Translation SUBMISSION BY THE CANADIAN INSTITUTE OF ACTUARIES TO THE RÉGIE DES RENTES DU QUÉBEC *** COMMENTS ON THE REGULATION AMENDING THE REGULATION RESPECTING SUPPLEMENTAL PENSION PLANS NOVEMBER 9, 2001 Document S20107
COMMENTS BY THE CANADIAN INSTITUTE OF ACTUARIES ON THE REGULATION AMENDING THE REGULATION RESPECTING SUPPLEMENTAL PENSION PLANS Introduction The Canadian Institute of Actuaries is pleased to submit its comments on the Regulation amending the Regulation respecting Supplemental Pension Plans (the Regulation). The CIA has more than 2,300 members across Canada. Many of these members work in the pension plan area and are involved in the design, administration and funding of pension plans. They are often called upon to assume an important role in the efficient operation of pension plans. They are involved directly in determining the funding of defined benefit plans and in developing plan investment policies. Actuaries also often provide assistance with various aspects of the day-to-day administration of pension plans. Our comments on the Regulation are presented below in the order of the sections to which they relate. The numbers of the sections indicated refer to the section numbers in the present regulation or to those that will be added when the Regulation comes into force. We have also taken this opportunity to comment on section 66.1 of the Supplemental Pension Plans Act (SPPA), which we will address first given the importance of our comments. Comments on section 66.1 of the SPPA Section 66.1 of the SPPA took effect on January 1, 2001 as a result of additions to Bill 102 after the related consultation period. It is our understanding that a member who is already receiving pension payments may request the refund provided for in section 66.1 if the member meets the conditions set out in that section. Given the costs of antiselection 1 and the potential problems related to the wind-up of pensions taken out with an insurer, we strongly suggest that section 66.1 be amended, or a regulatory measure adopted, so that there is no entitlement to a refund once benefit payments have begun. It should be noted that the government adopted a similar limited entitlement with respect to the refund provided in section 66. No other jurisdiction in Canada requires pension plans to offer such a refund option to members who are receiving benefits. 2 We would be in favour of a change that would allow, but not require, a plan to offer such a refund option. 1 By antiselection, we mean the possibility of a member in poor health receiving benefits of a higher value than initially provided under the plan. In the situation described above, the basic undertaking corresponds to a pension that is terminated upon the member s death. If the member learns that he is in poor health and that he has a reduced life expectancy, he would have the option of requesting the discounted value of his pension, when that value is computed using a mortality assumption based on the whole of a population of pensioners. Clearly, such an option would result in higher costs to the plan than were anticipated. 2
2 Federal legislation and the legislation of British Columbia provide for the unlocking of the pension of a member who has not resided in Canada for at least two years. However, the application of this provision to retired members is at the plan s discretion in these jurisdictions because the plan is not required to offer transfer options once a member is eligible for early retirement. Actuarial Valuation Reports The first paragraph of section 4 refers to the Standard of Practice for Valuation of Pension Plans approved by the Council of the Canadian Institute of Actuaries on January 20, 1994. Since this standard will eventually be amended (both its approval date and its title), retaining such wording in the Regulation could result in a requirement to apply outdated standards. We therefore suggest that a reference to the CIA s standards be used, as is the case in section 64. We must also point out that reference to the CIA s standards also leads to a requirement to comply with other standards adopted by the CIA, notably, the Valuation Technique Paper on Wind-up and Solvency Valuations of Registered Pension Plans. Based on the wording of paragraph 3 of section 4, it is our understanding that the report will need to identify separately the number of beneficiaries. In the case of many pension plans, the data provided to the actuary does not enable him to distinguish between beneficiaries and non-active members who are receiving a pension as at the valuation date. Such a distinction is not important to the actuary for the purposes of the valuation. In order to comply with this requirement, the plan administrator will have to supply additional information to the actuary, creating extra work for the administrator and the actuary. For this reason and because the number of beneficiaries is not required in order to understand the financial information presented in the actuarial valuation report, we suggest that this requirement be removed. Pursuant to paragraph 4 of section 5, a partial valuation report of the plan will have to indicate separately, where applicable, the value of additional obligations arising from an improvement in current annuities or an amendment that is a temporary retirement incentive for members. We are unsure of the reasons for this particular requirement. Further, we see it as a concern as it may create the perception that these two types of amendments are more (or less) appropriate than others. We suggest that this requirement be removed. Additional benefits In general, we are supportive of the provisions in sections 15.0.1 and 15.0.2. Based on the information provided verbally by the Régie des rentes du Québec (the Régie) and which is based on discussions that its representatives have had with the Canada Customs and Revenue Agency (CCRA), the conversion of an additional benefit to a supplemental pension in accordance with paragraph 1 of section 15.0.2 would not require the preparation of a past service pension adjustment (PSPA) at the time of the conversion. Written confirmation to this effect would be greatly appreciated because it is of major importance to many individuals involved in the administration of pension plans. 3
Still based on the information provided by the Régie, the CCRA would, however, require a PSPA if, at the time the pension payment begins, the amount of the supplemental pension arising from the application of paragraph 1 of section 15.0.2 exceeds an increase in the basic pension corresponding to 100% of inflation between the date of termination of membership and the date on which the pension payment begins. The likelihood of such an occurrence is slight. Nevertheless, it does exist. Declaring a PSPA, with the necessary certification from the CCRA, would have adverse consequences for both the plan administrator and the member. We encourage the Régie to continue discussions with the CCRA so that supplemental pensions need not be subject to this test. The supplemental pension purchased by the additional benefit would thus be treated in the same manner as the supplemental pension acquired through surplus salary contributions pursuant to the application of sections 60 and 83 of the SPPA. We suggest that pension plans be allowed to offer a third option regarding the form of the additional benefit. Under this option, the value of the additional benefit would accumulate with interest until the commencement of the member s pension. At that time, the accumulated amount would be converted into an ancillary benefit or a supplemental pension. If this option is of interest to the Régie, we encourage the Régie to take the necessary action with the CCRA to exclude these benefits from the requirement to produce a PSPA. Transfer of benefits We support the principle by which the value of benefits determined for the purposes of a transfer between spouses must, to some degree, take into account early retirement allowances. It is also our view that the value of these allowances should not be established at the maximum amount for the purposes of the transfer of benefits. Consequently, the formula set out in section 37, which includes half of the maximum value of allowances, appears at first glance to be an acceptable compromise. However, we are very concerned about the impact that the application of the rule prescribed under section 37 will have on the subsequent reduction of the member s benefits under sections 54 and 55. When the amount paid to the spouse takes into account early retirement allowances, it could lead to a substantial reduction of the member s pension if he takes that pension at normal retirement age, after or slightly before that age. In certain cases, the member might even have to retire soon after the settlement in order to protect himself against a substantial reduction in his pension. It is therefore our opinion that, in cases where a final settlement must be established at the time of separation, it is inappropriate to include half of the maximum value of early retirement incentives and to require the member to pay the cost in the form of a reduced pension when the latter will never receive those incentives if he retires on his normal retirement date. As a compromise, transferring a smaller percentage of early retirement benefits to the spouse -- 25% for example -- would alleviate our concerns. We are in favour of clear rules for determining the value of benefits for the purposes of transfers between spouses. The amendments to section 37 help to clarify the rules. However, based on the explanations provided by the Régie, item P set out in the 4
formula in section 37 only includes the value of early retirement allowances if they are part of a deferred annuity because of the wording of section 36. For example, item P must not take into account early retirement allowances when the member is not entitled to such an allowance if he chose a deferred annuity, even if he is eligible for an early pension offering allowances on the date the value of the benefits is calculated. We do not believe that this conclusion is entirely clear from reading these sections. If the government decides to go ahead with the proposed approach, these sections should be clarified. Furthermore, we do not see the need to base the calculation on the features of the deferred annuity if the member is eligible for an early pension on the calculation date. Annual statement Under paragraph 3 of section 59.0.2, the member s annual statement must indicate the employer contribution that the employer was required to pay during the applicable fiscal year. What does this mean exactly? For example, if the plan has an actuarial surplus, is the employer s normal actuarial cost to be indicated or the employer s minimum contribution assuming the maximum contribution holiday allowed under the SPPA? If the plan has an actuarial deficit, is the employer s normal actuarial cost to be shown or the minimum employer contribution under the SPPA (that is, the employer s normal actuarial cost plus the minimum special payments)? We suggest that this paragraph be amended to make it clearer. As an example, and in the interest of simplicity, the wording could be amended to require the reporting of the amount of contributions paid by the employer during the applicable fiscal year. Merger of pension plans To avoid any confusion over the requirements for notifying members when pension plans are being merged, we suggest that the words in section 196 be replaced by in the second paragraph of section 196 in the first sentence of section 61.1. Paragraph 8 of section 61.1, and certain other sections of the SPPA, stipulate a period of 60 days from the date of receipt of the notice. We would like to point out that compliance with a timeline based on the date of receipt of a document is very hard for the plan administrator to verify because he cannot know with certainty the date on which the document was received. We therefore suggest that, in such situations, the time period be based on the date that the document is sent even if that means providing for a slightly longer period. Assumptions for the purposes of transfer values The first paragraph of section 68.1 refers to the Standard of practice entitled Recommendations for the Computation of Transfer Values from Registered Pension Plans approved by the Council of the Canadian Institute of Actuaries on July 13, 1993. Since this standard will very likely be amended (both its approval date and its title), retaining such wording could result in a requirement to apply outdated standards. For this reason, we suggest that reference to the standards of the Canadian Institute of Actuaries (as is the case in section 64) be used. 5
Under section 68.1, transfer values will need to be established using gender-based mortality rates. To simplify administration of plans covering members in several provinces, we prefer the use of combined male and female mortality rates for all members when the plan has members for whom legislation requires the computation of non-gender based transfer values. Therefore, we suggest that section 68.1 be amended to allow the use of combined mortality rates in the situation described above. The sole purpose of this suggestion is to facilitate the administration of certain plans since, in general, the Institute favours gender-based mortality tables. Conclusion We appreciate the opportunity we have been given to comment on the draft Regulation. We are available should you wish to discuss any of these comments. 6