Bill regarding Quebec's municipal pension plans
On June 12, 2014, the Quebec government tabled draft legislation to foster the financial health and sustainability of defined benefit pension plans in the municipal sector.
This Bill applies to any pension plan established by a municipal body. It sets out different terms and conditions for service before and after December 31, 2013 and aims to:
For service as of January 1, 2014:
- Ensure an equal sharing (50/50) of the plan costs (current service cost and future deficits attributable to this component). A transition period, ending January 1, 2020, is provided for some plans.
- Foster better risk management for the new component by requiring the creation of a stabilization fund through a stabilization contribution equal to 10% of the current service contribution, shared equally. Moreover, actuarial gains generated in this component will also have to be paid into the stabilization fund.
- Require the elimination of automatic indexation provisions. Limit the current service cost to 18% of payroll (20% for police and firefighters), including the stabilization contribution.
For service prior to January 1, 2014:
- Allocate the deficit between active members and retired members in proportion to their respective liabilities.
- For the portion of the deficit attributable to retired members, the employer may suspend indexation without requiring the retired members’ approval. The remaining deficit must be funded by the employer over a period of 15 years.
- The portion of the deficit attributable to the active members is assumed in equal shares by the members and the employer:
- Active members’ share: regardless of the financial situation, mandatory elimination of automatic indexation provisions. Their residual deficit must be assumed through benefit reductions.
- Employer’s share: funded over a period of 15 years.
- As well, the parties may agree that the active members’ share be reduced, to a minimum of 40%, if other elements of the overall remuneration are amended.
- Any new deficit identified in a subsequent actuarial valuation is to be covered by the employer.
- Members who started receiving a pension or who applied for a pension between January 1, 2014, and June 12, 2014, are deemed to be retired members as of December 31, 2013.
- Surplus assets can no longer be used to cover employer contributions, except when the tax limits have been reached (125% funded).
- Any additional obligations resulting from an amendment to the plan must be paid in full as of the day following the date of the valuation that establishes their value.
Any changes made to the plan in order to meet the above-mentioned requirements should normally be negotiated by the parties starting February 1, 2015, over a maximum period of 12 months, unless the parties agree agree to extend such period by three or six months.
If the parties have entered into an agreement regarding the pension plan during the three years preceding the legislation’s date of assent, negotiations can begin no later than January 1, 2016, based on an actuarial valuation as at December 31, 2014.
We note that this Bill has some major implications. It will be interesting to see if the work of the parliamentary commission to be held later this summer will lead to significant changes.