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Federal government implements moratorium on solvency special payments

Following up on the April 15, 2020 announcement of a federal solvency funding moratorium as discussed in the May 2020 News & Views, the federal government has adopted a regulation to provide temporary, short-term solvency funding relief for federally regulated defined benefit pension plans. The new regulations became effective on May 27, 2020.

Solvency special payments moratorium

Under the new regulation, no solvency special payment instalments are required from May 27, 2020 until December 30, 2020. Therefore, federally regulated defined benefit pension plan sponsors are not required to make solvency special payments that are due from April 1, 2020 until December 30, 2020.

If a plan sponsor has made solvency special payments between April 1, 2020 and May 27, 2020, the amount of any such payments can be deducted from future normal cost contributions and going concern special payment requirements due from now until December 30, 2020.

The new regulation also provides that, from the date the new regulation comes into force, no interest will be payable in respect of solvency special payments that became due after March 31, 2020 and before the day on which the regulation comes into force.

Plan sponsors that use letters of credit to meet their solvency funding requirements may reduce the face values of letters of credit that have been obtained to cover solvency special payments in respect of the moratorium period by the amount of payments that would otherwise have been due.

All normal cost contributions and going concern special payments will continue to be required through the moratorium period. Plan sponsors can continue making contributions in respect of their plans’ solvency deficiencies if they choose to do so. Any such contributions, to the extent that they exceed the solvency special payments that would ordinarily have been required in the absence of the new regulations, will be considered additional payments and applied to subsequent plan years.

Following the moratorium period, sponsors of federally regulated defined benefit pension plans will be required to resume making monthly solvency special payments, beginning with the December 2020 payment due January 30, 2021. Plan sponsors will not be required to repay the 2020 solvency special payments under a separate amortization schedule. Rather, the usual solvency funding requirements will apply.

Threshold for void amendments

Between May 27, 2020 and November 30, 2020, any plan amendment that would reduce a plan’s solvency ratio to below 1.05 will require approval from the Office of the Superintendent of Financial Institutions (OSFI). Any plan whose solvency ratio is already below 1.05 will also require OSFI’s approval for any plan amendment that would increase benefits or pension benefit credits. The usual threshold for void amendments is 0.85 in most cases and 1.0 in certain cases.

Disclosure requirements

The new regulation also introduces new disclosure requirements aimed at informing beneficiaries of the impact of the solvency special payment moratorium on their pension plans. In respect of a plan year in which solvency special payments are reduced under the new regulation, members’ and former members’ annual statements must indicate (a) the amount of reduced solvency special payments for the plan year and (b) what payments would have normally been required for the plan year to members and former members. This would affect annual statements covering any part of 2020 in which the solvency moratorium is taken, but not annual statements in respect of prior years.

News & Views - June 2020 (PDF)