Saskatchewan: City of Regina target benefit plan
As reported in the December 2014 News and Views, the City of Regina and the Civic Pension and Benefits Committee (the “Committee”), representing the employers and employees of the Civic Pension Plan (the “Plan”), have reached a negotiated agreement to address concerns regarding the long term sustainability of the Plan. The City and Committee made joint submissions to the Government in December 2014 setting out further details of their agreement to implement substantial changes effective July 1, 2015. On that basis, the Government of Saskatchewan announced, on March 11, 2015, that it has agreed to move forward with special regulations to implement the Regina agreement and the Saskatchewan regulator has announced it will not cancel the registration of the Plan for non-compliance with The Pension Benefits Act. The Plan was reported to have a $224 million deficit.
The joint submission, submitted on December 10, 2014, is in line with the memorandum of understanding (“MOU”) between the parties submitted on December 5, 2014. It includes a funding policy, which will be a schedule to the plan text and part of the documents on file with the regulator, and proposed amendments to the pension plan text. The joint submission provides further details on the implementation of the MOU.
The funding policy is intended to permit future service benefits and contribution rates to be adjusted (up or down) in accordance with the policy and the financial circumstances of the Plan. The intention is to deliver benefits accrued before July 2015, and provide a reasonable degree of certainty over the contribution rates for both the City and employees. Benefits accrued before July 2015 are not subject to change. The Plan will no longer be funded on a solvency basis, while the current deficit on a going concern basis will be amortized over 20 years and any new going concern deficit will be funded over the greater of 10 years and the remaining initial 20 year amortization period.
The funding policy identifies key risks to be managed. A margin or provision of 10% of going concern liabilities will be used initially to act as a buffer to control risks, but this buffer will be revised in the future to reflect stochastic projections. Temporary benefit decreases are also possible if projected contribution increases exceed a certain level, and will be subject to reinstatement if funding levels improve.
The existing deficit for past service benefits will be 60% funded by the City and 40% by the employees, with 50-50 cost splitting for future costs, including current service and any new deficits related to past or future service. The initial contribution rates will be 10.9% of pay for the City and 9.8% for employees.
The funding policy also provides for conditional indexing of post-amendment benefits, up to 50% of CPI, for the period until the Plan becomes fully funded, but only if Plan assets show a net return in excess of the Plan discount rate. After the Plan reaches full funding, the indexing of post-amendment benefits is to be funded by a notional fund resulting from a special contribution of 1% of pay (equally shared by employer and employees).
A funding excess utilization plan is also in place in case the going concern ratio exceeds 115% and combined employer and employee contribution rates exceed the current service cost for future benefits.
Required regulatory amendments
In order to implement the agreement, the funding policy anticipates the Government providing a permanent exemption from solvency funding requirements and an extension of the going concern amortization period to 20 years in respect of pre-amendment accrued benefits. In addition, any increase in the deficit revealed in future valuations will be amortized over the greater of 10 years and the remaining initial amortization period of 20 years. On March 11, 2015, the Government announced that it has accepted the proposals in the joint submission.
The MOU and funding policy are intended to become effective July 1, 2015. The required regulatory amendments have not yet been released.
The MOU and funding policy provide further details of the agreement between the City of Regina and the PBC, and may provide interesting precedents for other public sector pension reforms in Canada. The funding policy and governance model will also be of interest as a potential model for the development of target benefit plans in Canada.