Nova Scotia: Details on new rules for DB funding
Building on the initial changes that were introduced as a part of Bill 109, the Nova Scotia government recently released further details on its proposed funding framework for defined benefit DB pension plans and amendments that will be made to the regulations. The proposed DB funding framework will permit plans to fund on a reduced solvency basis of 85%, but require funding on an enhanced going concern basis by specifying a 10-year going concern amortization period and requiring funding of a Provision for Adverse Deviation (PfAD). The proposed framework also includes other changes.
Enhanced going concern funding requirements
The enhanced going concern funding rules would apply to all DB plans, including solvency exempt plans that would nevertheless maintain their current solvency exemption. The funding of the PfAD would have to be established and applied to the pension plan’s liabilities, but not to the normal cost. The PfAD would have to be funded in the same manner as the plan’s going concern liabilities.
Separate schedules of special payments would no longer be maintained for going concern unfunded liabilities established in different valuation reports. Instead, special payments for unfunded liabilities would be consolidated into one 10-year schedule that begins after the pension plan’s valuation date.
PfAD calculation options
Two options are being considered as the required methodology for calculating a PfAD. Comments are being sought on the appropriate PfAD methodology, as well as on whether a different PfAD should apply for solvency exempt plans and public sector plans.
Under the first option, the PfAD would be determined based on the below two-dimensional grid, which considers the duration of assets relative to the duration of liabilities, thereby incorporating both a measure of interest rate risk and a measure of market risk.
Option 1: PfAD Determined Based on Asset/Liability Duration Ratio
Further, if a pension plan valuation report uses a discount rate that exceeds a certain level (the current level under consideration is Ontario’s Benchmark Discount Rate1), the PfAD would have to be supplemented by an additional amount.
The recent legislative amendments introduced reserve accounts for special payments made in respect of solvency deficiencies. The proposal requests comments on whether PfAD funding should be eligible for reserve accounts, as well as what other employer contributions should be permitted to be put in reserve accounts.
Reduced solvency funding requirements
Plan sponsors would be permitted to elect, on a go-forward basis, to permanently fund their solvency liabilities to 85% instead of 100%. The reduced solvency deficiencies would have to be funded over five years and no consolidation of prior years’ deficiencies would be permitted.
Similar to past rules for electing temporary solvency funding relief, the election to fund on a reduced solvency basis could only move forward if fewer than one third of plan participants object to the proposal.
Restrictions on contribution holidays
Contribution holidays would only be permitted if the pension plan remains at least 110% funded on a going concern basis and 110% funded on a solvency basis after the holiday is taken. Comments on the appropriateness of the 110% standard are being sought.
Other proposed changes
Proposed changes include solvency funding exemptions for individual pension plans sponsored by business owners and significant shareholders, and incorporation by reference of the federal Pension Benefits Standards Act investment rules.
Also included are amendments that would improve the ability of solvency exempt plans to improve benefits. These plans would be able to make benefit improvements funded over five years if, at the time of benefit improvement, the plan is fully funded on going concern basis and 85% funded on a solvency basis. Further, with respect to solvency exempt plans who exhibit solvency concerns (i.e., solvency funded status below 0.85), they would no longer be required to file annual valuation reports but would instead be required to file annual cost certificates.
For pension plans whose contribution requirements would increase as a result of the new funding framework, it is proposed that a three-year transitional period be put in place. Comments on the need and the length of a transition period are being sought.
Conclusions and next steps
The proposed rules are expected to reduce funding costs for some plans and increase funding costs for other plans in the short term. Over the longer term, however, funding requirements should be less volatile for most plan sponsors and the new funding regime would maintain a high degree of benefit security for members. The proposed changes will encourage plan sponsors to review funding and investment policies in order to optimize their strategies.
The proposed rules are subject to consultation until June 21, 2019 and regulations are expected for fall 2019. Sponsors are encouraged to start planning as soon as possible for the new pension funding regime.
1 Ontario’s Benchmark Discount Rate is the sum of:
- The rate given by CANSIM V39056 (Government of Canada long-term bond yield) for the valuation date;
- The proportion of the plan’s target asset mix allocated to non-fixed income investments times 5% (i.e., a risk premium of 5% on non-fixed income assets);
- The proportion of the plan’s target asset mix allocated to fixed income investments times 1.5% (i.e., a risk premium of 1.5% on fixed income assets); and
- 0.5% for diversification; where “non-fixed income investments” has a similar definition as “variable-yield investments” under Quebec rules.