CIA Pension Seminar Colloque sur les régimes de retraite April 16, 2007 Le 16 avril 2007 Toronto, Ontario
Introduction Development perspective at the Régie des rentes du Québec: Promote changes in the legislative framework of supplemental pension plans with a view to facilitating and maintaining plans
Context: A willingness on the part of workers to assume a greater share of risk In a defined benefit pension plan, the employer has to assume the financial risks: Variation in the cost of current service Amortization of unfunded liabilities Debt existing upon plan termination Some employers are becoming reticent to assume the financial risks of a defined benefit plan Some employee groups say that they are willing to assume the financial risk related to unfunded liabilities
Convergence of needs Needs expressed by workers They prefer defined benefit plans (which they rate as superior to defined contribution plans) They are ready, as a group, to assume risk These needs were first expressed in 2000 by some representatives of workers Employers point of view They would like to have a fixed financial commitment
An answer to the needs: the member-funded pension plan (MFPP) Background: Preliminary consultations (2001 to 2003) Pre-publication of the draft regulation (October 2004) Receipt of submissions from organizations with comments Draft regulation adjusted and prepared for publication
An answer to the needs: the member-funded pension plan (MFPP) Background: August 2005: intervention of Finance Canada May 2006: agreement with Finance Canada (letter of intent) Second pre-publication of the draft regulation (October 2006) and receipt of submissions Coming into force of the regulation: 15 March 2007
Subject to the Supplemental Pension Plans Act but having its own characteristics Career earnings plan or flat benefit plan Funding anticipates pension indexation Fixed employer contributions Pension indexation given priority in the event of surplus assets Specific minimum benefits (no minimum employer contribution and benefits are paid according to the plan s degree of solvency)
Advantages of the MFPP Accrual of defined benefits, as in a regular defined benefit pension plan. Clear rules on the responsibilities of each party: Fixed commitment by the employer Allocation of any surplus assets to the members Allows plan members, as a group, to assume financial risk Fairness between the different categories of members Solves the problem of asymmetry (surpluses and unfunded liabilities)
Targeted groups Unionized employees (large enterprise) Unionized employees (multi-employer plans) Employees of community associations
Characteristics of the MFPP
Review: Funding of a regular plan The employer is responsible for any outstanding plan cost (including unfunded liabilities) Funding is determined by an actuarial valuation using two approaches: Funding: method that assumes an on-going plan Solvency: method that assumes plan termination at the valuation date Valuation determines the cost of current service, amortization of unfunded liabilities and surplus assets
Funding of the MFPP The employer: Assumes a fixed cost, up to a maximum of 100% of the cost of current service The members: Assume the balance of the cost (including unfunded liabilities) Surplus assets are allocated to them Funding is determined by an actuarial valuation: Both approaches (funding and solvency) are applicable, with certain specifics for the funding method
Funding of the MFPP Justification for the specific MFPP funding rules The workers financial capacity is more limited than the employer s To reinforce the MFPP s financial soundness
Funding of the MFPP Valuation of funding: must include projection for indexation of pensions Indexation is funded (by contributions), but not promised by the plan Consequences : creation of a margin by the payment of contributions for funding future indexation (in the event of a surplus) reduction of the risk of having to amortize an unfunded liability Valuation of solvency: in accordance with the rules set out in the Supplemental Pension Plans Act
Mechanism for pension indexation Indexation carried out if the plan s financial situation allows it: the plan must remain fully solvent and fully funded. Indexation carried out uniformly for all members: Retirees pensions Pension credits for active members Deferred pensions Thus, there is fairness between the various categories of members The measures result in retirees partially sharing the plan s experience with the other members
Allocation of surplus during plan s existence First, indexation of pensions (uniformly for retirees and pension credits for all other members) Then, surplus assets can be allocated in different forms to the members: Reduction of member contributions, or Improvements in benefits (pension increases or other plan improvements) Principle: a plan must remain fully funded and fully solvent after allocation of surplus assets
Allocation of surplus at termination Surplus allocated to the members (active and retired), pro rata to their benefits, according to the plan s degree of solvency
Other particularities Payment of benefits According to the plan s degree of solvency Passage from a regular plan to a MFPP No direct passage The regular plan must be terminated first Pension committee Same rules as those applying to regular plans Generally composed of members and retirees Stricter requirements for information provided to members Allows additional voluntary contributions
Changes in taxation rules The Taxation Act should be amended in the near future Rules for MFPPs: Funding 100% of the cost of current service by employer contributions still possible Reversal of employer and employees roles: in the event of surplus assets (paragraph 147.2 (2) of the Canada Income Tax Act), employer contributions will be allowed, up to 50% of the cost of current service. Member contributions must be nil. Exception: unless there is a solvency deficit The plan must be maintained as provided for in a collective agreement