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British Columbia releases Target Benefit Plan Conversion policy

On March 15, 2016, the Financial Institutions Commission of British Columbia (FICOM) released Bulletin 16-001: Guideline for Converting Plans from Defined Benefit to Target Benefit (the “Bulletin”). The Bulletin summarizes the legislative requirements for a conversion from a defined benefit (DB) pension plan to a target benefit pension plan (TBP), lays out FICOM’s expectations, and also includes a questions and answers section. For the time being, only a negotiated cost multi-employer pension plan can be converted to a TBP in British Columbia.

Conversion procedure and required documents

Initial notice to Superintendent

Trustees must notify the Superintendent once a resolution has been passed to convert a plan to a TBP (with the conversion date). In the case where the conversion may reduce accrued benefits, the plan may only be amended with consent from the trade union representing members of the plan.

In order to assist the Superintendent’s reviewing process, FICOM requests a document containing:

  1. A high level summary of the TBP design. For example:
    1. What is the effective date of conversion?
    2. Does the conversion apply to all benefits or future benefits only?
    3. Does the plan intend to change its asset mix as a result of the conversion?
    4. Any other specific (key) changes to the plan provisions that relate to the conversion.
  2. A conversion schedule summarizing the important events; such as, amendment filing, member communications, and the proposed timeline of each step in the conversion process.

FICOM encourages plan administrators and/or consultants to work with FICOM staff in developing the conversion schedule, which will be reviewed on a case-by-case basis.

Notice to members

A written notice explaining the conversion from a DB plan to a TBP must be sent to members at least 30 days before a plan amendment is filed with FICOM.

FICOM recommends that the administrator provide members with revised employee booklets (if applicable). It strongly urges plan administrators to hold information sessions to communicate the changes to members.

FICOM expects that member communications will at least include the following information concerning the TBP conversion:

  1. Plan name and registration number;
  2. Effective date of conversion;
  3. A high level summary of the key changes to the plan provisions;
  4. Implications to members’ benefits under the plan (for example, how is the commuted value payment calculation affected, and the effective date of the change to a TBP basis);
  5. An explanation of how the member’s benefits would be affected if the member terminated employment at a time when the target benefit funded ratio is less than one;
  6. Plan administrator’s contact information in case of members’ inquiries; and
  7. Other relevant information.

Amendment filing requirements

A conversion is done by way of a plan amendment. Although a plan amendment may be filed if it covers all details related to the TBP conversion, FICOM recommends that a restated plan text be prepared.

The conversion amendment must be filed with the Superintendent before the plan administrator can administer the new rules.

The following documents related to the conversion must be filed with FICOM within the prescribed time period:

  1. within 60 days after the date on which the amendment is made
    1. A Board resolution and amendment or restated plan text (both a clean version and a black-lined format);
    2. Any supporting documents (if amended as a result of the conversion);
    3. The required filing forms; and
  2. within 180 or 270 days of the conversion date:
    1. Actuarial valuation report or cost certificate.

In addition, FICOM requests copies of member communications and the funding and governance policies reflecting the target benefit provision.

Actuarial valuation requirements

In support of the conversion to a TBP, an actuarial valuation report or a cost certificate, including stress testing, as at the conversion date is required to be filed with the Superintendent.

FICOM recognizes that a valuation filing due 60 days after the conversion date or the filing of the amendment date may not be practical. It will accept valuation filing for purposes of TBP conversion as follows:

  1. within 270 days of the conversion date (i.e. review date) if the conversion date coincides with the plan’s fiscal year end date; or
  2. within 180 days of the review date for any other conversion if the conversion date does not coincide with the plan’s fiscal year end date.

Benefit increases on conversion date

In accordance with the legislation, a plan may provide for a temporary improvement in benefits on the conversion date for pensions in payment under the plan if the actuarial valuation on conversion date demonstrates that:

  1. The target benefit component has accessible going concern excess; and
  2. After taking into account the cost of the temporary improvement in benefits, the target benefit component will continue to have accessible going concern excess.

The plan may also provide benefit improvements to non-retired members if the required conditions are fulfilled.

Commuted value calculation and reduction based on funded ratio

If the target benefit funded ratio (essentially, the going-concern funded ratio) is less than 1, the lump sum transferred upon the termination of a member must be reduced by the target benefit funded ratio. Furthermore, the Regulation requires that the lump sum be calculated on a going concern basis, which will, in most cases, be lower than the lump sum calculated on the commuted value basis used for a typical DB plan.

The change in the basis used to determine the lump sums and the application of the target benefit funded ratio to reduce transfer values does not have to coincide with the conversion date. The administrator can continue to pay out on the traditional commuted value basis until the conversion report is filed 270 days after the conversion date.

Alternatively, the actuary can give an interim assessment on the funded status of the plan and the administrator can begin to apply the target benefit funded ratio and calculate the lump sum on a going concern basis immediately after conversion. Note that if the interim assessment target benefit funded ratio is lower than what is eventually determined in the conversion report, a second payment will need to be made to members when the final target benefit funded ratio is determined. However, if the estimate was higher than actual, there is no corresponding reduction to the amounts previously paid to members.


Comment

The Bulletin provides helpful guidance to plan administrators who are considering or undergoing a conversion from a DB pension plan to a TBP. In particular, the Bulletin provides good guidance on communications to members, the conversion timeline, and requirements for valuation reports. Plan administrators and consultants will be required to coordinate with FICOM to ensure the conversion process goes smoothly.