Quebec: Regulation on funding policies and annuity purchases
A draft regulation to amend the Supplemental Pension Plans (SPP) Regulation was published on July 12, 2017 in the Gazette officielle du Québec.
This draft regulation covers some of the same material as the draft regulation published July 20, 2016 (see our August 2016 News & Views) and adds new elements, in particular provisions regarding funding policies and annuity purchasing policies.
The following is a summary of the draft regulation.
1. Actuarial valuation report and letters of credit
The draft regulation makes some changes to the content of the actuarial valuation report and to letters of credit.
2. Funding policy
The funding policy required by the SPP Act must:
- indicate that its purpose is to establish the principles related to plan funding that must guide the pension committee in the performance of its duties;
- describe the main characteristics of the employer and the market trends observed in the employer’s sector that could affect plan funding;
- describe the type of pension plan, its main provisions and the demographic characteristics that could affect plan funding;
- describe the funding objectives of the pension plan with regard to variations in and the level of contributions and benefits;
- identify the main risks related to funding of the pension plan and the employer’s and active members’ level of tolerance thereto.
The funding policy may also provide specifications with regard to any question related to the pension plan’s funding goals, particularly with regard to:
- the determination of the value of the liabilities and the determination of the value of the assets for, among other things, the smoothing of assets, or the use of an implicit margin in the interest rate assumption;
- the circumstances giving rise to the reduction of a letter of credit;
- the frequency of actuarial valuations not required under the SPP Act; and
- the measures that could be used to quantify and manage the risks related to plan funding.
The funding policy must be established no later than one year after the regulation comes into force. Note that the funding policy must be adopted by the person or body who may amend the plan.
3. Annuity purchase policy
When an annuity purchase policy is established, to permit the plan to discharge its obligations, it must indicate:
- that it has been established by the person or body who may amend the pension plan;
- the rules regarding its revision;
- the frequency at which and the circumstances under which annuity purchases may be made from an insurer;
- whether the benefits of members and beneficiaries may be paid in part and the special conditions that apply to such a payment;
- the funding requirements with respect to maintaining the degree of solvency of the plan and for making the special annuity purchasing payment to the pension fund;
- the obligation to obtain the written consent of the employer with regard to making the special annuity purchasing payment;
- the criteria for selecting the annuities to be purchased from an insurer;
- the requirements regarding the characteristics that the annuity purchased from an insurer must have and the conditions under which the characteristics of the pension may be replaced, in particular regarding the written consent of the member or beneficiary with regard to replacing the characteristics of his or her pension;
- the information that must be provided to each member and beneficiary regarding the purchase of his or her annuity, such as the amount and the characteristics of the annuity purchased, the name and contact information of the insurer and the rules provided for in the SPP Act regarding, upon plan termination, the retention of status as a member or beneficiary for three years for certain purposes under the plan (with respect to the allocation of surplus assets or the reduction of benefits following the employer’s bankruptcy or insolvency);
- the process and the criteria for choosing the insurer;
- the effective date of the annuity purchase policy.
In addition to addressing the content of the annuity purchase policy, the draft regulation also provides the following requirements:
- The annuity purchased from an insurer must have the same characteristics as the pension payable under the plan.
- If no annuity of the type to which the member or beneficiary is entitled is available on the market due to its nature, in order to have an insurer guarantee the pension, the characteristics of the annuity that make it unavailable on the market may be replaced by similar characteristics of equal value. In such a case, for the purchase of the annuity to be considered final payment of benefits, the member or beneficiary must, within 30 days of the date on which the notice is sent, consent in writing to the replacement of the characteristics of his or her pension.
- Insured annuities held by a plan may be paid in accordance with the annuity purchase policy of the pension plan by subrogating the member or beneficiary of the annuity in the rights of the pension fund as regards the contract entered into with the insurer.
- The payment of benefits under an annuity purchase policy is subject to funding requirements including:
- An actuarial valuation must be performed as at the annuity purchase date;
- Where the actuarial valuation shows that the degree of solvency of the plan is less than 100%, a special annuity purchasing payment must be paid to maintain the degree of solvency of the plan at the level established before the annuity purchase.
- Where the degree of solvency is greater than or equal to 100%, the payment of benefits must not cause the degree of solvency of the plan to be less than 100%. Otherwise, a special annuity purchasing payment must be paid into the pension fund to maintain the degree of solvency at 100%.
Note that the provisions concerning the annuity purchase policy do not apply to municipal and university sector pension plans. Currently, a municipal or university sector pension plan may purchase annuities, but such purchase does not release the plan from its obligations to the members for whom these annuities were purchased.
4. Subjects on the agenda of the annual meeting
In addition to the subjects required under the SPP Act, the following subjects must be on the agenda of the annual meeting:
- the main risks related to plan funding identified in the funding policy;
- the measures taken, in the course of a fiscal year of the plan, to manage the main risks related to the plan’s funding;
- in the case of a pension plan that has adopted an annuity purchase policy, since the previous annual meeting, the number of annuities purchased and the premium required by the insurer for each annuity purchased and, if applicable, the amount of the employer’s special annuity purchasing payment.
New content has been added to member statements, in particular:
- Annual statements: information about the degree of solvency, the stabilization provision and the banker’s clause;
- Annual statements for non-active members and beneficiaries: information when the plan’s annuity purchase policy is applied to final payment of benefits.
Annual statements for a fiscal year ended before December 31, 2017 may simply comply with the current provisions of the regulations (i.e., those in effect on the date prior to the effective date of this regulation).
6. Variable benefits under a DC plan
Where a pension plan provides for the payment, as a life income, of variable benefits under a defined contribution (DC) provision, the following rules apply:
- for each fiscal year, the member or spouse sets the income to be received as variable benefits;
- the minimum income paid is that prescribed for a registered retirement income fund (RRIF) by the Income Tax Regulations;
- the maximum income paid is set in accordance with the rules applicable to the life income fund (LIF), which apply with the necessary modifications.
Furthermore, where a pension plan provides for the payment of variable benefits as temporary income, special rules apply depending on whether the member is at least 55 years of age but less than 65 years of age, or where the member is less than 55 years of age.
The plan administrator shall, at the beginning of each year, provide the member with a statement that indicates the information prescribed for a LIF, with the necessary modifications.
7. Transfer of benefits between spouses
For the purposes of provisions with respect to the transfer of benefits between spouses, the definition of “pension benefits” is amended to eliminate any reference to the additional pension benefit. The method of determining total benefits is also amended, in particular by the elimination of any reference to the additional pension benefit.
Where there is a transfer of benefits from the member to the member’s spouse due to the member’s partition of benefits, the payment is no longer subject to the rules governing payment in proportion to the degree of solvency.
The provisions with respect to the transfer of benefits between spouses will apply to transfers executed as of the third month following the final publication date of the regulation.
Comments are solicited within 45 days of the publication of this draft regulation. The regulation will come into force on the 15th day after final publication in the Gazette officielle du Québec.