Nova Scotia Pension Benefits Regulations amended
On February 24, 2020, Nova Scotia amended its Pension Benefits Regulations (the Regulation) and announced that the changes in Bill 109 will become effective April 1, 2020 (Bill 109 was discussed in the April 2019 News & Views). The amendments will amend the defined benefit (DB) funding framework largely in line with Ontario’s revised DB funding framework, and in line with previous announcements from the Nova Scotia government (see the June 2019 News & Views).
Solvency funding requirements
Under the new 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 will 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% will have to fund the shortfall over a period of five years. The first valuation filed on or after December 31, 2019 requires past deficiencies to be consolidated, including any deficiencies currently being funded over a 15-year period, and any required contributions will take effect immediately at the valuation date (i.e. there is no option to defer the new funding schedule). For subsequent valuations, no consolidation of past deficiencies is permitted, though any new deficiency contributions may be deferred up to 12 months. Previous proposals requiring member consent or employer opt-in for 85% funding to apply have been dropped.
Pension plans that are currently exempt from solvency funding requirements will remain exempt under the new rules.
Going concern funding requirements
Going concern deficiencies will have to be funded over 10 years, rather than the current 15 year period. Going concern deficiencies will be consolidated at each valuation and any increase in contributions may be deferred up to 12 months from the valuation date.
The amendments also introduce a requirement to fund a provision for adverse deviations (PfAD) on going concern liabilities. The PfAD includes 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 are also exempt from the fixed 5% component of the PfAD.
A transition schedule is in place to address plans whose contributions increase under the new funding rules due to the introduction of a PfAD. Contributions in the year following the first valuation filed on or after December 31, 2019 will be capped at 100% of the contribution level that would have been required under the current rules. In subsequent years the cap on contributions will reduce gradually to 80%, 60%, 40%, 20% and then 0% in the sixth year after the first valuation filed under the new rules.
The amended Regulation will permit a pension plan to take a contribution holiday if the plan’s assets will be greater or equal to 105% of the solvency liabilities and 105% of the going concern liabilities after the holiday. The Nova Scotia government had previously proposed thresholds of 110% of solvency and going concern liabilities.
The amended Regulation permits solvency deficiency payments and certain other prescribed contributions, such as contributions relating to the PfAD, to be paid into a separate “reserve account.”
Upon the wind up of a pension plan, an administrator can withdraw a surplus held in a reserve account after all benefits have been paid, subject to Superintendent of Pensions consent.
Frequency of valuation reports for solvency-exempt plans
Pension plans that are exempt from solvency funding requirements and that have a solvency ratio of less than 85% will be required to file a full actuarial valuation report every three years and a cost certificate annually, or earlier if the Superintendent of Pensions deems this to be warranted.
Plans that are not exempt from solvency funding will still need to file a full valuation report annually if their solvency ratio is less than 85%.
If benefits are increased and a solvency funded ratio below 85% is created or increased, the new deficiency (up to 85%) must be funded in accordance with the usual solvency amortization periods. However, for solvency-exempt plans, the new deficiency (up to 85%) must be fully funded at the time of amendment.
The amended Regulation will incorporate the federal investment rules by referencing Schedule III to the federal Pension Benefits Standards Regulations, 1985. Assets of Nova Scotia regulated pension plans will have to be invested in accordance with federal investment regulations, rather than the previous Nova Scotia rules.
In line with the federal investment rules, memberdirected defined contribution pension plans will not be required to have a statement of investment policies and procedures (SIPP). Furthermore, the 10% limit on investing pension plan assets in a single entity will be based on the “market value” of a pension plan’s assets rather than the “book value.” Finally, the previous exemption that permitted securities of a related party to be purchased on a public exchange will no longer apply.
Exemption for individual pension plans
Effective April 1, 2020, the individual pension plans (IPPs) whose members are “connected persons” as defined in the Income Tax Act will be exempt from most of the requirements of the Pension Benefits Act and Regulation. In order to be exempted, an IPP administrator must file a certificate with the Superintendent of Pensions attesting that all of its members are “connected persons” and expressing its understanding that the plan will be exempt from most provisions of the Pension Benefits Act and Regulation.
Certain provisions of the Pension Benefits Act and Regulation remain applicable after an IPP has become exempt. The requirement that the administrator exercise care, diligence and skill, obligations related to plan records, provisions respecting retirement dates and termination of membership, restrictions on commuted value transfers, investment rules and locking-in restrictions will all remain in place for an exempt IPP.
The administrator of an exempt IPP is required to inform the Superintendent of Pensions of any change that results in the plan no longer meeting the exemption criteria.
Effective April 1, 2020, the amendment adds a number of sections to the Regulation setting out requirements for annuity purchases in order to receive discharge of the obligation to pay a pension to former members, retired members and other persons in receipt of a pension upon the purchase of an annuity.
The new provisions also set out record-keeping requirements related to annuity purchases, as well as prescribed requirements for the certificate that must be filed in order for an administrator to obtain a discharge of the obligation to pay a pension upon the purchase of an annuity.
These amendments to the Regulation will generally be welcome to private sector employers in Nova Scotia with the easing of solvency funding requirements. They are generally in line with Ontario funding reform, and mean that Nova Scotia joins British Columbia, Ontario and Quebec in passing comprehensive defined benefit funding reform.
With the introduction of the PfAD, plans that currently include any margins for conservatism in their going concern funding assumptions may wish to review that practice with their actuary. Further, plans may wish to review their asset allocations in light of the new rules, but it will be important to balance short and long-term considerations.
Reserve accounts will provide employers who are considering plan wind-ups an opportunity to potentially access surplus that may have previously been subject to the specific surplus availability and sharing rules of their plan provisions.
The annuity discharge provisions will allow employers to be discharged from legal liability for plan liabilities by purchasing annuities, and can be a valuable de-risking tool. Nova Scotia joins British Columbia, Ontario and Quebec in providing for statutory discharges for annuity purchases in their legislation.