FSCO restricts use of excess contributions
On February 4, 2019, the Financial Services Commission of Ontario (FSCO) published three guidelines to assist in interpreting the new defined benefit (DB) funding rules that came into force on May 1, 2018. FSCO’s guideline on the permitted use of excess contributions that have been previously made is more restrictive than prior interpretations and will be of concern to DB plan sponsors. FSCO has also issued guidance on the funding of benefit improvements as well as the definition of a closed plan for the purposes of calculating the provision for adverse deviation (PfAD).
Treatment of excess contributions
FSCO’s guidance restricts the ways in which a DB plan sponsor can use excess contributions. In the FSCO guideline, “excess contributions” refers to contributions that have been made by the employer in excess of minimum contribution requirements set out in the last valuation report, including those that were made in accordance with the requirements of an expired valuation report while a new valuation report with lower funding requirements was being prepared. Because of the introduction of the new DB funding rules, many DB plan sponsors may have accumulated significant excess contributions over the period from December 31, 2017, until a valuation report could be filed under the new DB funding rules.
There are two major changes from past practice. First, FSCO has made clear its interpretation that excess contributions are not an overpayment to a plan and so, cannot be refunded under the Pension Benefits Act (the Act). Refunds will only be permitted for mistaken payments that were not required under the Act.
Secondly, FSCO states that the new contribution holiday restrictions in the Act significantly limit the flexibility to use a prior year credit balance (PYCB). Excess contributions may still be used to establish a PYCB or increase the PYCB in a valuation report. However, FSCO interprets the new provisions as only permitting the PYCB to be used to offset special payments in respect of a funding deficit. A PYCB can no longer be applied against the normal cost of benefits or the PfAD on normal cost contributions, unless there is an available actuarial surplus. We note that the plan would be allowed to use the available actuarial surplus for a contribution holiday even without a PYCB, so effectively a PYCB can only be used for special payments.
FSCO will still allow excess contributions to be used to reduce any contributions otherwise required during the remaining months of the fiscal year, but excess contributions cannot be applied in respect of contributions beyond the fiscal year.
The new interpretations will be applied on a go-forward basis.
Funding benefit improvements
The new DB funding rules do not affect the requirement to file a valuation report or cost certificate if a plan amendment affects employer contributions, or creates or changes a going concern unfunded liability or solvency deficiency. A valuation report or cost certificate with a valuation date on or after December 31, 2017 must apply the new funding rules.
FSCO states that, if the last full valuation was filed under the old funding regime, it is not possible to file a cost certificate in respect of a benefit improvement. In that case, a full valuation report is required.
Under section 14.0.1 of the Act, a plan amendment will be void if the solvency ratio or the going concern funded ratio of the pension plan, determined in accordance with the Regulation, would fall below 0.80 after the amendment, unless a top-up contribution is made. FSCO advises that the test for determining whether a benefit improvement is void is measured under the later of the effective date of the benefit improvement and the date on which the amendment is adopted. Any top-up contribution must be made before the cost certificate or valuation report supporting the amendment is filed.
Finally, the increase in going concern liability of any benefit improvement must be funded over 8 years if it causes the going concern funded status (including PfAD) to drop below 100%.
Determining whether a plan is closed
Under the new DB funding regime, whether a plan is closed impacts the PfAD calculation and therefore the level of funding required.
The regulation provides that a plan is closed if at least one portion of it does not permit new members to join and accrue defined benefits. However, whether a plan is closed depends on the particular facts.
While the ultimate determination as to whether a plan is closed rests with the plan administrator, FSCO has provided some general guidance as to how to determine whether a plan is closed.
- A plan amendment providing that a class of members who participate in a plan will no longer accrue benefits and/or that no new members of the class will be allowed to join and accrue benefits suggests the plan is closed.
- An amendment to a benefit formula for a class of members does not, in and of itself, cause the closing a portion of the plan.
- If external factors (not caused by a plan amendment) result in members not joining the plan, this does not, on its own, mean that a plan is closed.
FSCO expects plan administrators to make their own determination as to whether a particular plan is closed or open. It retains the right to ask the signing actuary to provide facts and analysis to support the administrator’s determination of a plan being open if it believes the facts in a valuation report indicate otherwise.
FSCO’s new interpretations relating to the use of excess contributions will be of concern to DB plan sponsors in Ontario who had been counting on the use of excess contributions to cover the normal funding cost on a prospective basis. The restrictions on applying a PYCB against the normal cost appears to be an inadvertent result of amendments to the Act and it may be hoped that the government amends this language in the future.
Ontario DB sponsors who are contemplating benefit improvements should be aware of the revised funding requirements for benefit improvements and should consider the implications prior to making such improvements.