Solvency Special Payments Relief Regulations, 2020: SOR/2020-113

Canada Gazette, Part II, Volume 154, Number 12

Registration

SOR/2020-113 May 27, 2020

PENSION BENEFITS STANDARDS ACT, 1985

P.C. 2020-393 May 27, 2020

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to paragraphs 39(1)(e) and (e.1) footnote a, subparagraph 39(1)(e.2)(v)footnote a and paragraphs 39(1)(h.2) footnote b and (o) of the Pension Benefits Standards Act, 1985 footnote c, makes the annexed Solvency Special Payments Relief Regulations, 2020.

Solvency Special Payments Relief Regulations, 2020

Definitions

Definitions

1 The following definitions apply in these Regulations.

Payment Relief

Reduction of annual payments

2 The solvency special payments that are required for a plan year are to be reduced by the total amount of all instalments of those payments in respect of that plan year that, under paragraph 9(14)(b) of the Pension Benefits Standards Regulations, 1985,

Instalments not required

3 (1) Despite paragraph 9(14)(b) of the Pension Benefits Standards Regulations, 1985, no solvency special payment instalments are required to be paid during the period beginning on the day on which these Regulations come into force and ending on December 30, 2020.

Deduction from other payments

(2) The amount of any solvency special payment instalment that becomes due after March 31, 2020 and is paid no later than the day on which these Regulations come into force may be deducted from the total amount of all instalments that become due to the same plan under paragraphs 9(14)(a) and (b) of the Pension Benefits Standards Regulations, 1985 during the period beginning on the day on which these Regulations come into force and ending on December 30, 2020, and the corresponding contributions and going concern special payments required under paragraphs 9(4)(a) and (b) of the Pension Benefits Standards Regulations, 1985 are to be reduced accordingly.

No interest

(3) Despite paragraph 10(2)(b) of the Pension Benefits Standards Regulations, 1985, no interest is payable in respect of a special solvency payment instalment that became due after March 31, 2020 but before the day on which these Regulations come into force.

No reduction for subsequent plan year

4 Subsection 9(6) of the Pension Benefits Standards Regulations, 1985 does not apply in respect of any portion of an additional payment that, but for these Regulations, would have been payable as a solvency special payment.

Letter of credit — reduction of face value

5 (1) The face value of a letter of credit that was provided or transferred before the day on which these Regulations come into force may, in addition to any reduction permitted under subsections 9.1(2) to (4) of the Pension Benefits Standards Regulations, 1985, be reduced by an amount not exceeding the total amount of all instalments referred to in paragraphs 2(a) and (b) of these Regulations that were to be replaced by the letter of credit.

Deeming

(2) If the face value of a letter of credit is reduced in accordance with subsection (1), it is deemed to have been reduced in accordance with the Pension Benefits Standards Regulations, 1985 and the non-renewal of that letter of credit for its full face value does not constitute a default for the purpose of section 9.1 of those Regulations.

Void amendment — solvency ratio

6 For the period beginning on the day on which these Regulations come into force and ending on November 30, 2020, the prescribed solvency ratio level for the purposes of paragraphs 10.1(2)(c) and (d) of the Act is 1.05.

Provision of information

7 The following information is prescribed, in addition to the information referred to in subsections 23(1) and (1.1) of the Pension Benefits Standards Regulations, 1985, for the purposes of subparagraphs 28(1)(b)(iv) and (b.1)(ii) of the Act in respect of any plan year for which a solvency special payment is reduced under section 2 of these Regulations:

Coming into Force

Registration

8 These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

Due to the economic impacts of the global COVID-19 pandemic, some federally regulated defined benefit pension plan sponsors may be facing significant financial constraints that are creating short-term liquidity issues and, in some cases, threaten the long-term viability of their businesses and pension plans.

Some of the mandatory analytical requirements related to this proposal may have been adjusted as it is related to the Government of Canada’s response to COVID-19.

Objective

The Solvency Special Payments Relief Regulations, 2020 (the Regulations) will provide temporary, short-term solvency funding relief for federally regulated defined benefit pension plan sponsors. This will help ensure that these pension plan sponsors have the financial resources needed to maintain their operations and their pension plans, which will support the retirement security of their workers and retirees.

Description and rationale

The federal Pension Benefits Standards Act, 1985 (PBSA) and Pension Benefits Standards Regulations, 1985 (PBSR) apply to the approximately 7% of Canadian private pension plans linked to employment in federally regulated industries, such as telecommunications, banking and inter-provincial transportation, all private sector employment in the Territories, and certain Crown corporations. The Office of the Superintendent of Financial Institutions is responsible for the administration of federally regulated private pension plans under the PBSA. The Office of the Superintendent of Financial Institutions supervises 400 plans with defined benefit provisions, including 278 defined benefit plans and 122 combination plans that contain both defined benefit and defined contribution provisions.

The PBSA and PBSR set out funding requirements for defined benefit pension plans to ensure that defined benefit pension plan assets are sufficient to meet pension plan obligations, both on a solvency basis and a going concern basis. Solvency funding requirements assume that a plan will be terminated and wound up and all benefits must be immediately paid, while going concern funding requirements assume that the plan remains in operation indefinitely.

Under the PBSR, defined benefit pension plan sponsors must make special payments to pay any solvency and going concern deficits over a 5- and a 15-year period, respectively. The special payments must be made at least monthly based on the pension plan’s most recent actuarial valuation report filed with the Superintendent of Financial Institutions, and are due no later than 30 days after the end of the month for which they are required. For example, February special payments are due no later than March 30th.

The impacts of the global COVID-19 pandemic are placing significant stress on many pension plan sponsors, which could affect the sustainability of defined benefit pension plans and benefit security for those plans’ members and retirees. The federal pension framework’s solvency funding requirements balance the benefit security of plan beneficiaries and ongoing pension plan sustainability. As a result, federally regulated defined benefit pension plans have been generally well funded in recent years.

The Office of the Superintendent of Financial Institutions regularly estimates the average solvency ratio for federally regulated pension plans with defined benefit provisions. The estimated solvency ratio represents the average solvency ratio for all plans at a certain point in time, and helps identify broad funding trends for these plans. According to the most recently published data, as at December 31, 2018, the average estimated solvency ratio for federally regulated plans was 98%.

In light of the COVID-19 pandemic, some federally regulated businesses are facing significant financial constraints that are creating short-term liquidity challenges, and could threaten business sustainability. In this environment, sponsors of defined benefit pension plans may struggle to make their required solvency special payments. Plan sponsor financial weakness could lead to a reduction in pension benefits in instances where a plan sponsor enters into bankruptcy or insolvency proceedings and terminates the defined benefit pension plan while the plan is underfunded on a solvency basis.

The Regulations implement a temporary moratorium on solvency funding payments that would otherwise be required under the PBSR. The Regulations reduce solvency special payment requirements for any plan year between coming into force and the end of 2020 by the total amount of all instalments of those payments due from April 1, 2020, until December 30, 2020 (i.e. in respect of the months of March 2020 to November 2020). Under the Regulations, no solvency special payment instalments are required to be paid from the day the Regulations come into force until December 30, 2020. The Regulations provide that the amount of any solvency special payments made from April 1, 2020, until the day the Regulations come into force may be deducted from future normal cost contributions and going concern special payment requirements until December 30, 2020. The Regulations also provide that, commencing on the date on which these Regulations come into force, no interest is payable in respect of solvency special payments that became due after March 31, 2020, and before the day on which the Regulations come into force.

Regarding plan sponsors who choose to meet their solvency funding requirements through letters of credit, under the Regulations the face value of letters of credit that have been obtained to cover solvency special payments in respect of the moratorium period may be reduced by the amount of payments that would have been due in the absence of the Regulations.

All normal cost contributions and going concern special payments will continue to be required in accordance with the PBSR. While the Regulations provide a temporary moratorium on monthly solvency special payments, plan sponsors may continue making contributions in respect of their plans’ solvency deficiencies should they so choose. Under the Regulations, these contributions may only be considered additional payments and applied to subsequent plan years to the extent that the payments exceed the solvency special payments that would have been required in the absence of the Regulations. From the day the Regulations come into force until November 30, 2020, any plan amendment (e.g. increasing member benefits) that would reduce the solvency ratio of the plan below 1.05 would require authorization of the Superintendent of Financial Institutions. Similarly, any plan with a solvency ratio below 1.05 would require authorization of the Superintendent of Financial Institutions for any plan amendment that would increase pension benefits or pension benefit credits.

Lastly, the Regulations include disclosure requirements to ensure all plan beneficiaries are aware of the impact of the solvency special payment moratorium on their respective plans. Plan administrators must disclose to members and former members through the annual statement in respect of any plan year for which solvency special payments have been reduced under the Regulations: (1) the amount of reduced solvency special payments for the plan year; and (2) what payments would have normally been required for the plan year.

The solvency relief provided by the Regulations will allow pension plan sponsors to focus on their short-term corporate financial sustainability by freeing up money that would otherwise be going into the pension plan. This will help plan sponsors remain viable through the ongoing global COVID-19 pandemic, thereby maintaining the long-term sustainability of the defined benefit pension plan for members and retirees.

Following the moratorium period, defined benefit pension plan sponsors will be required to renew making monthly solvency special payments, beginning with the December 2020 payment (due by January 30, 2021). The required monthly solvency special payment will be based on the most recent actuarial report filed with the Superintendent of Financial Institutions, which for most pension plans will reflect financial positions as at December 31, 2019. Plan sponsors are not required to repay the 2020 solvency special payments under a separate amortization schedule; the normal solvency funding requirements under the PBSR will apply.

The Regulations come into force upon registration.

Consultation

Throughout March 2020, the Government held consultations with a targeted group of stakeholders, including plan sponsors, labour and retiree groups and industry experts, such as actuaries and law firms. Federally regulated defined benefit plan sponsors and industry experts expressed concerns regarding the ability of many plan sponsors to maintain business operations while continuing required payments to their pension plans. Labour and retiree groups recognized the challenges faced by plan sponsors while emphasizing the importance of benefit security.

There was broad support among industry experts for immediate temporary relief from solvency funding as a way to free up resources that businesses need to maintain their operations during the global COVID-19 pandemic. There was also general support amongst industry experts for maintaining existing requirements related to going concern funding and normal cost contributions in order to achieve an appropriate balance between relief for plan sponsors and benefit security for plan members and retirees.

Cost and benefit analysis

The analytical requirements for cost-benefit analysis have been adjusted as it relates to the response to COVID-19.

The short-term relief provided to plan sponsors will help ensure that these employers have the financial resources they need to maintain their operations and their pension plans. This will support the retirement security of workers and retirees, recognizing that the level of pension benefits is best secured through solid funding practices and a financially viable plan sponsor.

The Regulations may impose minimal costs on pension plan sponsors in order to comply with the additional disclosure requirements. There will not be any costs imposed on the government, plan members or retirees. The PBSR sets out minimum funding standards. While the Regulations will allow for a temporary moratorium on solvency funding requirements, they will not prevent plan sponsors from making the solvency special payments that would have been required in the absence of the Regulations.

Small business lens

Analysis under the small business lens determined that the proposal will not impact small businesses in Canada.

One-for-one rule

The one-for-one rule does not apply to this proposal because the regulatory amendments do not impose any administrative costs to businesses.

Regulatory cooperation and alignment

This proposal is not part of a formal regulatory cooperation initiative. The Government held informal discussions with provinces in March 2020 to discuss options under consideration to provide federally and provincially regulated defined benefit pension plans with short-term solvency relief.

In recent years, all Canadian jurisdictions except for the federal government, Alberta, Saskatchewan, New Brunswick and Newfoundland and Labrador have implemented or announced permanent changes to solvency funding requirements. This includes either the elimination of solvency funding requirements or requiring funding at 85 per cent of solvency liabilities. The federal government has taken a different approach by maintaining full solvency funding requirements for single-employer defined benefit pension plans.

Implementation

The Office of the Superintendent of Financial Institutions supervises federally regulated private pension plans and ensures they are in compliance with the PBSA and PBSR, including these Regulations. Under the PBSA, the Superintendent is required to report annually to Parliament on the operations of the Act during the year.

Contact

Lynn Hemmings
Director General
Financial Crimes and Security Division
Department of Finance Canada
90 Elgin Street, 13th Floor
Ottawa, Ontario
K1A 0G5
Email: Lynn.Hemmings@canada.ca