New Brunswick proposes defined benefit pension funding reform
The New Brunswick government recently released proposed changes to the Pension Benefits Regulations (the Regulation) relating to the funding framework for defined benefit (DB) pension plans.
Highlights of the proposed funding framework include:
- Funding on an reduced solvency basis (85% as opposed to 100%);
- Requiring funding on an enhanced going concern basis with the addition of a Provision for Adverse Deviation (PfAD) funding requirement;
- Shortening the going concern amortization period from 15 years to 10 years;
- Permitting letters of credit (LOCs) for up to 15% of solvency liabilities; and
- Restricting the use of going concern excess for contribution holiday purposes.
The proposed rules would also require plan administrators to establish a written governance policy and make certain other minor changes.
Reduced solvency funding requirements
Under the proposed rules, DB pension plans will be required to be funded to at least 85% of their solvency liabilities, rather than the current requirement of 100%. The new solvency funding rules would apply to new and existing pension plans with valuation dates on or after December 31, 2019. Plans with a solvency ratio of less than 85% would have to fund the shortfall over a period of five years.
Pension plans that are currently exempt from solvency funding requirements will remain exempt under the new rules.
The proposed rules would also allow for solvency assets smoothing over a period of not more than five years.
Enhanced going concern funding requirements
Under the proposed rules, going concern deficiencies would have to be funded over 10 years, rather than the current 15-year period.
The proposed rules would also introduce a requirement to fund a PfAD on going concern liabilities. The PfAD would include a fixed 5% component plus a variable component based on the plan’s combined target asset allocation for non-fixed income assets which ranges from 0% to 17%, with higher PfADs for higher allocations to non-fixed income assets. Plans that are exempt from solvency funding requirements would also be exempt from the fixed 5% component of the PfAD.
Restrictions on use of going concern excess for contribution holidays
A plan administrator would only be able to apply a going concern excess to reduce any contributions relating to the normal cost provided that there is no going concern unfunded liability or solvency deficiency, and the plan’s assets would be greater or equal to 105% of the solvency liabilities and 105% of the going concern liabilities after the holiday. Further, a plan administrator would have to provide 60-days’ prior written notice to members and former members of the pension plan of their intent to utilize a going concern excess to reduce contributions.
Letters of credit
Sponsors of DB pension plans, other than multiemployer plans, would be able to use LOCs of up to 15% of the solvency liabilities for the pension plan. The LOCs would have to meet certain prescribed requirements contained in a new Schedule A to the Regulation.
The establishment of governance policies for the proper administration of a pension plan has long been recommended by the Canadian Association of Pension Supervisory Authorities (CAPSA) in its Guideline No. 4. With the introduction of a legislative requirement to adopt a governance policy, New Brunswick would now join other jurisdictions, such as Alberta, British Columbia, Manitoba and Quebec, which require governance policies be adopted for most or all pension plans. This requirement would apply to all pension plans, including defined contribution pension plans.
The governance policy would need to set out, among other things, the structures and processes for overseeing, managing and administrating the plan. There would also be a need to identify the material risks that apply to the plan and to establish internal controls to manage those risks. As well, the roles, responsibilities and accountabilities of all participants who have authority to make decisions would need to be described and performance measures would need to be established for such participants. Other important components of the governance policy would include a code of conduct, conflict of interest procedures, and an ongoing process to identify the educational requirements and skills for the administrator.
While plan administrators would not be required to file their governance policy with the Financial and Consumer Services Commission, the New Brunswick Superintendent of Pensions could nevertheless request plan administrators to provide a copy.
In addition to the above-mentioned changes relating to DB funding reform, certain other changes have been proposed. Individual pension plans, as defined in the Income Tax Regulations, will be exempted from the Pension Benefits Act and Regulations.
The minimum withdrawal amounts for Life Income Funds (LIFs) will be amended to correspond with the minimum withdrawal amount for a Registered Retirement Income Fund (RRIF) under the Income Tax Regulations.
The proposed rules were subject to public comments until July 13, 2020.
These proposed amendments to the Regulation, with the easing of solvency funding requirements, will generally be welcome to private sector employers in New Brunswick; however, current solvency exempt plans will potentially see an increase in their funding requirements The changes are generally in line with Ontario and Nova Scotia funding reform, and mean that New Brunswick would join British Columbia, Ontario, Quebec and Nova Scotia in passing comprehensive DB funding reform.
With the proposed introduction of the PfAD, plans that currently include any margins for conservatism in their going concern funding assumptions may consider reviewing that practice with their actuary in preparation for the funding changes. Plans may also wish to review their asset allocations in light of the proposed rules, but it will be important to balance short and long-term considerations.
Further, plan administrators who have yet to establish a pension governance policy will need to take steps to establish one.