Nova Scotia announces consultation on DB pension plan funding
On September 6, 2017, Nova Scotia announced a consultation on defined benefit (DB) pension plan funding and other regulatory matters. Broadly speaking, the three options under consideration are:
- maintain full solvency funding with measures to help reduce funding volatility;
- eliminate solvency funding and enhance going concern funding; and
- require only partial funding of solvency liabilities.
In August 2017, Nova Scotia announced two forms of temporary solvency funding relief (see our News & Views of September 2017). This follows previous rounds of temporary funding relief in 2009 and 2013. Furthermore, the new Pension Benefits Act adopted on June 1, 2015, permitted some permanent measures to relieve funding requirements, such as allowing the deferral of new special payments until 12 months after a valuation date, permitting smoothing of solvency interest rates, and permitting letters of credit (LOCs) of up to 15% of solvency liabilities.
Options under consideration
Three options are considered in the consultation paper:
1. Maintain full solvency funding
Solvency liabilities would still have to be 100% funded, but some or all of the following relief measures would be introduced to help reduce the volatility and variability of funding payments:
Longer funding period: The maximum funding period could be increased from five years to a longer period, such as seven or ten years.
Consolidate solvency deficiencies: Instead of requiring different schedules for each solvency deficiency established in a valuation report, deficiencies could be consolidated and a single 5-year schedule produced at each valuation date.
Solvency reserve accounts: A separate account within a pension plan fund could be established to hold payments made in respect of a solvency deficiency. Employer withdrawals from a solvency reserve account could be made, up to a certain maximum, if the solvency ratio was greater than 100%.
Letters of credit: LOCs obtained from a financial institution can currently be used to cover solvency special payments for up to 15% of solvency liabilities. The 15% cap on LOCs could be raised.
2. Eliminate solvency funding and enhance going concern funding
Under these proposals, solvency funding would be eliminated, but enhanced going concern funding requirements would be adopted. These enhanced going concern funding requirements could include some or all of the following features:
Require a funding reserve or Provision for Adverse Deviation (PfAD): Requiring an amount in excess of a plan’s liabilities to be funded before the plan may take an action that could weaken the plan’s funded position.
Shortened funding period: Provide for a shorter maximum funding period than the current 15-year period.
Return on investment assumptions: The maximum allowed interest rate for use in going concern valuations could be required to be based on high-quality long term corporate bonds.
Solvency “trigger” for enhanced funding: A plan’s solvency position would be used to determine whether additional funding is needed or if the plan would be allowed to take an action that would weaken its funded position. For example, if a plan fell below a certain solvency funding threshold, then a requirement to pay an additional lump sum could be triggered.
3. Reduced solvency funding requirements
The solvency funding requirement would be reduced to a lower level, such as 85% of solvency liabilities. This reduced solvency funding approach could be combined with elements of the other two options described above.
Other regulatory issues
The consultation paper also requests feedback on several other potential regulatory reforms affecting Nova Scotia DB pension plans.
Target benefit plans
Nova Scotia’s pension legislation contains provisions that have not been proclaimed into force that would permit target benefit plans to be established in unionized settings. This is similar to Ontario’s legislation, which is also unproclaimed. The paper asks whether Nova Scotia should develop a target benefit pension plan framework, whether it should be restricted to unionized environments, and whether past benefits should be convertible to target benefits.
Under this proposal, a statutory discharge would be provided to DB plan sponsors who purchase annuities from life insurance companies to meet their pension obligations. Certain conditions would have to be met to qualify for the discharge.
Permitted investment rules
In 2015, the federal government amended its investment regulations. In particular, they were amended so that the 10% limit on investing pension plan assets in a single entity be based on the “market value” of a pension plan’s assets rather than the “book value.” Nova Scotia is asking whether it should adopt the 2015 federal amendments, and if its pension regulations should be amended to incorporate the federal investment regulations by reference.
The Nova Scotia consultation will be of interest to employers who sponsor Nova Scotiaregistered DB pension plans. The consultation follows the introduction of target benefit plans in New Brunswick, Quebec funding reforms, and the newly announced funding framework in Ontario.
Public comments are requested by November 10, 2017.