio will, however, continue to be calculated and reported for the purpose of calculating transfer values upon termination of membership or utilization of surplus assets. Furthermore, the funding of an MFPP on a going-concern basis will no longer need to include the stabilization provision required of private defined benefit pension plans, since the funding of nonguaranteed indexation already provides a margin to mitigate future fluctuations stemming from plan experience. In addition, the plan will no longer require a solvency surplus before pension indexation will be permitted.
The draft regulation also specifies that a funding deficiency that gives rise to amortization payments is based on plan commitments, excluding any assumed future indexation.
Lastly, to simplify things, any variation in the contribution established by the plan’s actuarial valuation will take effect on the first day of the fiscal year following the one for which the contribution is calculated.
These new rules could permit more frequent pension indexation, which is good news for members of this type of plan. On the other hand, if the funding level, taking into account future indexation, is below 100%, this additional flexibility will reduce the implicit margin equal to the cost of the indexation. However, given that future indexation is not guaranteed, the margin level remains significant.
As noted above, indexation of pension benefits is not automatic, but depends on the financial position of the MFPP. When the MFPP was introduced in 2007, benefits could only be indexed if, after indexation, the plan was still solvent and funded (taking into account the provision for future indexation). The draft regulation now considerably eases these rules, since indexation may be granted if the plan remains funded after the indexation (without taking into account the provision for future indexation). Furthermore, indexation may now be granted without regard to the plan’s solvency ratio.
Additional pension benefit
In an MFPP, the additional pension benefit (representing indexation of 50% of assumed inflation to age 55) had to be included in the values payable in the event of death or of benefit transfer following termination of membership. It did not have to be included when member benefits were left in the plan. The draft regulation has eliminated the inclusion of the additional pension benefit in the calculation of the transfer value. This measure is similar to changes made to private-sector defined benefit plans.
Amending the pension plan
Given that the MFPP risk is assumed by plan members, plan amendments may only be implemented if indexation has been granted for prior years and if the plan remains solvent and funded (taking future indexation into account). Despite the draft regulation’s easing of indexation rules, the criteria governing other improvements to MFPP benefits remain in place. The same is true for using surplus assets to reduce contributions.
Background to the MFPP
Special rules for MFPP were introduced in 2007 for unionized workers in Quebec. With few exceptions, an MFPP must be maintained in accordance with a collective agreement and cannot include workers from another province. It may be a multi-employer or a single employer plan.
The MFPP is exempt from several provisions of the Quebec Supplemental Pension Plans Act (SPP Act), but is governed by specific rules established by regulation. The MFPP is a defined benefit pension plan, since each participating worker accrues pension benefits calculated in accordance with plan provisions. However, the plan cannot be a “best-average-earning” or “final-average-earnings” plan; it must be a “career earnings” or “flat benefit” plan. Also, automatic pension indexation is not permitted.
What distinguishes an MFPP from a traditional defined benefit plan is that the employer’s financial obligation is fixed. The financial risk is assumed by plan members, but unlike in a defined contribution plan, it is a collective risk. This makes an MFPP closer to a target benefit plan, with prescribed funding rules and mechanisms to protect pensions.
Since members assume the risks, the funding rules incorporate security margins. An MFPP actuarial valuation on a funding basis must assume that pensions will be indexed to the increase in the Consumer Price Index, even though such indexation is not guaranteed. The purpose of this measure is to create an implicit security margin equal to the cost of indexation.
Pension indexation is only granted if the plan’s financial position permits. If assets are higher than the amount required to fund indexation, the surplus may be used to increase benefits or modify contributions.
If the MFPP has a funding deficiency, plan members must make amortization payments, without taking future indexation into account. Until the draft regulation was tabled on April 12, 2017, solvency deficiencies also had to be funded.
The proposed changes, especially the solvency funding exemption and easing of pension indexation rules, could increase the popularity of MFPPs. Even though this type of plan has been an option for 10 years, it is still very rare and occurs primarily as a multi-employer plan. But for the most part the plans that do exist are in a good financial position.
Given the decline in defined benefit pension plans, the MFPP and target benefit pension plans could provide employers with another way to help their employees save for retirement. It would be interesting if access to an MFPP were more formally extended to non-union employees.
The draft regulation is scheduled to come into force on May 27, 2017, but takes effect as of December 31, 2016.