Vol. 144, No. 14 — July 7, 2010

Registration

SOR/2010-149 June 17, 2010

PENSION BENEFITS STANDARDS ACT, 1985

Regulations Amending Certain Regulations made under the Pension Benefits Standards Act, 1985

P.C. 2010-788 June 17, 2010

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to subsection 9(1), paragraph 10.1(2)(b) (see footnote a), subsection 12(3), and section 39 (see footnote b) of the Pension Benefits Standards Act, 1985 (see footnote c), hereby makes the annexed Regulations Amending Certain Regulations made under the Pension Benefits Standards Act, 1985.

REGULATIONS AMENDING CERTAIN REGULATIONS MADE UNDER THE PENSION BENEFITS STANDARDS ACT, 1985

PENSION BENEFITS STANDARDS REGULATIONS, 1985

1. (1) The definitions “actuarial gain”, “experience gain” and “experience loss” in subsection 2(1) of the Pension Benefits Standards Regulations, 1985 (see footnote 1) are repealed.

(2) The definitions “actif évalué sur une base de permanence”, “évaluation sur une base de permanence” and “passif évalué sur une base de permanence” in subsection 2(1) of the French version of the Regulations are repealed.

(3) The definitions “solvency ratio” and “special payment” in subsection 2(1) of the Regulations are replaced by the following:

“solvency ratio” means

(a) for a plan that is a defined contribution plan that does not have defined benefit provisions, and an insured plan, one; and

(b) for any other plan, the ratio of the solvency assets to the solvency liabilities, excluding those solvency assets and solvency liabilities that are attributable to benefits that are paid by means of an annuity, other than a revocable annuity, or an insurance contract, based upon the most recent actuarial report filed with the Superintendent under section 12 of the Act; (ratio de solvabilité)

“special payment” means a payment or one of a series of payments determined in accordance with section 9 and made for the purpose of liquidating an unfunded liability or a solvency deficiency; (paiement spécial)

(4) The definition “coûts normaux” in subsection 2(1) of the French version of the Regulations is replaced by the following:

« coûts normaux » Le coût, déterminé selon une évaluation en continuité, des prestations, à l’exclusion des paiements spéciaux, qui sont censées s’accumuler pendant un exercice. (normal cost)

(5) Subsection 2(1) of the Regulations is amended by adding the following in alphabetical order:

“adjusted solvency asset amount” means the amount determined by multiplying the average solvency ratio by the amount of the solvency liabilities; (montant rajusté de l’actif de solvabilité)

“average solvency ratio” means the solvency ratio determined in accordance with subsections 9(8) to (11); (ratio de solvabilité moyen)

“going concern deficit” means the amount by which the going concern liabilities exceed the going concern assets; (déficit évalué en continuité)

“going concern excess” means the amount by which the going concern assets exceed the going concern liabilities; (excédent évalué en continuité)

“going concern special payment” means a special payment made in respect of an unfunded liability under subsection 9(3); (paiement spécial de continuité)

“prior valuation date” in relation to a valuation date, means the day one year prior to that valuation date; (date d’évaluation antérieure)

“prior second valuation date” in relation to a valuation date, means the day two years prior to that valuation date; (deuxième date d’évaluation antérieure)

“solvency assets” means the market value of the assets that relate to the defined benefit provisions of a plan minus the estimated expense of the winding-up of the plan as certified by an actuary; (actif de solvabilité)

“solvency deficiency” means the amount by which the solvency liabilities exceed the adjusted solvency asset amount; (déficit de solvabilité)

“solvency excess” means the amount by which the adjusted solvency asset amount exceeds the solvency liabilities; (excédent de solvabilité)

“solvency liabilities” means the liabilities of a plan that relate to defined benefit provisions and are determined on the basis that the plan is terminated; (passif de solvabilité)

“solvency special payment” means a special payment made under paragraph 9(4)(c) or (d); (paiement spécial de solvabilité)

“valuation date” means the date on which the actuarial report values the liabilities of a plan; (date d’évaluation)

(6) Subsection 2(1) of the French version of the Regulations is amended by adding the following in alphabetical order:

« actif évalué en continuité » La valeur de l’actif d’un régime, y compris les revenus à recevoir et courus, qui est déterminée selon une évaluation en continuité. (going concern assets)

« évaluation en continuité » Évaluation de l’actif et du passif d’un régime selon des hypothèses et des méthodes actuarielles conformes aux normes actuarielles reconnues qui s’appliquent à l’évaluation d’un régime selon le principe de continuité d’exploitation. (going concern valuation)

« passif évalué en continuité » La valeur actualisée des prestations accumulées d’un régime, y compris les montants dus et impayés, qui est déterminée selon une évaluation en continuité. (going concern liabilities)

(7) The reference to “( actif évalué sur une base de permanence)”at the end of the definition“going concern assets” in subsection 2(1) of the English version of the Regulations is replaced by “(actif évalué en continuité)”.

(8) The reference to “(passif évalué sur une base de permanence)”at the end of the definition“going concern liabilities” in subsection 2(1) of the English version of the Regulations is replaced by “(passif évalué en continuité)”.

(9) The reference to “(evaluation sur une base de permanence)”at the end of the definition“going concern valuation” in subsection 2(1) of the English version of the Regulations is replaced by “(évalué en continuité)”.

2. (1) Section 9 of the Regulations is replaced by the following:

9. (1) In this section “unfunded liability” means

(a) the going concern deficit of a plan as determined on the date that the plan was established;

(b) the amount by which an increase in the going concern liabilities of a plan resulting from an amendment to the plan exceeds the going concern excess of the plan as determined on the day before the effective date of the amendment; or

(c) the amount by which the going concern deficit of a plan determined at the valuation date exceeds the present value of going concern special payments of the plan established in respect of periods after the valuation date.

(2) For the purposes of this section

(a) the date of emergence of an unfunded liability in respect of an occurrence described in

(i) paragraph (1)(a) is the effective date of the plan,

(ii) paragraph (1)(b) is the effective date of the amendment, and

(iii) paragraph (1)(c) is the valuation date;

(b) the date of emergence of a solvency deficiency is the date of the valuation that identified the deficiency; and

(c) the interest rate used to determine the present value of going concern special payments referred to in paragraph (1)(c) is the same as the interest rate used to determine the going concern liabilities of the plan at the valuation date.

(3) An unfunded liability of a plan shall be funded by going concern special payments sufficient to liquidate the unfunded liability by equal annual payments over a period of 15 years from the date on which the unfunded liability emerged.

(4) A plan shall be funded in each plan year as follows:

(a) by a contribution equal to the normal cost of the plan,

(b) by going concern special payments;

(c) if there is a solvency deficiency, by annual solvency special payments equal to the amount by which the solvency deficiency divided by 5 exceeds the amount of going concern special payments that are payable during the plan year;

(d) if there is an additional solvency deficiency referred to in subsection (12), by additional annual solvency special payments payable from the effective date of the amendment and equal to the amount by which the additional solvency deficiency divided by 5 exceeds the going concern special payment in respect of the unfunded liability emerging from the amendment to the plan; and

(e) by an amount required to be paid by an employer under a defined contribution provision.

(5) The amount required under paragraph (4)(a) or (e) may be reduced by all or a portion of the lesser of

(a) the going concern excess, and

(b) the amount by which the solvency assets exceed the solvency liabilities multiplied by 1.05.

(6) If an unfunded liability or solvency deficiency is liquidated at a rate greater than the sum of the special payments required under paragraph (4)(b),(c) or (d) by the making of an additional payment, the amount of a special payment for a subsequent plan year may be reduced if the outstanding balance of an unfunded liability will at no time be greater than it would have been had the going concern special payments referred to in paragraph (4)(b) been made.

(7) If the aggregate of the present value of going concern special payments referred to in paragraph (1)(c) exceeds the going concern deficit, this excess shall be applied to reduce the outstanding balance of any unfunded liability and the going concern special payments remaining to be made in respect of the unfunded liability shall be reduced pro rata.

(8) The average solvency ratio for a valuation date is the arithmetic average of the solvency ratios at the valuation date, the prior valuation date and the prior second valuation date adjusted as follows:

(a) the solvency ratio at the valuation date shall be adjusted to remove the effect of any amendment made after the prior second valuation date that retroactively increases or decreases the plan benefits;

(b) the solvency ratio at the prior valuation date shall be adjusted to remove the effect of any amendment made after the prior second valuation date and before the prior valuation date that retroactively increases or decreases the plan benefits;

(c) the solvency ratios at the prior valuation date and the prior second valuation date may be adjusted to increase the solvency assets by an amount not in excess of the present value of any special payment made in respect of the period between the prior valuation date and the valuation date, or in respect of the period between the prior second valuation date and the valuation date, as the case may be, but not including an additional payment referred to in subsection (6) that will be applied to reduce special payments in respect of periods after the valuation date;

(d) the solvency ratio at the valuation date shall be adjusted by reducing the solvency assets at the valuation date by the amount of an additional payment referred to in subsection (6) that will be applied to reduce special payments in respect of periods after the valuation date;

(e) the solvency ratios at the prior valuation date and the prior second valuation date shall be adjusted to reduce the solvency assets by the present value of any reduction made under subsection (5) or under subsection (7.1) as that subsection read immediately before this section comes into force, between the prior valuation date and the valuation date or between the prior second valuation date and the valuation date, as the case may be; and

(f) the solvency ratios at the prior valuation date and the prior second valuation date shall be adjusted to reflect the transfer into the plan of all of the assets of another plan between the prior valuation date and the valuation date or between the prior second valuation date and the valuation date, as the case may be, by including the assets of the transferring plan as solvency assets and the liabilities of the transferring plan as solvency liabilities.

(9) The average solvency ratio shall be adjusted to include the effect at the valuation date of any amendments referred to in paragraph (8)(a) or (b).

(10) The interest rate used to determine the present value of the special payments referred to in paragraphs (8)(c) and the present value of the reductions referred to in paragraph (8)(e) shall be the same interest rate that was used to determine the solvency liabilities of the plan on the prior valuation date or the prior second valuation date, as the case may be.

(11) The solvency ratio at the valuation date, without the adjustments made under subsection (8) or (9), may be used as the solvency ratio for a prior valuation date or prior second valuation date in respect of which no actuarial report was filed for the plan in accordance with subsection 12(3) of the Act.

(12) An additional solvency deficiency resulting from an amendment to the plan is equal to the amount by which the increase in solvency liabilities determined in accordance with subsection (13) exceeds the solvency excess at the day before the effective date of the amendment.

(13) If an amendment to the plan increases the solvency liabilities, the increase in solvency liabilities shall be valued using the actuarial assumptions and methods used in the solvency valuation of the actuarial report filed or due to be filed under subsection 12(3) of the Act for the most recently completed plan year in relation to the effective date of the amendment.

(14) Payments to a plan shall be made as follows:

(a) the normal cost of the plan shall be paid in equal instalments or as a percentage of the anticipated remuneration to be paid to the members during the plan year and shall be paid not less frequently than quarterly and not later than 30 days after the end of the quarter in respect of which the instalment is paid;

(b) any special payment to be made during the plan year shall be paid not less frequently than quarterly and not later than 30 days after the end of the quarter in respect of which the instalment is paid;

(c) the contributions of plan members shall be remitted to the administrator not later than 30 days after the end of the period in respect of which such contributions were deducted; and

(d) the administrator shall immediately pay into the fund any amount remitted to the administrator.

(2) Paragraphs 9(14)(a) and (b) of the Regulations are replaced by the following:

(a) the normal cost of the plan shall be paid in equal instalments or as a percentage of the anticipated remuneration to be paid to the members during the plan year and shall be paid not less frequently than monthly and not later than 30 days after the end of the period in respect of which the instalment is paid;

(b) any special payment to be made during the plan year shall be paid not less frequently than monthly and not later than 30 days after the end of the period in respect of which the instalment is paid;

3. Section 10 of the Regulations is replaced by the following:

10. (1) An administrator who fails to pay into the fund any amount remitted to the administrator under subsection 9(14) is liable to the plan for the outstanding payment and interest on it.

(2) If an employer fails to make payments to the plan at the times set out in subsection 9(14) or fails to make payments in accordance with subsection 29(6) of the Act or if the administrator is liable under subsection (1), the interest rate shall be

(a) in respect of a going concern special payment, the one used to determine the going concern liabilities;

(b) in respect of a solvency special payment, the one used to determine the solvency liabilities;

(c) in respect of a normal cost, the one applicable in paragraph (a); and

(d) in respect of any other payments, the one applicable in paragraph (b).

4. Paragraphs 11(3)(c) and (d) of the Regulations are replaced by the following:

(c) the outstanding amount of unfunded liabilities existing on the date as of which the report is prepared and the special payments to be made in accordance with paragraph 9(4)(b);

(d) a certification that the plan does not have a solvency deficiency or a determination of the solvency deficiency of the plan and the special payments to be made in accordance with paragraph 9(4)(c); and

5. Subsection 16(1) of the French version of the Regulations is replaced by the following:

16. (1) Pour l’application de la définition de « excédent » au paragraphe 2(1) de la Loi, l’excédent de l’actif du régime sur son passif est déterminé par soustraction du passif de l’actif tels qu’ils figurent dans le rapport actuariel déposé auprès du surintendant conformément au paragraphe 12(3) de la Loi et établi en conformité avec les normes actuarielles reconnues. Dans le cas d’un régime ne faisant pas l’objet d’une cessation totale, cet actif et ce passif correspondent aux montants établis selon l’évaluation en continuité qui figure dans le rapport.

6. Section 10 of Schedule III to the Regulations is repealed.

SOLVENCY FUNDING RELIEF REGULATIONS

7. The Solvency Funding Relief Regulations (see footnote 2) are amended by adding the following before section 6:

5.1 For the purposes of this Part,

(a) despite paragraph 9(4)(c) of the Pension Benefits Standards Regulations, 1985, if there is a solvency deficiency, a plan shall be funded in each plan year by annual solvency special payments equal to the amount by which the solvency deficiency divided by 5 exceeds the amount of going concern special payments — other than those referred to in paragraph 12(1)(c) — that are payable during the plan year; and

(b) ”unfunded liability” means

(i) the going concern deficit of a plan as determined on the date that the plan was established;

(ii) the amount by which an increase in the going concern liabilities of a plan resulting from an amendment to the plan exceeds the going concern excess of the plan as determined on the day before the effective date of the amendment; or

(iii) the amount by which the going concern deficit of a plan determined at the valuation date exceeds the sum of

(A) the present value of going concern special payments established in respect of periods after the valuation date, and

(B) the present value of special payments referred to in paragraph 12(1)(b).

8. Subsection 6(4) of the Regulations is replaced by the following:

(4) Despite the fact that the special payments set out in subsection (1) may be made over a period that exceeds the period applicable under Part 1, for the purposes of subsection 8(1) of the Act, the amount by which the aggregate amount of special payments that would have been remitted to the pension fund in accordance with that Part from the day on which the initial solvency deficiency emerged, as adjusted to take into account the reductions in special payments resulting from the application of the Pension Benefits Standards Regulations, 1985, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with this Part, plus interest, shall be considered to be an amount accrued to the pension fund.

9. Subsection 7(2) of the Regulations is replaced by the following:

(2) If the funding is for an initial solvency deficiency of a multi-employer pension plan and if the annual amount of payments required to be made to the pension fund under subsection (1) is less than the aggregate amount of payments that are required to be made to the pension fund, excluding the normal cost and the special payments required to liquidate an unfunded liability, under all applicable collective agreements, the amount of payments required to be made to the pension fund in accordance with this Part shall be the aggregate amount of payments required to be made to the pension fund pursuant to all applicable collective agreements.

10. Section 12 of the Regulations is replaced by the following:

12. (1) Despite section 9 of the Pension Benefits Standards Regulations, 1985, a solvency deficiency that emerges after the day on which the initial solvency deficiency emerged shall be calculated as the amount by which the solvency liabilities exceed the sum of the following amounts:

(a) the adjusted solvency asset amount,

(b) the present value of special payments made under section 6 or 7 if at least one of those payments is due more than five years after the valuation date, and

(c) the present value of the going concern special payments that were used to fund the initial solvency deficiency that are due during the period beginning on the valuation date and ending on the 10th anniversary of the date of emergence of the initial solvency deficiency if at least one of those payments is due more than five years after the valuation date.

(2) The interest rate used to determine the present value of the special payments referred to in subsection (1) is the same as the interest rate used to determine the solvency liabilities.

11. (1) Subparagraphs 17(1)(a)(ii) to (iv) of the Regulations are replaced by the following:

(ii) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with Part 1 from the day on which the initial solvency deficiency emerged to the day on which funding ceases, as adjusted to take into account the reductions in special payments resulting from the application of the Pension Benefits Standards Regulations, 1985, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with this Part, plus interest, shall immediately be remitted to the pension fund, and

(2) Subparagraph 17(1)(b)(ii) of the Regulations is replaced by the following:

(ii) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with Part 1 from the day on which the initial solvency deficiency emerged to the day on which funding ceases, as adjusted to take into account the reductions in special payments resulting from the application of the Pension Benefits Standards Regulations, 1985, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with this Part, plus interest, shall immediately be remitted to the pension fund.

(3) Subsection 17(2) of the Regulations is repealed.

12. The Regulations are amended by adding the following before section 19:

18.1 For the purposes of this Part,

(a) despite paragraph 9(4)(c) of the Pension Benefits Standards Regulations, 1985, if there is a solvency deficiency, a plan shall be funded in each plan year by annual solvency special payments equal to the amount by which the solvency deficiency divided by 5 exceeds the amount of going concern special payments — other than those referred to in paragraph 27(1)(c) — that are payable during the plan year; and

(b) “unfunded liability” means

(i) the going concern deficit of a plan as determined on the date that the plan was established;

(ii) the amount by which an increase in the going concern liabilities of a plan resulting from an amendment to the plan exceeds the going concern excess of the plan as determined on the day before the effective date of the amendment; or

(iii) the amount by which the going concern deficit of a plan determined at the valuation date exceeds the sum of

(A) the present value of going concern special payments established in respect of periods after the valuation date, and

(B) the present value of special payments referred to in paragraph 27(1)(b).

13. Section 22 of the Regulations is replaced by the following:

22. If the face amount of letters of credit obtained or maintained in accordance with this Part for a plan year is less than the amount required by subsection 19(2) for that plan year, the employer shall make up the difference either by increasing the amount of letters of credit or by making additional payments to the pension fund no later than on the day on which the next payment is made to the pension fund in accordance with subsection 9(14) of the Pension Benefits Standards Regulations, 1985.

14. Section 27 of the Regulations is replaced by the following:

27. (1) Despite section 9 of the Pension Benefits Standards Regulations, 1985, a solvency deficiency that emerges after the day on which the initial solvency deficiency emerged shall be calculated as the amount by which the solvency liabilities exceed the sum of the following amounts:

(a) the adjusted solvency asset amount,

(b) the present value of special payments made under section 19 if at least one of those payments is due more than five years after the valuation date, and

(c) the present value of the going concern special payments that were used to fund the initial solvency deficiency that are due during the period beginning on the valuation date and ending on the 10th anniversary of the date of emergence of the initial solvency deficiency if at least one of those payments is due more than five years after the valuation date.

(2) The interest rate used to determine the present value of the special payments referred to in subsection (1) is the same as the interest rate used to determine the solvency liabilities.

15. Subsection 29(1) of the Regulations is replaced by the following:

29. (1) If a default occurs, the amount by which the aggregate amount of special payments that would have been remitted to the pension fund in accordance with Part 1 from the day on which the initial solvency deficiency emerged, as adjusted to take into account the reductions in special payments resulting from the application of the Pension Benefits Standards Regulations, 1985, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with this Part, plus interest, shall immediately be remitted to the pension fund.

16. Paragraph 30(b) of the Regulations is replaced by the following:

(b) the amount by which the aggregate amount of special payments that would have been remitted to the pension fund in accordance with Part 1 from the day on which the initial solvency deficiency emerged, as adjusted to take into account the reductions in special payments resulting from the application of the Pension Benefits Standards Regulations, 1985, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with this Part, plus interest, shall be remitted to the pension fund at least 30 days before the plan’s year end; and

SOLVENCY FUNDING RELIEF REGULATIONS, 2009

17. Subsection 5(6) of the Solvency Funding Relief Regulations, 2009 (see footnote 3) is replaced by the following:

(6) If the funding is for a deficiency of a multi-employer pension plan and if the annual amount of the payments required to be made to the pension fund in accordance with subsection (2) or (3), as the case may be, is less than the aggregate amount of the payments that are required to be made to the pension fund, excluding the normal cost and the special payments required to liquidate an unfunded liability, under all applicable collective agreements, the amount of the payments required to be made to the pension fund in accordance with subsection (2) or (3), as the case may be, shall be the aggregate amount of the payments required to be made to the pension fund under all applicable collective agreements and subsection (4) shall not apply.

18. Subsections 8(2) and (3) of the Regulations are replaced by the following:

(2) In respect of the 2009 plan year, the solvency deficiency and solvency special payments shall be determined in accordance with section 9 of the Pension Benefits Standards Regulations, 1985.

19. The Regulations are amended by adding the following before section 9:

8.1 For the purposes of this Part,

(a) despite paragraph 9(4)(c) of the Pension Benefits Standards Regulations, 1985, if there is a solvency deficiency, a plan shall be funded in each plan year by annual solvency special payments equal to the amount by which the solvency deficiency divided by 5 exceeds the amount of going concern special payments — other than those referred to in paragraph 14(1)(c) — that are payable during the plan year; and

(b) “unfunded liability” means

(i) the going concern deficit of a plan as determined on the date that the plan was established;

(ii) the amount by which an increase in the going concern liabilities of a plan resulting from an amendment to the plan exceeds the going concern excess of the plan as determined on the day before the effective date of the amendment; or

(iii) the amount by which the going concern deficit of a plan determined at the valuation date exceeds the sum of

(A) the present value of going concern special payments established in respect of periods after the valuation date, and

(B) the present value of special payments referred to in paragraph 14(1)(b).

20. Section 14 of the Regulations is replaced by the following:

14. (1) Despite section 9 of the Pension Benefits Standards Regulations, 1985, a solvency deficiency that emerges after the day on which the initial solvency deficiency emerged shall be calculated as the amount by which the solvency liabilities exceed the sum of the following amounts:

(a) the adjusted solvency asset amount,

(b) the present value of special payments made under section 5 if at least one of those payments is due more than five years after the valuation date, and

(c) the present value of the going concern special payments that were used to fund the initial solvency deficiency that are due during the period beginning on the valuation date and ending on the 10th anniversary of the date of emergence of the initial solvency deficiency if at least one of those payments is due more than five years after the valuation date.

(2) The interest rate used to determine the present value of the special payments referred to in subsection (1) is the same as the interest rate used to determine the solvency liabilities.

21. (1) Subparagraphs 19(1)(a)(ii) to (iv) of the Regulations are replaced by the following:

(ii) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 from the day on which the deficiency emerged to the day on which funding ceases, as adjusted to take into account the reductions in special payments resulting from the application of those Regulations, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with Part 1 and this Part, plus interest, shall immediately be remitted to the pension fund, and

(2) Subparagraph 19(1)(b)(ii) of the Regulations is replaced by the following:

(ii) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 from the day on which the deficiency emerged to the day on which funding ceases, as adjusted to take into account the reductions in special payments resulting from the application of those Regulations, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with Part 1 and this Part, plus interest, shall immediately be remitted to the pension fund.

(3) Subsection 19(2) of the Regulations is repealed.

22. The Regulations are amended by adding the following before section 21:

20.1 For the purposes of this Part,

(a) despite paragraph 9(4)(c) of the Pension Benefits Standards Regulations, 1985, if there is a solvency deficiency, a plan shall be funded in each plan year by annual solvency special payments equal to the amount by which the solvency deficiency divided by 5 exceeds the amount of going concern special payments — other than those referred to in paragraph 29(1)(c) — that are payable during the plan year; and

(b) “unfunded liability” means

(i) the going concern deficit of a plan as determined on the date that the plan was established;

(ii) the amount by which an increase in the going concern liabilities of a plan resulting from an amendment to the plan exceeds the going concern excess of the plan as determined on the day before the effective date of the amendment; or

(iii) the amount by which the going concern deficit of a plan determined at the valuation date exceeds the sum of

(A) the present value of going concern special payments established in respect of periods after the valuation date, and

(B) the present value of special payments referred to in paragraph 29(1)(b).

23. Section 24 of the Regulations is replaced by the following:

24. If the face amount of letters of credit obtained or maintained in accordance with this Part for a plan year is less than the amount required by subsection 21(3) for that plan year, the employer shall make up the difference either by increasing the amount of letters of credit or by making additional payments to the pension fund no later than on the day on which the next payment is made to the pension fund in accordance with subsection 9(14) of the Pension Benefits Standards Regulations, 1985.

24. Section 29 of the Regulations is replaced by the following:

29. (1) Despite section 9 of the Pension Benefits Standards Regulations, 1985, a solvency deficiency that emerges after the day on which the initial solvency deficiency emerged shall be calculated as the amount by which the solvency liabilities exceed the sum of the following amounts:

(a) the adjusted solvency asset amount,

(b) the present value of special payments made under section 21 if at least one of those payments is due more than five years after the valuation date, and

(c) the present value of the going concern special payments that were used to fund the initial solvency deficiency that are due during the period beginning on the valuation date and ending on the 10th anniversary of the date of emergence of the initial solvency deficiency if at least one of those payments is due more than five years after the valuation date.

(2) The interest rate used to determine the present value of the special payments referred to in subsection (1) is the same as the interest rate used to determine the solvency liabilities.

25. Subsection 31(1) of the Regulations is replaced by the following:

31. (1) If a default occurs, the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 from the day on which the deficiency emerged, as adjusted to take into account the reductions in special payments resulting from the application of those Regulations, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with Part 1 and this Part, plus interest, shall immediately be remitted to the pension fund.

26. Paragraph 32(b) of the Regulations is replaced by the following:

(b) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 from the day on which the deficiency emerged, as adjusted to take into account the reductions in special payments resulting from the application of those Regulations, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with Part 1 and this Part, plus interest, is remitted to the pension fund at least 30 days before the plan’s year end; and

TRANSITIONAL PROVISIONS

27. A plan may continue to be funded under section 9 of the Pension Benefits Standards Regulations, 1985, as they read immediately before this section comes into force, until the day on which the first actuarial report is filed after this section comes into force.

28. A reference to an “unfunded liability” in these Regulations includes a reference to an “initial unfunded liability” as defined in subsection 9(1) of the Pension Benefits Standards Regulations, 1985, as it read immediately before this section comes into force.

29. (1) For the purpose of determining the average solvency ratio for the first actuarial report required to be filed after this section comes into force, the solvency ratio that is determined on the valuation date, without the adjustments made under subsections 9(8) and 9(9), may be used as the solvency ratio for

(a) the prior valuation date and the prior second valuation date; or

(b) the prior second valuation date.

(2) If the average solvency ratio is determined under paragraph (1)(a), the “solvency assets” means the value of the assets of the plan, determined on the basis of market value or of a value related to the market value by means of a method using market values over a period of not more than five years to stabilize short-term fluctuations.

(3) For the purpose of determining the average solvency ratio for the second actuarial report required to be filed after this section comes into force, if the average solvency ratio for the first actuarial report was determined under paragraph (1)(a), the solvency ratio that is determined on the valuation date, without the adjustments made under subsections 9(8) and 9(9), may be used as the solvency ratio for the prior second valuation date.

30. These Regulations do not apply to a plan to which the Canadian Press Pension Plan Solvency Deficiency Funding Regulations apply.

COMING INTO FORCE

31. (1) These Regulations, other than subsection 2(2), come into force on the later of July 1, 2010 and the day on which they are registered.

(2) Subsection 2(2) comes into force on January 1, 2011.

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issue

Under the Pension Benefits Standards Act, 1985 (the “Act”), the federal Government regulates private pension plans covering areas of employment under federal jurisdiction, such as telecommunications, banking and inter-provincial transportation. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of such plans. As of March 31, 2009, OSFI supervised some 1 380 pension plans or about 7% of all pension plans in Canada, representing about 12% of trusteed pension fund assets in Canada; 449 of the federal plans were defined benefit pension plans.

Under the Act and the Pension Benefits Standards Regulations, 1985 (the “Regulations”), minimum standards are set for a number of areas, including minimum standards for funding, investment, membership eligibility, vesting, locking-in, portability of benefits, death benefits and members’ rights to information. For defined benefit pension plans, the Act requires that promised benefits be funded in accordance with the standards provided for under the Regulations.

Recent challenges and government action

Pension plan funded levels have experienced much volatility in recent years. In the early to mid-2000s, a sharp decline in long-term interest rates along with changes in actuarial standards, such as the longevity assumptions, resulted in increased plan liabilities. Combined with poor investment returns, these factors led to many plans being underfunded on a solvency basis. More recently, the 2008 global credit crisis led to a sharp decline in global equity markets, which reduced the funded status of federally regulated private pension plans.

To address the pressure that increased funding requirements put on plan sponsors, the Government adopted two temporary Solvency Funding Relief Regulations (the “2006 and 2009 Regulations”). The 2006 and 2009 Regulations provided solvency funding relief by allowing plans to extend their solvency funding payment schedule from five to ten years, subject to the condition of either members’ and retirees’ consent, or securing the difference between the five- and ten-year payment schedules with a letter of credit. These measures provided for the solvency deficiencies of federally regulated defined benefit pension plans to be addressed in an orderly fashion while providing safeguards for pension benefits. In addition, the Government also brought into force special regulations for two specific sponsors with the Canadian Press Pension Plan Solvency Deficiency Funding Regulations (2009), the Air Canada Pension Plan Funding Regulations, 2009 and the Air Canada Pension Plan Solvency Deficiency Funding Regulations (2004) in order to help these entities deal with their own specific challenges that involved funding of their pension plans.

The existence of the temporary solvency funding relief measures and special regulations points to the need to improve the legislative and regulatory framework respecting federally regulated private pension plans on a permanent basis.

Objectives

On October 27, 2009, in order to strengthen the legislative and regulatory framework for federally regulated private pension plans, the Government announced a series of proposals to improve the legislative and regulatory framework respecting federally regulated private pension plans. Divided into five main themes, the proposals notably included the modernization of the investment rules as well as modifications to the pension plan funding rules to allow sponsors to better manage their funding obligations, while at the same time protecting member benefit security.

In this regard, certain amendments to the Regulations have been made in respect of the funding and investment rules. The Government is committed to bringing the other proposals forward at the earliest opportunity.

The regulatory amendments have two main objectives. First, amendments have been made to the Regulations in respect of funding rules of pension plans to ensure that the rights and interests of pension plan members, retirees and their beneficiaries are protected. More specifically, these amendments will mitigate the effects of short-term fluctuations in the value of plan assets and liabilities on solvency funding requirements as well as place restrictions on employer contribution holidays. Second, amendments to investment rules will provide more flexibility for plans to choose the investment options that best suit their investment needs. In particular, the objective is to adopt flexible, prudent and effective principles-based investment rules.

Description

Defined benefit pension plan funding rules

Defined benefit pension plans must file actuarial valuations at a frequency directed by the Superintendent of Financial Institutions (the Superintendent). Where these valuations show a pension plan’s assets to be less than its liabilities, payments must be made into the plan to eliminate the deficiency over a prescribed period of time, as described below.

Every actuarial valuation of a defined benefit plan must be conducted using two different sets of actuarial assumptions: “solvency valuations” use assumptions consistent with a plan being terminated, while “going-concern valuations” are based on the plan continuing in operation. Under the previous funding rules, if a solvency valuation revealed a shortfall of plan assets to plan liabilities, the Regulations required the plan sponsor to make “special payments” into the plan sufficient to eliminate the deficiency over five years. Where a deficiency exists on the basis of a going-concern valuation, the Regulations require special payments to eliminate the going-concern deficiency over 15 years. In general, the payments that a plan sponsor must remit to a plan in a given year include the amount necessary to cover the ongoing current service costs associated with the plan, plus any “special payments” required in that year to pay down a funding deficiency over the relevant time period.

Amendments to the funding rules

Three-year average solvency ratios

Under the previous requirements of the Regulations, solvency deficiencies were required to be amortized over a five-year schedule, according to the current solvency ratio (i.e. plan assets divided by liabilities determined on a solvency basis). This approach could result in fluctuations, sometimes dramatic, in the year-over-year special funding obligations faced by plan sponsors. Moreover, these additional requirements can be faced at a time when other economic factors may be posing challenges to the sponsor in other areas, which adds an element of “pro-cyclicality” to the previous approach.

Amendments to the funding rules adopt a new standard for establishing minimum funding requirements on a solvency basis that will use average — rather than current — solvency ratios to determine minimum funding requirements. The average solvency position of the plan for funding purposes will be defined as the average of the solvency ratios over three years, i.e. the current and previous two years. The three solvency ratios used in the determination of the average will be based on the market value of plan assets. Past deficiencies will be consolidated annually for the purpose of establishing solvency special payments. To put this funding model into effect, annual filing of valuation reports will be required.

This approach will generally reduce the effects of short-term fluctuations in the value of plan assets and liabilities on solvency funding requirements. This measure will change the timing and the profile of contributions such that the impact of shocks to the funded status will be spread over a longer period. In the case of adverse shocks to a pension plan’s funding position, the increase in required special payments will initially be less than under the previous solvency funding rules, but required payments will tend to be higher in later periods. Similarly, when a pension plan’s funding position improves, as a result of strong investment returns, for example, solvency special payments will decline more gradually, which will further strengthen the financial position of the plan. This approach will help mitigate the “pro-cyclicality” of the previous funding rules.

In recognition that a five-year target for funding solvency deficiencies remains appropriate, under the amendments, pension plans will be required to remit 20% of the solvency deficiency each year in which a solvency deficiency exists. The going concern methodology and its 15-year amortization period will remain unchanged.

In periods of substantial market downturns, as was the case in 2008, the use of the average solvency ratio method with a requirement to remit 20% of a solvency deficiency each year will dampen the effect of a market downturn on funding requirements without the potential adverse impact on benefit security of a significantly longer amortization period.

The amendments to the Regulations also contain certain transitional rules which include, for example, rules to determine the average ratio in the first actuarial report filed after the coming into force of the new funding rules, as well as rules to determine transition requirements for sponsors subject to the temporary Solvency Funding Relief Regulations in both the 2006 and 2009 versions. The transitional rules are intended to bridge the period between the current funding rules and the time when the three-year average ratio approach can be fully adopted.

While the average solvency ratio will be used for minimum funding purposes, the current solvency ratio will still be the relevant measure for all the other purposes under the Act and the Regulations, including, for example, information statements sent to the beneficiaries.

Solvency margin

With respect to defined benefits plans, an employer is required to remit to a pension fund amounts to fund the accrual pension benefits, known as “normal costs.” Under the previous Regulations, in situations where the plan was considered fully funded, the employer was not required to remit all or part of this amount. In this situation, the employer was considered to be taking a “contribution holiday.” The ability of employers to take contribution holidays provided that the pension plan’s solvency ratio was above 1.0 means that there was no requirement to leave additional funds in the plan that could provide a cushion against future adverse shocks.

The introduction of a solvency margin as a limit on contribution holidays sets a level higher than a 1.0 solvency ratio under which employers will be required to maintain their normal cost contributions to the plan. It will operate as a restriction against employer contribution holidays, which will not be permitted unless the solvency ratio exceeded full funding plus the margin, which will be set at a level of 5% of solvency liabilities. A solvency margin will act to create a funding cushion in order to protect plan benefits.

The solvency margin will not be explicitly funded. Solvency funding requirements will continue to be based on an objective of bringing the solvency ratio of the pension plan to 1.0. The difference is that where the current solvency ratio exceeds 1.0, but is less than 1.05, the employer will have to continue making its normal cost contributions.

Investment rules

Pension investment is governed under a principles-based prudent person framework. Previously, the framework included five quantitative limits:

• a pension plan may not own more than 30% of the voting shares of a single entity;
• a pension plan may not invest more than 10% of its portfolio in a single investment;
• a pension plan may not invest more than 5% of its portfolio in a single parcel of real estate or Canadian resource property;
• a pension plan may not make new investments in Canadian resource properties if the total value of investments in such properties exceeds 15% of its portfolio; and
• a pension plan may not make new investments in Canadian resource properties or real estate if the total value of such investments exceeds 25% of its portfolio.

Amendments to the investment rules

In a prudent person environment, the quantitative limits in respect of real estate and resource property are considered cumbersome and no longer required. Thus, the amendments to investment rules see the removal of the 5%, 15% and 25% quantitative investment limits in respect of resource and real property investments.

The Government intends to propose further modifications to the investment rules in respect of the 10% concentration and a general prohibition on pension fund investment in the shares of its sponsoring employer in future regulatory amendments.

Regulatory and non-regulatory options considered

Funding rules

During public consultations, many plan member organizations, including labour unions, advocated their support for remaining on a five-year schedule while a number of defined benefit plan sponsors made representations seeking a ten-year amortization period. The year-over-year volatility in funding requirements for solvency deficiencies was also raised as a critical concern.

The option of extending the solvency funding payment schedule from five to ten years has been considered. The intent of such a measure would be to provide the employer with funding relief; however, it would not address the structural and recurrent issue related to funding rules, i.e. the volatility of the year-over-year funding status of pension plans. In the amendments, the average solvency position of the plan for funding purposes is defined as the average of the solvency ratios over three years. In doing so, the funding status of pension plans will be less exposed to the market fluctuations and mitigate the “pro-cyclicality” of the previous funding rules.

In addition, an extension of the funding payment schedule was considered, but extending the period for an employer to fund its deficiencies may result in an increased probability of a plan terminating in an underfunded position. Therefore, extending the solvency funding target period to more than five years without any additional protections could negatively affect benefit security. The amendments are not expected to negatively affect the protection of the plan member benefits.

Investment rules

As described above, the Government has removed the investment quantitative limits related to resource properties and real estate. During public consultations, the Government received many representations from pension plan sponsors and pension service providers indicating that, in a prudent person environment, the quantitative limits were unnecessarily cumbersome and no longer required. Similar representations were made in respect of the 30% rule, which states that a pension plan may not own more than 30% of the voting shares of a single entity. The Government has examined this rule and has concluded that it remains appropriate at this time for prudential reasons. Specifically, the Government believes that removing the 30% rule will increase the potential for pension plans to own and operate companies.

Benefits and costs

Benefits

Overall, the key benefit of the amendments is to allow sponsors to better manage their funding obligations and give them greater flexibility in terms of investment allocation in order to fulfill their funding obligation, including during times of volatility. It is also expected that the solvency margin will create a funding cushion that could absorb some fluctuation and mitigate the risk of the plan falling into an underfunded position. As a result, it is expected that the implementation of the amendments will help protect the interests of plan members and other beneficiaries.

Additionally, by encouraging more stable funding, the amendments will reduce the probability of having to adopt other temporary regulations. Ad hoc temporary regulations in order to adapt to a particular situation are inefficient, due to the substantial resources that are required to put them into effect, and because they can result in a lack of certainty over the regulatory framework.

Costs

Only modest additional costs are anticipated for OSFI to administer the amendments, as they will require additional guidance to be issued to plan administrators. Existing supervisory procedures and information systems will not require significant changes and can be accommodated in the existing OSFI budget.

Employers will incur some costs in relation to the amendments in respect of two areas: (1) additional contributions that may be required under the solvency margin; and (2) additional compliance costs arising from annual valuation report filings. In respect of the first area, there will be additional costs to the employer to the extent that it would have otherwise taken a contribution holiday, but is now required to maintain its normal cost contributions. In respect of the second area, the preparation of annual valuation reports will result in an additional compliance cost, but these would be marginal given that the majority of plans are already filing annual valuation reports due to their underfunded status.

There will be no direct or indirect cost to beneficiaries of pension plans.

Rationale

Funding rules

As demonstrated during the last few years, the ability of employers to meet the previous funding requirements was made more difficult, in light of the year-over-year volatility in required payments, which resulted from a number of factors, including volatility in the equity market and changes in interest rate levels. This volatility results in unstable funding requirements that could create sudden financial stress for many plan sponsors, which could affect their business operations and on-going viability. This could ultimately lead to a reduction in pension benefits.

These amendments mitigate the effects of short-term fluctuations in the value of plan assets and liabilities on solvency funding requirements. The five-year target funding period is generally seen as an appropriate timeframe to deal with solvency deficiencies, as it represents a balance between the funding of plans and the protection of pension benefits. The implementation of a restriction of employer contribution holidays in the form of a 5% solvency margin will promote the adequate funding of defined benefit pension plans.

Investment rules

The investment rules, which have not been reviewed in 15 years, were originally set under market conditions that do not reflect the present environment. The quantitative limits in respect of real estate and resource property are considered unnecessarily cumbersome. During public consultations, there was widespread support from plan sponsors and industry experts for eliminating all the quantitative investment rules to rely exclusively on the prudent person standard. Certain unions and plan members advocated retaining the quantitative limits for benefit security purposes. Repealing the limits on real estate and resource property investments is a balance between these two points of view.

Consultation

On January 9, 2009, the Government released a discussion paper entitled “Strengthening the Legislative and Regulatory Framework for Private Pension Plans Subject to the Pension Benefits Standards Act, 1985.” This was followed by a series of public meetings, led by Mr. Ted Menzies, Parliamentary Secretary to the Minister of Finance, in Ottawa, Halifax, Montreal, Toronto, Vancouver, Whitehorse, Edmonton and Winnipeg. Concerned stakeholders were afforded the opportunity to make their views known to the Government by speaking at one of the public meetings or by making a written submission. Although the deadline for written submissions was initially March 16, 2009, this was extended to May 31, 2009, based on the level of interest and stakeholder engagement.

The Government received a wide range of views during the consultation. Over 200 unique submissions were made on behalf of a range of stakeholders, including plan sponsors, industry associations, pension actuaries, members of the legal profession, labour unions, pensioner organisations and plan members. In addition, dozens of individuals made their views known at the various public meetings. The views expressed through the public meetings and consultation paper responses regarding defined benefit plans were diverse in areas such as solvency measurement and funding, benefit security and investment strategies.

The amendments to the Regulations were pre-published for a 21-day comment period in the Canada Gazette, Part I, on May 8, 2010. The Department of Finance received 12 written submissions regarding the Regulations during the consultation period. The submissions were from plan sponsors, industry associations, pensioner organisations, pension actuaries, a board of trustees, and an individual.

A number of comments concerned the implementation date of the transition rules for the December 2009 actuarial reports, which are generally filed by June 30, 2010. Since plans did not receive advance notice of when the Regulations would come into force, and they are currently preparing their actuarial reports, there may have been some uncertainty regarding which rules apply upon filing. In order to address this concern, a coming into force date of July 1, 2010, has been set. This will be coupled with an extension period that OSFI has provided to plans to allow them to consider the transition options available to prepare their December 2009 reports under the new Regulations. In addition, a change was also made in how the average funding ratio could be calculated for the second valuation report under the transition rules. This change will have limited impact with some plans transitioning to the new rules one year earlier. In response to other technical comments on the Regulations, clarifications have been made. In particular, some submissions sought clarification that a solvency funding prepayment would be reflected in adjustments for periods in which the prepayment is applied. This was the objective of the Regulations and a change to clarify the intent has been made. Also, some clarifications of the interaction between solvency funding relief rules and the new funding rules have been made.

Implementation, enforcement and service standards

It is the intent of the Government that the amendments apply to valuations of 2009. Actuarial reports, which outline the payments the sponsoring employer must make to the pension plan, must generally be filed with the Superintendent within six months after the valuation date. For most plans, the reports have an effective date of December 31, 2009. As the Regulations have a coming into force date of July 1, 2010, OSFI has provided an extension period under which plans can file their December 2009 report under the new Regulations. More details can be found at www.osfi.gc.ca.

OSFI’s current supervisory process, which includes examining regular reporting and analyzing plans’ risk profiles, will enable OSFI to monitor compliance with the amendments. The Superintendent has the authority to issue a direction of compliance to the administrator of a pension plan, an employer, or any person to ensure that the funding requirements are being met.

The amendments do not require any significant change in OSFI procedures or significant additional personnel resources.

Contact

Leah Anderson
Director
Financial Sector Division
Department of Finance
L’Esplanade Laurier, 20th Floor, East Tower
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-6516
Fax: 613-943-8436
Email: leah.anderson@fin.gc.ca

Footnote a
S.C. 1998, c. 12, s. 10

Footnote b
S.C. 2007, c. 35, s. 142

Footnote c
R.S., c. 32 (2nd Supp.)

Footnote 1
SOR/87-19

Footnote 2
SOR/2006-275

Footnote 3
SOR/2009-182

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