British Columbia adopts DB funding reform and introduces single employer target benefit plans
On December 12, 2019, British Columbia amended its Pension Benefits Standards Regulation to increase going concern funding requirements and reduce solvency funding requirements for provinciallyregulated defined benefit (DB) pension plans.
The amendments also permit single employers to offer target benefit plans on a go-forward basis. The amendments are summarized in the BC Financial Services Authority (FSA) Information Bulletin PENS 19-004 and are generally in line with the proposals that were summarized in the September 2019 News & Views.
The revised solvency funding rules require DB pension plans to be funded to a reduced level of 85% of their solvency liability. Any solvency deficit will be consolidated at each valuation and amortized over five years.
A DB plan must maintain a solvency ratio of at least 85% after a plan amendment providing for benefit improvements.
Going concern funding
The going concern funding rules include a provision for adverse deviation (PfAD). The PfAD is generally equal to the monthly long-term benchmark Government of Canada bond yield as at the valuation date, multiplied by five.
The PfAD is subject to a minimum of 5%, but no maximum. A downward adjustment to the PfAD is made for plans with an exposure of at least 70% to traditional fixed income investments. The PfAD is calculated and funded on both going-concern liabilities and the normal cost.
Any unfunded going concern liability is consolidated at each valuation and amortized over 10 years, instead of the current 15 years. The unfunded going concern liability to be amortized must include an allowance for the PfAD.
For actuarial valuations as at December 31, 2019, the required PfAD for plans with at least 30% of their target asset mix in non-fixed-income asset classes is equal to 8.35% of going-concern liabilities and of the normal cost.
Application of the new funding framework
The new regulations apply to actuarial valuations with effective dates on or after December 31, 2019. The solvency relief options that had previously been offered to pension plans will no longer be available as of December 31, 2019. Any previously elected solvency relief options will cease to apply as of the first review date on or after December 31, 2019. Furthermore, the FSA has advised that it will cease to approve applications for extensions of the solvency funding period under its general authority to extend regulatory deadlines.
Target benefit plans
Single employer target benefit plans are now possible in British Columbia. The target benefit provisions of the legislation were previously limited to multi-employer pension plans. Since the right to convert past benefits to target benefits is restricted to multi-employer negotiated cost pension plans, single employer target benefit provisions would only be possible in respect of future benefits.
Although we would have preferred not to see the PfAD solely based on interest rate risk, the changes are broadly positive for DB plan sponsors in British Columbia and should improve the sustainability of DB plans in the province. British Columbia employers who sponsor DB pension plans may wish to file early actuarial valuations as of December 31, 2019, in order to take advantage of the new provisions.
The reduced amortization period for going-concern deficits and introduction of the PfAD is reflective of the shift in emphasis away from solvency funding and towards enhanced funding on a going concern basis across Canada, as enacted in Ontario and Quebec, and as proposed in Manitoba and Nova Scotia.
The introduction of single employer target benefit plans gives employers greater flexibility to offer retirement programs that best meet their needs, but it remains to be seen how many employers choose to take advantage of these provisions.