Decline in pension plan solvency may affect commuted value transfers in certain jurisdictions
With the reduction of interest rates and equity market fluctuations in the early part of 2015, some defined benefit (DB) pension plans may have experienced declines in their transfer or solvency ratios, particularly if their last valuation was at December 31, 2013. The rules of certain provinces require plan administrators to periodically check their transfer ratios and notify regulators of a significant decline in plan funding as a condition of transferring the commuted value of pension benefits after a plan member terminates employment.
Provincial rules are inconsistent across Canada, so the discussion in this article is divided by region.
Ontario regulations require the administrator to request approval from the Financial Services Commission of Ontario (FSCO) to transfer commuted values or purchase annuities if: (a) the transfer ratio of the plan was at least 1.00 in the most recently filed report and has fallen below 0.90 or (b) the transfer ratio of the plan was less than 1.00 in the most recently filed report and has declined by at least 10%.
Pursuant to FSCO Policy T800-402, a plan administrator is expected to monitor the transfer at least on a quarterly basis. If the monitoring indicates that the plan has crossed these thresholds, the plan administrator must submit a request for approval indicating the revised transfer ratio, among other things.
Quebec does not require the solvency ratio or transfer ratio to be updated between valuations, although the administrator may consider it prudent to do so (for instance, in the context of mass layoffs).
Regulations containing provisions that may restrict commuted value transfers in the event of significantly reduced transfer ratios also exist in Nova Scotia, New Brunswick, and Newfoundland and Labrador.
The Newfoundland and Labrador legislation requires administrators to notify the regulator and calculate a revised solvency ratio if the solvency ratio has declined to less than 0.90 since the last valuation. However, the Newfoundland and Labrador superintendent advises that the intent of the regulation is to require plan administrators to recalculate the solvency ratio when the solvency of the plan has been significantly impacted. A minor change in solvency ratio (e.g., from 0.92 to 0.88) would not require notice to be provided to the regulator.
New Brunswick requires the administrator to calculate a new transfer ratio if the transfer ratio has declined by more than 10% since the last valuation, or would decline by that amount on account of a transfer. In both of these cases, superintendent approval is required for transfers to occur.
Nova Scotia requires the administrator to notify the superintendent and apply for approval to make transfers if it has reason to believe the transfer ratio has been materially reduced since the last valuation. A “material reduction” is not defined in the regulation.
Alberta, British Columbia and Manitoba permit the administrator to notify the superintendent and apply for approval to make transfers if it has reason to believe that the solvency position of the plan would be impaired by the transfer. British Columbia permits a lower transfer ratio to be applied with an actuarial certification attesting to the deterioration of the solvency position of the plan.
Saskatchewan does not require the solvency ratio or transfer ratio to be updated between valuations.
The Office of the Superintendent of Financial Institutions (OSFI) does not require the solvency ratio or transfer ratio to be updated between valuations.
A number of provinces require DB pension plan administrators to monitor the solvency position of their plan and notify regulators of a deterioration in the transfer or solvency ratio between valuations in order to adjust commuted value transfers after the termination of a plan member. Although recent economic conditions may not have triggered this requirement as of this date, administrators in the affected provinces should ensure they have the required monitoring mechanisms in place. Even where not required to do so, administrators of all DB plans can benefit from periodic monitoring of the plan’s financial position between valuations.