Solvency funding relief for defined benefit plans

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1 Solvency funding relief for defined benefit plans Qs and As Question Can the holder of the letter of credit be a different trust company from the trustee or custodian of the pension fund? If an actuarial report valuing the plan at a date later than December 30, 2005 has already been filed with OSFI, can a revised actuarial report be filed to take advantage of the Solvency Funding Relief Regulation? How can the going concern special payments established in prior valuations be adjusted in the report establishing the initial solvency deficiency (ISD)? Do the Regulations apply only to pure defined benefit plans or does it also apply to combination or hybrid plans that include both defined benefit and defined contribution provisions? Can funding relief be applied to plans established after December 31, 2005? Are there any other conditions that a plan must meet to qualify under any of the funding relief options? Answer The holder of the LOC can be the same entity or person or a different entity or person. However, the holder must be a trust company that is licensed to carry on business in Canada. Where the employer is not the plan administrator, the administrator must be a party to the trust agreement. Yes, a revised actuarial report can be filed with revised funding requirements, using the same valuation date and assumptions. Contributions already made in accordance with the initial report can be used to satisfy funding requirements in accordance with the revised report. Alternatively, a plan administrator can choose to take advantage of the Regulations in the next report filed with OSFI as long as the date of the report is prior to January 2, Going concern special payments established in prior valuations can be reduced or eliminated by the application of going concern actuarial gains in accordance with subsection 9(9) of the PBSR. Subsection 9(11) of the PBSR, which can in normal circumstances limit the reduction of going concern special payments, does not apply at the time of determination of the ISD because it refers to subsection 9(4) of the PBSR and subsection 2(3) of the Solvency Funding Relief Regulations eliminates payments previously established under subsection 9(4). The Act defines a defined benefit plan as any plan with a defined benefit provision. The Regulations apply to all plans that contain a defined benefit provision and meet the conditions of the Regulations, regardless of whether the plan also contains a defined contribution provision. Generally, plans established after December 31, 2005 cannot apply the funding relief set out in the Regulations. However, a plan established after December 31, 2005 as a result of a merger or split of a plan established before 2006 is eligible to fund under the Solvency Funding Relief Regulations. To qualify for funding relief, a plan must be up to date in its required contributions with respect to any amounts owed up to the date of the valuation report used for funding relief. For multiemployer pension plans, the requirement applies to the negotiated contribution amounts. The Regulations also contain different preconditions depending upon the type of Funding Relief option that is chosen. For example, there may be filing requirements with the Superintendent.

2 - 2 - Will it be possible to apply future actuarial gains to reduce special payments established under the Funding Relief Regulation? Under the 10-year funding under Part 2, what happens to the difference between the five-year schedule and the 10-year schedule (deemed trust provision)? Is it necessary for a valuation report of a plan funding under Part 2 to also show the payments required under a five-year schedule? If some plan members are represented by a union or court-appointed representative does the union or representative speak on behalf of those members in expressing any objection to funding under Part 2 of the Regulations? Under any of the funding relief options, must the special payments be equal dollar amounts during the payment schedule or can they be structured as a level percentage of members pay? Does the deemed trust provision for the difference between the five-year schedule and the 10-year schedule apply to multiemployer pension plans? Yes, subsequent valuation reports are prepared in accordance with the PBSR and actuarial gains can be applied as per subsection 9(9) of the PBSR to previously established special payment schedules, including special payments established under funding relief. Section 9(11) of the PBSR applies in the preparation of subsequent valuation reports. If a plan funds the ISD under Part 2, the payments required to liquidate the ISD are considered accrued over a five year period but payments are made to the fund over a ten year period. Should the plan terminate before the payments are all made, the accumulated difference between the five-year schedule and the 10-year schedule constitutes an amount accrued and due to the pension fund by the employer. Section 13 of the Regulation specifies the payment required on plan termination. Pursuant to section 8 of the Act, if this amount is not paid to the pension fund, a deemed trust for the benefit of the plan beneficiaries attaches to the employer s assets. Yes, OSFI expects reports for a plan that is being funded under Part 2 to show the payments that would be required if the plan was funding under Part 1 in each report as long as funding under Part 2 continues. If actuarial gains are used in subsequent reports to reduce the 10-year schedule of special payments, the report should show how the five-year schedule would have been reduced under the same reduction method. Yes, where the union or court-appointed representative expresses an objection to 10-year funding under Part 2 on behalf of all the persons they represent, that objection shall be counted as a separate objection for each person that they represent. The payments must be expressed as equal dollar amounts. No, it does not.

3 - 3 - What type of disclosure is to be included under paragraph 8(1)(c) to satisfy the description of the extent to which benefits would be reduced if the plan were terminated? If members are represented by a union or court-appointed representative must the plan administrator provide the information required under Section 8 to both the representative and individual members? In what form should the administrator file notification to the Superintendent that the plan will be funded under Parts 1, 2 or 3? Section 8 of the Regulation provides that beneficiaries must be informed that amendments increasing benefits will be restricted for the first five years, but where is the restriction defined in the Regulation? Where a plan is funding under Part 3, do amounts secured under letters of credit count as plan assets in actuarial valuations or financial statements of the plan? Can the trust agreement required for letters of credit be an amendment to an existing trust agreement or must it be a separate agreement? The wording of the paragraph is equivalent to the disclosure requirement for member annual statements where a plan is not fully funded. OSFI expects similar information to be disclosed. No, the administrator can provide the information to the representative only. The administrator should use the filing form attached to this document. Paragraph 10.1(2)(b) of the PBSA provides that any amendment that results in the reduction of a plan s solvency ratio below the prescribed level is void unless authorized by the Superintendent. Section 11 of the Solvency Funding Relief Regulation sets the prescribed level for plans funding under Part 2 as the ratio reported in the most recent report filed with OSFI, for the first five plan years of funding under Part 2. This effectively means that benefit improvements cannot be made unless the solvency ratio is not reduced as a result of the improvement. This requirement could be satisfied if immediate funding of the improvement is made so as to not reduce the ratio on the effective date of the improvement. Amounts secured under letters of credit are not counted as plan assets in actuarial valuations or in plan financial statements, as including them would improperly distort future contribution requirements. Amounts of letters of credit should also not be counted in calculating the plan s solvency ratio. However, the amounts of letters of credit should be disclosed in the valuation report. The trust agreement may be a separate agreement or an amendment to an existing agreement, as the parties to the agreement may decide. A separate or new trust agreement would be required where the holder of the letter of credit is not the same institution as the trustee or where the current custodian for the pension fund is not a trust company that is licensed to carry on business in Canada.

4 - 4 - If a plan opts to use solvency funding relief, what, if any, additional information should be given to members in annual statements? Is there a deadline for filing a revised actuarial report to take advantage of the Solvency Funding Relief Regulation? Is the fee payable to the financial institution for securing a letter of credit an acceptable administration expense to be charged to the pension fund? If a plan administrator elects funding relief under Part 3, and files a revised actuarial report for funding relief purposes, what period must be covered by the initial letter of credit? Where a plan is funding under Part 3, what special payments should be included in the calculation to determine the face amount of the letter of credit in accordance with section 19 of the Funding Relief Regulation, if the plan has both a going concern unfunded liability and an initial solvency deficiency? In general, clause 23(1)(q)(i)(B) of the Pension Benefits Standards Regulations calls for a description of the measures the administrator has implemented or will implement to bring the solvency ratio to 1. Where a plan is being funded under the Solvency Funding Relief Regulations, it is expected that the administrator will describe annually how the solvency deficiency is funded as per the Relief Regulations. Also, more specifically, the Regulations specify what the administrator must disclose if using LOCs (section 25) and in case of Crown Corporations (subsection 18(2)). Where a plan administrator chooses to file a revised actuarial report to take advantage of funding relief retroactively, this revised report must be filed before the next actuarial report is filed or due to be filed. For example, an administrator wishing to file a revised report as at December 31, 2005 should do so before June 30, 2007, which is when the December 31, 2006 report is due to be filed. OSFI is of the view that fees payable to a financial institution for securing a letter of credit do not relate to the administration of the pension plan. Therefore, it would not be appropriate to charge such fees to the pension fund. A copy of the initial letter of credit must be filed with OSFI at the same time as the required filing form, and should cover the plan year in effect at the time of filing. If the first plan year of relief has ended before the date of filing, it is expected that the solvency special payments applicable to the first year of relief would have been made under a five year schedule. Going-concern special payments may be taken into account in determining the Initial Solvency Deficiency (ISD) and required solvency special payments. The special payments to be considered will depend on whether the going-concern special payments are sufficient to fund the entire solvency deficit (equal to the excess, when the ISD emerged, of solvency liabilities over solvency assets, without regard to the present value of pre-determined special payments) over 10 years. Remaining special payments, under Part 1, are derived from the special payments payable within the first five years following the date of the ISD for which the present value on that date equals the solvency deficit.

5 - 5 - Case 1: The present value of going-concern special payments payable within the first 10 years following the date of the ISD exceeds the solvency deficit. (a) Remaining special payments, under Part 3, may be derived from the schedule of going-concern special payments which begin on the date of the ISD, for a period such that the present value of the payments equals the solvency deficit. (b) Alternatively, remaining special payments, under Part 3, may be derived from the schedule of level dollar amounts payable over no more than 10 years whose present value equals the solvency deficit. Case 2: The present value of going-concern special payments payable within the first 10 years following the date of the ISD is less than the solvency deficit. Remaining special payments, under Part 3, are derived from the sum of (i) going-concern special payments paid within the first 10 years following the date of the ISD, and (ii) required solvency special payments. Illustration Valuation at date of ISD Going-concern deficit: $13,000 Going-concern special payment: $1,350 / yr. Present Value (Solvency basis) of going-concern special payments payable for 5 years: $6, years: $10,861 Case 1a: Solvency deficit: $7,000 Present value of going concern special payments ($10,861) exceeds the solvency deficit ($7,000). Remaining special payments, under Part 3, are the going concern special payments needed to amortize the solvency deficit: $1,350 / yr. for 5 years, followed by $1,248 in year 6.

6 - 6 - Case 1b: Remaining special payments, under Part 3, are the level dollar amounts whose present value equals the solvency deficit: $870 / yr. for 10 years. Case 2: Solvency deficit: $12,000 Present value of going concern special payments ($10,861) is less than the solvency deficit ($12,000). Therefore, solvency special payments of $142 / yr. must be paid over 10 years. Remaining special payments, under Part 3, are the sum of going concern and solvency special payments paid during the 10 years following the date of the ISD: $1,350 + $142 = $1,492 for 10 years.