Session/séance : PS-3 Speaker(s)/conférencier(s): Jean-Claude Primeau (OSFI)/Mario Marchand (RRQ)

Session/séance : PS-3 Speaker(s)/conférencier(s): Jean-Claude Primeau (OSFI)/Mario Marchand (RRQ)

New Funding Rules for Federally-regulated Plans Context for Reform Funding rules in place since 1987 Two funding relief regulations within short period Need to re-examine ongoing rules Solvency rules can add significant strain on plan sponsors Pressures from industry to relax solvency rules

New Funding Rules for Federally-regulated Plans Objectives of New Rules Maintain focus on benefit security Reduce volatility of funding requirements Design rules that can deal effectively with adverse shocks Prevent selective application of rules Simplify interaction of going concern and solvency rules

New Funding Rules for Federally-regulated Plans Average Solvency Ratio Method Average of solvency ratios at valuation date and two prior year-end dates Asset smoothing no longer permitted for solvency Adjusted solvency asset amount = solvency liabilities x average solvency ratio Solvency deficiency = solvency liabilities less adjusted solvency asset amount Solvency payments = one-fifth of solvency deficiency less going concern payments Solvency ratio at valuation date used for all purposes other than funding payments

New Funding Rules for Federally-regulated Plans Adjustments and Transition Ratios adjusted in averaging process for consistency Plan amendments Special payments and contribution holidays Plan mergers New Regulations apply to reports filed starting July 1, 2010 Transition rules apply to first two reports First report can use rules similar to previous Regulations Special transition rules for plans under funding relief

New Funding Rules for Federally-regulated Plans Other Funding Changes Going concern rules clarified Margin of 5% of solvency liabilities for contribution holidays Monthly remittance of employer contributions starting January 1, 2011 Superintendent Directive on actuarial report frequency Reports filed annually except for Designated plans Very well funded plans (solvency ratio of 1.20) Transition rules for year-end 2009 and prior valuation dates

New funding rules under the Supplemental Pension Plans Act Background Working paper Toward Better Funding of Defined Benefit Pension Plans published in May 2005 Bill 30 passed in December 2006 New funding rules take effect: January 1, 2010 for private sector pension plans December 31, 2008 for pension plans in the municipal and university sectors

New funding rules under the Supplemental Pension Plans Act for private sector pension plans Provision for adverse deviation (PAD) with respect to solvency A reserve equal to the PAD must be established using actuarial gains Variable provision tied to the plan s investment policy. The formula aims to better match retirees assets in relation to their liabilities Takes into account changing economic conditions

New funding rules under the Supplemental Pension Plans Act for private sector pension plans A contribution holiday is authorized only if the plan is fully funded and solvent + PAD Rule of 90%: if the degree of solvency is less than 90% following an amendment, a lump-sum payment equal to the lesser of the following must be made: The cost of the amendment The sum required to return the degree of solvency to 90%

New funding rules under the Supplemental Pension Plans Act for private sector pension plans An annual actuarial valuation is required. It can be a partial valuation if the plan is fully funded and solvent The funding deficiency is consolidated at each actuarial valuation A letter of credit can be given to the pension committee to release it from making amortization payments for solvency deficiencies as well as special amortization payments The total amount of the letters of credit cannot exceed 15% of the solvency liabilities

New funding rules under the Supplemental Pension Plans Act for plans in the municipal and university sectors Amortization payments for solvency deficiencies are no longer required Reserve and provision for adverse deviation (PAD) Plan assets are divided into two separate accounts: a general account and the reserve The reserve is established using the technical gains determined during a complete actuarial valuation and accumulates until it is equal to the PAD The reserve serves to pay a portion of the amortization payments for a technical actuarial deficiency

New funding rules under the Supplemental Pension Plans Act for plans in the municipal and university sectors A complete actuarial valuation is required every 3 years A partial actuarial valuation is allowed for an amendment that affects plan funding or where surplus assets are appropriated to the payment of employer contributions The maximum amortization period for an improvement unfunded liability is 5 years The maximum amortization period for a technical deficiency is 15 years. Subject to the transitional rules applying to municipalities, the technical deficiency is consolidated after December 30, 2001

Rules for Plans in Financial Difficulty Context for Workout Rules Government adopted Regulations for specific plans on a few occasions Framework for distressed plans intended to facilitate resolution of plan-specific problems Framework includes negotiation with parties Intended to be used in very limited circumstances

Rules for Plans in Financial Difficulty Elements of Workout Rules Employer declaration of not being able to make required payments Payments deferred during workout period Must negotiate with unions and court-appointed representatives for all members and former members Workout agreement includes funding schedule subject to minimum requirements Subject to Minister s approval Regulations pending

Provision for the implementation of special funding rules Section 2 of the SPP Act allows such rules to be defined The Government may, by regulation and on the conditions it determines, exempt any pension plan or category of pension plan it designates from the application of all or part of this Act The Government may also prescribe special rules applicable to the plan or category.

Provision for the implementation of special funding rules Examples regarding the use of section 2 for a category of plan Regulation respecting measures to reduce the effects of the financial crisis on private sector pension plans Regulation respecting the funding of pension plans of the municipal and university sectors Provisions concerning certain multi-employer plans

Provision for the implementation of special funding rules Examples regarding the use of section 2 for certain pension plans Provisions concerning daycare centre pension plans Provisions concerning certain pension plans of the City of Montréal Provisions concerning certain pension plans of Gesca and La Presse

Going Concern Margins Regulator Input in Actuarial Standards CAPSA formed Actuarial Standards Committee in 2009 Objective to provide common regulator input to actuarial profession on standards CAPSA input reflects regulator mandate of protecting member interests November 2009 letter to ASB included concerns about new pension standards Concern about absence of clear requirement for margins in going concern valuations

Going Concern Margins CAPSA Next Steps on Margins CAPSA expect going concern valuations to include reasonable level of margins Standards were not changed to reflect CAPSA concerns CAPSA considering its own standard on margins CAPSA will seek assistance from CIA in development of standard

Going Concern Margins OSFI Expectations OSFI Actuarial Guide contains expectations on margins Going concern discount rate should not exceed 6.5% before expenses for plans with 50% or more in variable securities Many plans have reduced discount rates in response Still some plans don t follow the requirement OSFI has authority to require revisions to actuarial reports

Agreement Respecting Multi-Jurisdictional Pension Plans 1968 Memorandum of Reciprocal Agreement: The authority with the plurality of active members (major authority) must apply all the other pension plan laws to which the active members are subject Does not provide for the resolution of legal conflicts Lacks rules for important issues (e.g., distribution of plan assets if a plan is terminated or divided)

Agreement Respecting Multi-Jurisdictional Pension Plans Major authority The pension supervisory authority of the jurisdiction with the plurality of active members of the plan Minor authority Any other supervisory authority that is subject to the agreement and has supervisory or regulatory powers over plan members or beneficiaries

Agreement Respecting Multi-Jurisdictional Pension Plans Matters concerning the plan The rules of the main authority apply to matters concerning the overall plan (e.g., registration, funding) Matters concerning individual rights and benefits The rules of the minor authority apply to matters concerning individual rights and benefits (e.g., vesting, locking-in)

Agreement Respecting Multi-Jurisdictional Pension Plans Final member jurisdiction Special funding rules Assets distributed among the various authorities in certain situations

Agreement Respecting Multi-Jurisdictional Pension Plans Final version of the agreement adopted by CAPSA in September 2010 Currently, 3 provinces are ready to sign the new agreement: Alberta, Ontario and Québec The goal is to sign the new agreement before year end so that it takes effect as of January 1, 2011