Funding policy implementation for defined benefit pension plans registered in Quebec
Defined benefit (DB) pension plans registered in Quebec are required to adopt a funding policy by January 4, 2019. This requirement is imposed pursuant to the Regulation to amend the Regulation respecting supplemental pension plans (the “Regulation”), which came into force on January 4, 2018. The Regulation was adopted in relation to Bill 29, which passed in 2015, and sets out, among other things, the content required for a DB funding policy.
Plan sponsor to adopt funding policy
The requirement for a funding policy applies to DB plans in both the private and public sectors. The funding policy must be established by the person or body who may amend the plan; for most DB plans in Quebec, this means the plan sponsor (i.e., the employer). For some plans, an agreement between the sponsor and one or more unions is needed in order to amend the plan. In such circumstances, union cooperation is necessary to implement this new policy.
It should be noted that the plan administrator, which is in most cases the pension committee, is not responsible for adopting the funding policy. The funding policy must be promptly forwarded to the pension committee.
For private sector plans, since the coming into force of Bill 29 on January 1, 2016, pension committee bylaws must now cover the measures to be used for quantifying risk. If addressed in the funding policy, the information in the two documents should be consistent.
Those who participate in the implementation of a funding policy should ensure that the policy is consistent with other policies and documents already in place, such as the statement of investment policies and procedures, annuity purchase policy, plan text, internal by-laws of the pension committee and any other plan documents.
With respect to municipal, para-municipal and university plans, given that there are two separate components and each one has different characteristics, the objectives and risks should also be identified separately for each component.
Items the funding policy must contain
The funding policy must:
- Indicate that its purpose is to establish the principles related to plan funding that must guide the pension committee in the performance of its duties;
- Describe the main characteristics of the employer and the industry sector in which the employer operates, as well as the plan type, the main provisions and the demographic characteristics that could influence plan funding;
- Describe the funding objectives of the pension plan with regard to variations in and the level of contribution and benefits;
- Identify the main risks related to funding of the pension plan and the employer’s and active members’ level of tolerance for such risks.
The description of objectives and identification of risks may be qualitative or quantitative (using deterministic and/or stochastic analyses).
Optional items in the funding policy
The funding policy may be made more complete by incorporating other items related to funding objectives and the management of funding-related risks. Under the Regulation, these include asset and liability smoothing methods, use of implicit margins for adverse deviation, frequency of actuarial valuations, and measures that may be used to quantify funding risks.
Comparison with other provinces
By imposing the requirement to establish funding policies, Quebec joins Alberta and British Columbia, which require funding policies under their new pension legislation, which came into force in 2014 and 2015, respectively. The requirements in those provinces are similar to Quebec, but with some additional required items that are similar to the optional items in Quebec.
Ontario’s previous government included the requirement for funding policies in 2017 amendments to the Pension Benefits Act (Ontario), but those provisions have not been proclaimed into force and regulations specifying the details of Ontario funding policies have not been released. The intentions of the new Ontario government in relation to funding policies are not clear.
Drafting and developing a funding policy is a process that takes time and careful consideration. It can also require consultation with a number of stakeholders, depending on the circumstances.
Given the January 4, 2019, deadline, it is important for all Quebec DB pension plan sponsors to commence work on the plan’s funding policy, if they have not already done so. A Morneau Shepell consultant will be pleased to assist you in setting up the funding policy for your Quebec DB pension plan by January 4, 2019, to make sure it meets both your objectives and legislative requirements.