Federal government consulting on solvency funding relief and other measures
On November 6, 2020, the federal Department of Finance released a consultation paper on solvency funding relief options for 2021 and a number of other proposed measures that would affect federally regulated pension plans.
The consultation paper proposes a number of changes, including solvency funding relief, new governance requirements, and the introduction of solvency reserve accounts and variable payment life annuities.
Temporary solvency funding relief
The federal government introduced a moratorium on solvency special payments from April 1, 2020, to December 30, 2020. It is now considering the following relief measures for 2021 and beyond to mitigate the impacts of the pandemic on defined benefit (DB) plan sponsors:
- Extending the solvency amortization period to ten years: Under this approach, federally regulated DB plans would be allowed to extend the amortization period for solvency special payments from five to ten years, provided they obtain either buy-in from plan beneficiaries or a letter of credit covering the difference in payments resulting from the extended amortization. Given the extended duration of this relief option, the government would require informed consent from plan beneficiaries.
- One-time extension of solvency amortization period to ten years: This approach would allow plans to extend their amortization schedules to ten years for the 2021 plan year only, such that solvency funding requirements for 2021 would be one-tenth the plan’s solvency deficiency, instead of one-fifth (as currently required).
- Extension of the letter of credit limit: Currently, federal pension legislation permits plan providers to use letters of credit from financial institutions to cover up to 15% of solvency liabilities, in place of solvency special payments. This approach would temporarily extend the limit on the use of the letter of credit from the current 15 per cent of solvency liabilities, to a new limit to be determined at the discretion of the issuer.
- Alternative valuation methodologies: This approach would allow plan sponsors to employ an alternative methodology for solvency valuations, in order to shield plans from volatility in funding contribution levels resulting from extreme market changes. For example, plan sponsors could be permitted to use a discount rate averaged over three years rather than the market discount rate, or calculate the average solvency ratio over five years instead of three. Alternatively, the requirement to file a valuation report at the end of 2020 may be deferred or made optional.
The government is considering a number of permanent measures to enhance plan governance and administration.
Currently, if a multi-employer pension plan is administered by a pension committee (such as in the case of non-unionized environments), the committee must include plan member and retiree representatives. The consultation paper proposes to apply the requirement for member and retiree representation to single-employer plans and multiemployer plans that are governed by Boards of Trustees.
The consultation paper also proposes to amend the Pension Benefits Standards Act (PBSA) to require all federally regulated pension plans to establish governance policies, which would have to be provided to the Superintendent of Financial Institutions upon request.
Additionally, all multi-employer negotiated contribution plans would be required to establish and maintain funding policies as well. Since negotiated contribution plans generally have fixed contribution rates and allow benefits to be reduced to address funding deficits, the government says funding policies would assist them in managing risk and benefit security. Funding policies would be encouraged but not required for single-employer and other multi-employer DB plans.
The federal government is also considering measures to encourage federally regulated pension plans to consider environmental, social and governance (ESG) factors in their investment and risk management strategies, including the risks and opportunities presented by climate change.
One possible approach would be to mandate that pension plans disclose in their statements of investment policies and procedures (SIPPs) whether and how they consider ESG factors. This would mirror the requirement currently in place in Ontario.
Pension plan administrators could also be required to file their SIPPs with the Office of the Superintendent of Financial Institutions (OSFI) or provide them to OSFI upon request.
Deemed consent to electronic communications
The consultation paper proposes that electronic communications rules be revised so as to permit plan administrators to rely on deemed consent to receive pension communications electronically. Such an approach would apply to plan members and their spouses and common-law partners. This proposal follows the release of the revised Guideline No. 2 – Electronic Communications in the Pension Industry (which was discussed in the December 2018 News & Views), in which the Canadian Association of Pension Supervisory Authorities (CAPSA) encouraged jurisdictions to recognize deemed consent by members to receive communications electronically.
Introduction of solvency reserve accounts
The paper also proposes a legislative framework for solvency reserve accounts (SRAs). An SRA would operate as a separate or notional account within a DB pension fund into which an employer could remit solvency special payments. The funds remitted in respect of special payments could be withdrawn by the employer if the plan later develops a surplus on a solvency basis and is fully funded on a going concern basis, subject to certain conditions. Employers would not be required to seek the approval of OSFI to withdraw funds from an SRA.
Introduction of variable payment life annuities
It is proposed that federally regulated Pooled Retirement Pension Plans (PRPPs) and defined contribution (DC) pension plans would be able to offer variable payment life annuities (VPLAs). VPLAs will provide plan members with lifetime retirement income payments that vary based on investment returns and the mortality experience of the fund. The proposed framework builds on proposed tax legislation set out in the 2019 federal budget, as discussed in the March 2019 News & Views.
In order to ensure that VPLA payments are consistent with the fund’s ability to provide a lifetime retirement income, VPLAs would be required to implement any required benefit changes at least once every three years, based on an actuarial valuation of the fund’s sustainability. In order to operate, the plan must reasonably expect the VPLA fund to maintain a minimum of 10 members on an ongoing basis.
Plan members who elect a VPLA would be permitted to receive a VPLA based on just a portion of their account balance, while transferring the remaining funds to a locked-in retirement income vehicle, leaving them in the plan to be withdrawn as variable benefits (if the plan so permits), or using them to purchase a fixed life annuity from a regulated insurance provider.
Any retiree with a spouse or common law partner would have to obtain spousal consent to participate in a VPLA.
If the VPLA option is terminated, the administrator would need to submit a termination report to OSFI. Members would be entitled to receive the commuted value of their VPLA benefits and would be provided the same portability options currently available to members of PRPP and DC plans.
Guidelines for obtaining special solvency funding relief
The consultation paper includes proposed ministerial guidelines on the process for obtaining special solvency funding relief. When the relief options available under the PBSA such as letters of credit or the distressed pension plan workout scheme are insufficient, the employer may seek special funding regulations that would provide temporary pension funding relief to the employer in order to relieve employer’s short-term financial constraints and improve the plan’s long-term sustainability.
The guidelines would include information on the process for seeking special funding relief under the PBSA, details on what is to be included in relief applications, factors to be considered in considering special funding regulations, and restrictions that may be imposed on corporations while the special relief is in place.
The Department of Finance has invited interested parties to comment on the proposals, either with general comments or responses to specific questions posed throughout the consultation paper. Submissions will be accepted until January 14, 2021.