Vol. 145, No. 8 — April 13, 2011

Registration

SOR/2011-85 March 25, 2011

PENSION BENEFITS STANDARDS ACT, 1985

ARCHIVED — Regulations Amending Certain Regulations Made Under the Pension Benefits Standards Act, 1985

P.C. 2011-448 March 25, 2011

His Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 39 (see footnote a) of the Pension Benefits Standards Act, 1985 (see footnote b), 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(1) The definition “actuary” in subsection 2(1) of the Pension Benefits Standards Regulations, 1985 (see footnote 1) is repealed.

(2) The definition “plan year” in subsection 2(1) of the English version of the Regulations is repealed.

(3) The definition “solvency assets” in subsection 2(1) of the Regulations is replaced by the following:

“solvency assets” means the amount determined by the formula

A + B - C

where

A is the market value of the assets that relate to the defined benefit provisions of a plan as determined at the valuation date,

B is the face value of all letters of credit in effect on the valuation date, other than those being used to fund a plan under Part 3 of the Solvency Funding Relief Regulations or Part 3 of the Solvency Funding Relief Regulations, 2009, up to a maximum of 15% of the amount referred to in the description of A, and

C is the estimated expense of the winding-up of the plan as certified by an actuary; (actif de solvabilité)

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

« exercice » S’entend au sens de « exercice du régime » au paragraphe 2(1) de la Loi. (French version only)

(5) Paragraph (b) of the definition “financial institution” in subsection 2(1) of the Regulations is replaced by the following:

1. (b) for the purposes of section 11.1, those entities referred to in subparagraphs (a)(i) to (vi) or a foreign institution for which an order of the Superintendent has been made under section 574 of the Insurance Companies Act; (institution financière)

(6) Paragraph (b) of the definition “solvency ratio” in subsection 2(1) of the Regulations is replaced by the following:

1. (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 on the most recent actuarial report; (ratio de solvabilité)

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

“actuarial report” means an actuarial report filed with the Superintendent under subsection 9.01(5) or 12(2) of the Act or a copy of the report that is provided under subsection 9.01(6) of the Act. (rapport actuariel)

“letter of credit” means a letter of credit that meets the requirements of subsection 9.1(5). (lettre de crédit)

2. (1) Subparagraphs 6(1)(b)(ii) and (iii) of the Regulations is replaced by the following:

1. (ii) in the name of a financial institution, or a nominee of it, in accordance with a custodial agreement or trust agreement, entered into on behalf of the plan with the financial institution, that clearly indicates that the investment is held for the plan, or
   
2. (iii) in the name of CDS Clearing and Depository Services Inc., or a nominee of it, in accordance with a custodial agreement or trust agreement, entered into on behalf of the plan with a financial institution, that clearly indicates that the investment is held for the plan.

(2) Subparagraph 6(2)(a)(ii) of the French version of the Regulations is replaced by the following:

1. (ii) ne doit jamais constituer un actif du fiduciaire ou de son repr(ii) ne doit jamais constituer un actif du fiduciaire ou de son repréésentant;

3. (1) Subsection 9(8) of the Regulations is amended by adding the following after paragraph (d):

1. (d.1) the solvency ratios at the prior valuation date and the prior second valuation date shall be adjusted to increase the solvency assets by the face value of all letters of credit included in the solvency assets on the valuation date and to reduce the solvency assets by the face value of all letters of credit included in the solvency assets on the prior valuation date or prior second valuation date, as the case may be;

(2) Subsection 9(11) of the Regulations is replaced by the following:

(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 or provided to the Superintendent.

(3) Subsection 9(13) of the Regulations is replaced by the following:

(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 for the most recently completed plan year before the effective date of the amendment.

(13.1) Subject to subsection (13.2), an employer, other than a participating employer under a multi-employer pension plan, may reduce the amount of any solvency special payment by the face value of a letter of credit that has been provided to a trustee or transferred to a trust under section 9.11 of the Act.

(13.2) An employer may not act under section 9.11 of the Act if the face value of all letters of credit provided to a trustee or transferred to a trust under that section exceeds, or would exceed, 15% of the market value of the assets that relate to the defined benefit provisions of the plan, as determined at the end of the most recent plan year.

(13.3) For the purposes of section 9.16 of the Act, a payment that is required to be made under subsection 9(1.1) of the Act may be reduced if

1. (a) the payment is a solvency special payment;
   
2. (b) the Crown corporation meets the requirements of section 9.2;
   
3. (c) the aggregate amount of all reductions does not exceed or would not exceed 15% of the market value of the assets that relate to the defined benefit provisions of the plan, as determined at the end of the most recent plan year.

(13.4) The aggregate amount of all reductions made under section 9.16 of the Act may be adjusted in a plan year by subtracting the difference between

1. (a) the amount of the solvency special payment that would be payable for the plan year following the valuation date if no reductions were made under section 9.16 of the Act; and
   
2. (b) the amount of the solvency special payment that would have been required for the plan year following the valuation date if the solvency assets at the valuation date were increased by the aggregate amount of all reductions made under section 9.16 of the Act at the valuation date.

(13.5) The aggregate amount of all reductions made under section 9.16 of the Act may be adjusted to zero if, based on the most recent actuarial report,

1. (a) the solvency ratio of the plan is no less than 1.05; and
   
2. (b) the average solvency ratio of the plan is no less than 1.0.

(4) Subsection 9(14) of the Regulations is amended by striking out “and” at the end of paragraph (c), by adding “and” at the end of paragraph (d) and by adding the following after paragraph (d):

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

4. The Regulations are amended by adding the following after section 9:

LETTERS OF CREDIT

9.1 (1) The following definitions apply in this section.

“acceptable rating” means the rating, given by a credit rating agency to an issuer at the time of the issuance or renewal of a letter of credit, that is at least equal to one of the following ratings:

1. (a) A, from Dominion Bond Rating Service Limited;
   
2. (b) A, from Fitch Ratings;
   
3. (c) A2, from Moody’s Investors Service; and
   
4. (d) A, from Standard & Poor’s Ratings Services. (note acceptable)

“ATB” means Alberta Treasury Branches established under the Alberta Treasury Branches Act of the Province of Alberta. (ATB)

“bank” means a bank or authorized foreign bank, as defined in section 2 of the Bank Act. (banque)

“cooperative credit society” means a cooperative credit society to which the Cooperative Credit Associations Act applies or a cooperative credit society that is incorporated and regulated by or under an Act of the legislature of a province. (coopérative de crédit)

“default” means the occurrence of one of the following:

1. (a) the written notification to the Superintendent that the administrator intends to terminate or wind up the whole of the pension plan under subsection 29(5) of the Act;
   
2. (b) the amendment of the plan, resolution by the employer or coming into force of any other measure that effects the termination of the whole of the plan;
   
3. (c) the Superintendent’s declaration under subsection 29(2) or (2.1) of the Act that terminates the whole of the plan;
   
4. (d) the bankruptcy of the employer or the filing of an application or petition by or against the employer under the Winding-up and Restructuring Act;
   
5. (e) the non-renewal of a letter of credit for its full face value unless
   
   1. (i) it has been replaced by another letter of credit for the same face value on or before the expiry of the letter of credit,
      
   2. (ii) an amount equal to the face value of the letter of credit has been remitted to the pension fund on or before the expiry of the letter of credit, or
      
   3. (iii) the face value of the letter of credit has been reduced in accordance with subsection (2), (3) or (4); and

1. (f) the failure by an employer to comply with a direction issued by the Superintendent under section 11 of the Act with respect to the face value a letter of credit referred to in subsection 9(13.1). (défaut)

“issuer” means a bank, a cooperative credit society or an ATB, that has an acceptable rating by two credit rating agencies, is not an employer or affiliated with an employer within the meaning of subsection 2(2) of the Canada Business Corporations Act and is a member of the Canadian Payment Association. (émetteur)

(2) If the aggregate face value of the letters of credit held for the benefit of the plan exceeds 15% of the market value of the assets that relate to the defined benefit provisions of the plan as determined at the valuation date and if, based on the most recent actuarial report,

1. (a) the average solvency ratio and the solvency ratio of the plan are 1.0 or more, the aggregate face value of the letters of credit may be reduced by the lesser of
   
   1. (i) the amount by which the aggregate face value of the letters of credit exceeds 15% of the market value of the assets that relate to the defined benefit provisions of the plan as determined at the valuation date, and
      
   2. (ii) the lesser of the solvency excess and the excess of the solvency assets over the solvency liabilities; and
      
   (b) either the average solvency ratio or the solvency ratio of the plan is less than 1.0, the aggregate face value of the letters of credit may be reduced by the amount of the excess referred to in subparagraph (a)(i) to the extent of the difference between
   
   1. (i) the amount of the solvency special payment for the plan year following the valuation date, and
      
   2. (ii) the amount of the solvency special payment that does not take into consideration the maximum referred to in the description of B of the definition “solvency assets” in subsection 2(1) for the plan year following the valuation date.

(3) An employer may reduce the face value of a letter of credit after making a payment to the pension fund of the amount of the reduction.

(4) The face value of a letter of credit may be reduced if, based on the most recent actuarial report,

1. (a) the solvency ratio of the plan would have been no less than 1.05 had the reduced face value been in effect at the valuation date; and
   
2. (b) the average solvency ratio of the plan would have been no less than 1.0 had the reduced face value been in effect at the valuation date.

(5) A letter of credit shall be an irrevocable and unconditional standby letter of credit that

1. (a) is in accordance with the rules of the International Standby Practices ISP98, International Chamber of Commerce Publication No. 590, as amended from time to time;
   
2. (b) specifies the date that it becomes effective, which can be no later than the date on which the instalment of the special payment that is being replaced is due, and the date that it expires, which shall be the day on which the plan year ends;
   
3. (c) provides that the issuer will pay the face value of the letter of credit on demand from the trustee without inquiring whether the trustee has a right to make the demand;
   
4. (d) is payable in Canadian currency;
   
5. (e) provides that
   
   1. (i) the insolvency, liquidation or bankruptcy of the employer is to have no effect on the rights or the obligations of the issuer of the letter of credit or the trustee,
      
   2. (ii) it will, in accordance with these Regulations, be renewed, replaced or allowed to expire without renewal or replacement, and
      
   3. (iii) it may not be
      
      1. (A) assigned except by the issuer to another issuer, or
         
      2. (B) amended except
         
         1. (I) on a renewal, to increase the face value or to decrease the face value,
            
         2. (II) if a successor issuer has taken over the rights and obligations under it from a predecessor issuer, to change the name of that predecessor to the name of that successor,
            
         3. (III) following an assignment, to reflect the change in issuer, and
            
         4. (IV) to decrease the face value in accordance with these Regulations;
            
   (f) provides that if the issuer assigns the letter of credit without the agreement of the employer or, after the issuance of the letter of credit, fails to meet the definition of an issuer, the issuer is still required to pay the face value of the letter of credit on demand from the trustee; and
   
6. (g) provides that any amendments to the letter of credit be provided to the employer within five days after the amendment is made.

(6) The employer or, if the employer is not the administrator of the plan, the administrator shall enter into a trust agreement or may amend any existing trust agreement that they may have with the trustee regarding the letters of credit.

(7) If the employer is not the administrator, the administrator shall give a copy of the trust agreement to the employer within 10 business days after entering into or amending a trust agreement.

(8) The trust agreement shall provide that

1. (a) the trustee shall hold letters of credit in Canada in trust for the plan;
   
2. (b) the definition “default” in subsection (1) applies to the agreement;
   
3. (c) the employer shall immediately notify, in writing, the trustee and the Superintendent and, if the employer is not the administrator of the plan, the administrator of a default;
   
4. (d) if not otherwise notified under paragraph (c), the administrator shall notify, in writing, the trustee and the Superintendent of a default immediately after becoming aware of it;
   
5. (e) on receipt of the notice referred to in paragraph (c) or (d), the trustee shall immediately make a demand for payment of the face value of
   
   1. (i) all of the letters of credit held for the benefit of the plan, if the default is one that is described in any of paragraphs (a) to (d) and (f) of the definition “default” in subsection (1), and
      
   2. (ii) the letter of credit that has not been renewed, if the default is one that is described in paragraph (e) of that definition;

1. (f) on receipt of a written notice of default from any person other than the employer or the administrator, the trustee shall
   
   1. (i) immediately notify, in writing, the employer, the administrator and the Superintendent of the notice, and
      
   2. (ii) make a demand for payment of the face value of all of the letters of credit held for the benefit of the plan unless the administrator provides a written notice to the trustee within 30 days after receipt of the notice that the default has not occurred;
      
   (g) when a trustee makes a demand for payment of the face value of a letter of credit held for the benefit of the plan, it shall notify, in writing, the employer, the administrator and the Superintendent that it has made the demand;
   
2. (h) the trustee shall immediately notify, in writing, the employer, the administrator and the Superintendent if the issuer does not pay the face value of a letter of credit after a demand for payment has been made;
   
3. (i) the trustee shall not make a demand for payment if a letter of credit expires without being renewed or if the face value is being reduced, in accordance with these Regulations; and
   
4. (j) the administrator shall notify the trustee of any circumstance in which a letter of credit may expire or when the face value of a letter of credit may be reduced, under these Regulations.

(9) The employer shall provide to the trustee

1. (a) the letter of credit, on its initial issuance, at least 15 days before the day on which the first instalment of a solvency deficiency payment to which the letter of credit relates is due;
   
2. (b) if a letter of credit is replacing another, the replacement letter of credit at least 15 days before the expiry of the letter of credit that is being replaced;
   
3. (c) if an expiring letter of credit is to be renewed, the renewed letter of credit at least 15 days before the day on which it would otherwise have expired; and
   
4. (d) if the letter of credit is being amended, the amended letter of credit within 15 days after the day on which the letter of credit was amended.

(10) Any demand made by the trustee in respect of a letter of credit shall be in writing or in any other form that the letter of credit provides.

(11) An issuer who assigns a letter of credit to another issuer shall inform the Superintendent, the employer, the administrator and the trustee of the transaction within 15 days after the assignment.

CROWN CORPORATIONS

9.2 A Crown corporation may reduce solvency special payments for a plan year under section 9.16 of the Act if

1. (a) it is an agent of Her Majesty in right of Canada;
   
2. (b) it has notified the Minister and the appropriate Minister, as defined in subsection 83(1) of the Financial Administration Act, of the decision to reduce its solvency special payments;
   
3. (c) it obtains from the Minister and the appropriate Minister, as defined in subsection 83(1) of the Financial Administration Act, letters acknowledging that they have been informed that it intends to reduce its solvency special payments and that they do not object to the reduction; and
   
4. (d) it files the information and documentation described in paragraphs (b) and (c) with the Superintendent within 60 days after the reduction is made.

VOID AMENDMENT — SOLVENCY RATIO

9.3 (1) For the purposes of paragraph 10.1(2)(c) of the Act, the prescribed solvency ratio level is 0.85.

(2) For the purposes of paragraph 10.1(2)(c) of the Act, the solvency ratio following the amendment is the solvency ratio set out in the most recent actuarial report adjusted to reflect

1. (a) the effect on the solvency ratio of the increase in solvency liabilities as a result of the amendment, determined in accordance with subsection 9(13); and
   
2. (b) the effect of any lump sum payment to the pension fund made before the later of
   
   1. (i) the effective date of the amendment; and
      
   2. (ii) the date when the actuarial report prepared in respect of the amendment was filed with the Superintendent.

(3) For the purposes of paragraph 10.1(2)(d) of the Act, the prescribed solvency ratio level is 1.0

1. (a) during a negotiation period referred to in subsection 29.04(1) of the Act; and
   
2. (b) while a funding schedule approved by the Minister under section 29.3 of the Act is in effect.

5. Subsection 10(2) of the Regulations is amended by striking out “and” at the end of paragraph (c), by adding “and” at the end of paragraph (d) and by adding the following after paragraph (d):

1. (e) in respect of an amount required to be paid under a defined contribution provision, the greater of the rate of return of the fund as at the date that the amount was required to be paid and 0%.

6. The Regulations are amended by adding the following after section 10:

DISTRESSED PENSION PLAN WORKOUT SCHEME

ELECTION

10.1 An election under subsection 29.03(1) of the Act may only be made once every 48 months.

10.2 For the purposes of subsection 29.03(3) of the Act,

1. (a) an employer that is not subject to proceedings under the Companies’ Creditors Arrangement Act or Part III of the Bankruptcy and Insolvency Act shall make the declaration in Form 1 of Schedule VI if it is governed by a Board of Directors or in Form 2 of Schedule VI if it is not governed by a Board of Directors; or
   
2. (b) an employer that is subject to proceedings under the Companies’ Creditors Arrangement Act or Part III of the Bankruptcy and Insolvency Act shall make the declaration in Form 3 of Schedule VI if it is governed by Board of Directors and in Form 4 of Schedule VI if it is not governed by a Board of Directors.

10.3 An election under section 29.03 of the Act shall not be made in respect of a plan that is subject to the Air Canada Pension Plan Funding Regulations, 2009 or the Canadian Press Pension Plan Solvency Deficiency Funding Regulations, 2010.

INFORMATION TO BE PROVIDED TO MEMBERS AND BENEFICIARIES

10.4 The employer shall provide the following information to the members and beneficiaries within 10 days after the beginning of the negotiation period:

1. (a) notice that the employer has entered into a distressed pension plan workout scheme;
   
2. (b) a statement indicating that a request for approval by the Minister of a funding schedule may only be made if less than one third of the members and less than one third of the beneficiaries object;
   
3. (c) a statement indicating that a collective bargaining agent may object or consent to a proposed workout agreement on behalf of the members that it represents;
   
4. (d) a statement indicating that a court-appointed representative may consent to a proposed workout agreement if less than one third of the members or one third of the beneficiaries that they represent object to the agreement;
   
5. (e) a statement indicating that the Minister’s approval is required to give effect to the funding schedule; and
   
6. (f) written notice of their right to examine the copies of the documents and information referred to in paragraph 28(1)(c) of the Act.

10.5 The representative, or the employer if the representative consents, shall, in writing, inform the members or beneficiaries that they represent of their representation within 10 business days after their appointment by the Federal Court or the court referred to in section 10.8.

END OF NEGOTIATION PERIOD

10.6 (1) For the purposes of subsection 29.04(1) of the Act, the negotiation period ends on the earlier of

1. (a) the day on which the funding schedule is approved by the Minister, and
   
2. (b) the date determined under subsection (2).

(2) The negotiation period ends

1. (a) if the declaration referred to in subsection 29.03(4) of the Act is filed in the six month period following the end of the plan year, on the last day of the ninth month following the end of the plan year; and
   
2. (b) in any other case, on the last day of the ninth month following the date on which the declaration referred to in subsection 29.03(4) is filed.

APPOINTMENT OF REPRESENTATIVES

10.7 For the purposes of subsection 29.08(3) of the Act, the representatives shall

1. (a) be capable of fairly and adequately representing the interests of the persons that they represent; and
   
2. (b) not have an interest that is in conflict with the interests of the persons represented.

10.8 For the purposes of subsection 29.08(2) of the Act, the appropriate court is the court in which a notice of intention or a proposal is filed under Part III of the Bankruptcy and Insolvency Act or the court that issued the initial order under the Companies’ Creditors Arrangement Act.

INFORMATION TO BE PROVIDED TO REPRESENTATIVES

10.9 (1) The administrator, or the employer if the administrator is not the employer, shall provide to a representative

1. (a) within 10 days after the representative’s appointment under subsection 29.08(3) of the Act
   
   1. (i) copies of the information return, the actuarial reports and the financial statements that have been filed with the Superintendent within the past three plan years under subsections 12(1) and (2) of the Act,
      
   2. (ii) a copy of the plan,
      
   3. (iii) a copy of the statement of investment policies and procedures of the plan established under section 7.1,
      
   4. (iv) a list of the 10 largest asset holdings of the pension fund in descending order of asset value, along with the corresponding asset value, and
      
   5. (v) the total face value of the letters of credit held in trust for the plan; and
      
   (b) within 10 business days after a request of the representative, a copy of any document or information that members may examine under paragraph 28(1)(c) of the Act.

(2) If the representative is a bargaining agent, the administrator, or the employer if the administrator is not the employer, shall provide the documents and information required under paragraph (1)(a) to the representative within 30 days after the day on which the declaration is filed under subsection 29.03(4) of the Act.

DISCLOSURE REQUIREMENTS — PROPOSED WORKOUT AGREEMENT

10.91 (1) For the purposes of subsection 29.2(1) of the Act, the members and beneficiaries shall be provided with the following information within 10 days after the day on which the employer and the representatives enter into the proposed workout agreement:

1. (a) written notice that the representatives and the employer have negotiated a proposed workout agreement respecting the funding schedule;
   
2. (b) the amount of the going concern deficit and of the solvency deficiency subject to the proposed workout agreement and the proposed funding schedule for those amounts;
   
3. (c) the special payments that would have been payable in the current plan year if the going concern deficit and the solvency deficiency had been funded in accordance with section 9;
   
4. (d) a written notice indicating that the funding schedule set out in the proposed workout agreement may only be submitted to the Minister for approval if less than one third of the members and less than one third of beneficiaries of the plan object; and
   
5. (e) if members and beneficiaries are represented by a representative that is not a bargaining agent, a description of how the members or beneficiaries may object to the proposed agreement and the period during which an objection may be made.

(2) For the purposes of subsection 29.09(1) of the Act, the employer and administrator shall provide the representatives with any information required to comply with subsection (1).

CONSENT OF MEMBERS AND BENEFICIARIES

10.92 A period of 30 days beginning on the day on which the information is provided under section 10.91 is prescribed for the purposes of subsection 29.2(2) of the Act.

10.93 A period of 40 days beginning on the day on which the information is provided under section 10.91 is prescribed for the purposes of subsection 29.3(2) of the Act.

REQUEST FOR APPROVAL

10.94 For the purposes of subsection 29.3(3) of the Act, the request for approval of the funding schedule shall be submitted to the Minister within 15 days after the end of the period referred to in section 10.93 and shall be accompanied by a description of how the funding schedule addresses the criteria referred to in section 10.95.

MINISTERIAL CONSIDERATIONS

10.95 For the purposes of subsection 29.3(4) of the Act, the Minister shall consider

1. (a) the extent to which the defined benefit provisions of the plan have been amended and the extent to which those amendments have changed the cost structure of the plan; and
   
2. (b) the manner in which the proposed workout agreement addresses the sustainability of the plan with reference to such factors as the investment policies of the plan, the demographic profile of the plan’s membership and the nature of the plan’s benefits.

NOTIFICATION OF MINISTER’S DECISION

10.96 The administrator, or the representative if the representative consents, shall notify all members and beneficiaries of the Minister’s decision under subsection 29.3(4) of the Act within five business days after receiving notification from the Minister.

MINIMUM REQUIREMENTS FOR FUNDING SCHEDULE

10.97 The funding schedule shall meet the following requirements:

1. (a) the funding schedule shall only address the funding and liquidation of a solvency deficiency and an unfunded liability as determined at the latest valuation date minus special payments and other payments due to the plan before the start of the negotiation period;
   
2. (b) the funding schedule shall specify the amounts of the going concern payments and solvency payments payable in each plan year that are used to fund the solvency deficiency and unfunded liability referred to in paragraph (a);
   
3. (c) the payments shall be made to the plan in equal monthly instalments;
   
5. (d) the aggregate present value, as at the end of the most recent plan year preceding the establishment of the funding schedule, of the going concern payments included in the funding schedule and the going concern special payments due to the plan before the start of the negotiation period shall be at least equal to the going concern deficit of the plan at the end of that year;
   
6. (e) the aggregate present value, as at the end of the most recent plan year preceding the establishment of the funding schedule, of the solvency payments and the going concern payments included in the funding schedule and the special payments due to the plan before the start of the negotiation period shall be at least equal to the solvency deficiency of the plan as at the end of the plan year preceding the plan year in which the payment is to be made;
   
7. (f) any annual going concern payment included in the funding schedule shall be no less than the annual amount of interest on the outstanding balance of the going concern deficit of the plan as at the end of the plan year preceding the plan year in which the payment is to be made;
   
8. (g) any annual solvency payment included in the funding schedule shall be no less than the annual amount of interest on the outstanding balance of the solvency deficiency as at the end of the plan year preceding the plan year in which the payment is to be made;
   
9. (h) the aggregate going concern payments to be made in the first half of the funding schedule shall be no less than 40% of the aggregate going concern payments for the entire duration of the funding schedule;
   
10. (i) the aggregate solvency payments to be made in the first five plan years of the funding schedule shall be no less than 40% of the aggregate solvency payments for the entire duration of the funding schedule;
    
11. (j) the interest rate used to determine the present value of going concern payments referred to in paragraph (d) and the interest rate used to calculate the amount of interest referred to in paragraph (f) is the same as the interest rate used to determine the going concern liabilities of the plan as at the valuation date; and
    
12. (k) the interest rate used to determine the present value of solvency payments referred to in paragraph (e) and the interest rate used to calculate the interest in accordance with paragraph (g) is the same as the interest rate used to determine the solvency liabilities of the plan as at the valuation date.

OPTIONAL REQUIREMENTS FOR FUNDING SCHEDULE

10.98 A funding schedule may provide that if

1. (a) the funding schedule includes the funding of an unfunded liability or solvency deficiency and the unfunded liability or solvency deficiency is liquidated at a rate greater than the sum of payments set out in the funding schedule by the making of additional payments, the amount of a payment set out in a funding schedule for a subsequent year may be reduced if the outstanding balance of the unfunded liability that is being liquidated by the remaining payments set out in the funding schedule or the solvency deficiency that is being liquidated by those payments will at no time be greater than it would have been had the payments that were required to be made under the funding schedule in relation to the unfunded liability or solvency deficiency, whichever is applicable, been made;
   
2. (b) the funding schedule includes the funding of an unfunded liability and the aggregate of the present value of payments set out in the funding schedule and of going concern special payments, established in respect of a period after the valuation date, exceeds the going concern deficit, that excess may be applied to reduce the going concern payments that will become due at the latest dates in the approved funding schedule in such a way that the present value of those payments is reduced by the amount of reduction applied to the outstanding balance of the unfunded liability; and
   
3. (c) there is a solvency excess as described in subsection 10.991(2), the payments established to liquidate a solvency deficiency that will become due at the latest dates in the approved funding schedule may be eliminated or reduced in such a way that the present value of the remaining payments set out in the funding schedule to liquidate the solvency deficiency is reduced by the solvency excess.

OCCURRENCE OF EVENTS AFTER APPROVAL OF A FUNDING SCHEDULE

10.99 For the purposes of section 9, an unfunded liability that emerges after the day on which the funding schedule was approved by the Minister under section 29.3 of the Act shall be calculated as the amount by which the going concern deficit of a plan as determined at the valuation date exceeds the aggregate of

1. (a) the present value of going concern special payments established in respect of a period after the valuation date,
   
2. (b) the present value of the going concern payments set out in the funding schedule, established in respect of a period after the valuation date, and
   
3. (c) the present value of the solvency payments set out in the funding schedule, established in respect of a period after the valuation date.

10.991 (1) For the purposes of section 9, a solvency deficiency that emerges after the day on which a funding schedule is approved by the Minister under section 29.3 of the Act shall be calculated as the amount by which the solvency liabilities exceed the aggregate of

1. (a) the adjusted solvency asset amount,
   
2. (b) the present value of the solvency payments set out in the funding schedule, established in respect of a period after the valuation date, and
   
3. (c) the present value of the going concern payments set out in the funding schedule, established in respect of a period beginning after the valuation date and ending on the date of the last solvency payment referred to in paragraph (b).

(2) For the purposes of section 9, a solvency excess that emerges after the day on which a funding schedule is approved by the Minister under section 29.3 of the Act shall be calculated as the amount by which the aggregate of the following amounts exceeds the solvency liabilities:

1. (a) the adjusted solvency asset amount,
   
2. (b) the present value of the solvency payments set out in the funding schedule, established in respect of a period after the valuation date, and
   
3. (c) the present value of the going concern payments set out in the funding schedule, established in respect of a period beginning after the valuation date and ending on the date of the last solvency payment referred to in paragraph (b).

7. Paragraph 11(1)(a) of the Regulations is replaced by the following:

1. (a) a copy of the plan, insurance contract, trust agreement, resolution, collective agreement on pensions, by-law and any other document that creates or supports the plan, the pension fund and any amendments to them;

8. Subsection 16(1) of the Regulations is replaced by the following:

16. (1) For the purposes of the definition “surplus” in subsection 2(1) of the Act, the amount by which the assets of the plan exceeds its liabilities shall be determined by subtracting the liabilities of the plan from its assets, as those assets and liabilities are shown in an actuarial report and, in the case of a plan that has not been fully terminated, as those assets and liabilities are valued in the report according to a going concern valuation.

9. The Regulations are amended by adding the following after section 24:

24.1 (1) For the purposes of this section, “solvency deficit” means the amount by which the solvency liabilities as at the date of termination of a plan or the valuation date, as the case may be, exceeds the sum of the solvency assets at that date and the amounts required to be paid under subsection 29(6) of the Act.

(2) For the purposes of subsection 29(6.1) of the Act,

1. (a) an employer shall pay an amount equal to the solvency deficit as at the date of termination of the plan either in a lump sum or by equal annual payments sufficient to liquidate the solvency deficit over a period of five years from the date of termination;
   
2. (b) the interest rate used to determine the annual payments is the same as the interest rate used to determine the solvency liabilities of the plan at the date of termination; and
   
3. (c) the annual payments shall be paid by equal monthly instalments no later than 30 days after the end of each month.

(3) The annual payment determined under paragraph (2)(a) that is to be paid in the plan year in which the plan is terminated may be reduced by the amounts required to be paid under subsection 29(6) of the Act.

(4) An actuarial report, filed after termination of the plan but before it is wound up, shall set out the remaining solvency assets, solvency liabilities, solvency deficit and remaining payments required to liquidate the solvency deficit as at the valuation date. The solvency assets and solvency deficit shall not include the face value of any letters of credit.

(5) If the present value of remaining payments determined in accordance with paragraph (2)(a) exceeds the remaining solvency deficit established as at the valuation date in accordance with the actuarial report referred to in subsection (4), the payments remaining to be made in respect of the solvency deficit are reduced pro rata.

(6) If the remaining solvency deficit established as at the valuation date in accordance with the actuarial report referred to in subsection (4) exceeds the present value of remaining payments determined in accordance with paragraph (2)(a), the remaining payments are increased pro rata such that the remaining payments will liquidate the remaining solvency deficit over the remainder of the five-year period beginning on the date of termination.

(7) Any solvency deficit that arises five or more years after the date of termination of the plan shall be immediately paid down.

(8) For the purposes of subsection 29(6.3) of the Act, the portion of the remaining amount that is attributable to the payments made under subsection 29(6.1) of the Act is equal to the lesser of

1. (a) the amount remaining in the pension fund at the date of winding-up, and
   
2. (b) the accumulated value at the date of winding-up, with interest at the rates earned by the pension fund, of the payments made under subsection 29(6.1) of the Act.

10. (1) The definition “opération” in section 1 of Schedule III to the French version of the Regulations is repealed.

(2) Paragraph (c) of the definition “transaction” in section 1 of Schedule III to the English version of the Regulations is replaced by the following:

1. (c) the taking of a security interest in securities or a hypothec on securities, and

(3) The expression “(opération)” at the end of the definition “transaction” in section 1 of Schedule III to the English version of the Regulations is replaced by the expression “(transaction)”.

(4) Section 1 of Schedule III to the French version of the Regulations is amended by adding the following in alphabetical order:

« transaction » Vise notamment :

1. a) tout placement dans des valeurs mobilières;
   
2. b) l’acquisition, notamment par cession, d’un prêt consenti par un tiers;
   
3. c) la constitution d’une sûreté sur des titres;
   
4. d) la modification, le renouvellement ou la prolongation d’une transaction antérieure.

Ne sont pas visés par la présente définition le versement de prestations de pension ou autres, le transfert de droits à pension et le retrait de cotisations d’un régime.(transaction)

11. The portion of subsection 12(3) in Schedule III to the Regulations before paragraph (a) is replaced by the following:

(3) Any financial statement of a plan filed under subsection 12(2) of the Act shall value the common shares of the real estate corporation held by, or on behalf of, the plan at a value not greater than the amount obtained by multiplying

12. The portion of subsection 13(3) in Schedule III to the Regulations before paragraph (a) is replaced by the following:

(3) Any financial statement of the plan filed under subsection 12(2) of the Act shall value the common shares of the resource corporation held by, or on behalf of, the plan at a value not greater than the amount obtained by multiplying

13. The Regulations are amended by adding, after Schedule V, the Schedule VI set out in the schedule to these Regulations.

14. The French version of the Regulations is amended by replacing “opération” and “opérations” with “transaction” and “transactions”, respectively, with any modifications that the circumstances require, in the following provisions:

1. (a) the definition “valeur marchande” in subsection 2(1);
   
2. (b) paragraph 7.1(1)(h);
   
3. (c) paragraph 20(1)(c);
   
4. (d) paragraph 20.1(1)(j);
   
5. (e) paragraph 20.2(1)(c);
   
6. (f) paragraph 20.3(1)(j);
   
7. (g) paragraphs 21(1)(a) and (b);
   
8. (h) the definition “conditions du marché” in section 1 of Schedule III;
   
9. (i) section 15 of Schedule III;
   
10. (j) paragraphs 16(1)(b) and (2)(b) of Schedule III; and
    
11. (k) subsections 17(1), (3) and (4) of Schedule III.

15. The French version of the Regulations is amended by replacing “société coopérative de crédit” with “coopérative de crédit” in the following provisions:

1. (a) paragraph (a) of the definition “institution étrangère” in subsection 2(1); and
   
2. (b) subparagraphs (a)(iii) and (vi) of the definition “institution financière” in subsection 2(1).

AIR CANADA PENSION PLAN SOLVENCY DEFICIENCY FUNDING REGULATIONS

16. Section 14 of the Air Canada Pension Plan Solvency Deficiency Funding Regulations (see footnote 2) is replaced by the following:

14. For the purpose of paragraph 10.1(2)(b) of the Act, the prescribed solvency ratio level is the solvency ratio calculated on the basis of the most recent actuarial report.

SOLVENCY FUNDING RELIEF REGULATIONS

17. (1) The definition “société coopérative de crédit” in subsection 1(1) of the French version of the Solvency Funding Relief Regulations (see footnote 3) is repealed.

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

« émetteur » Banque ou coopérative de crédit qui détient une note acceptable et qui n’est ni l’employeur, ni un membre du même groupe — au sens du paragraphe 2(2) de la Loi canadienne sur les sociétés par actions — que l’employeur. (issuer)

(3) Paragraph (c) of the definition “default” in subsection 1(1) of the Regulations is replaced by the following:

1. (c) the Superintendent’s declaration under subsection 29(2) or (2.1) of the Act that terminates the whole plan;

(4) The expression “(société coopérative de crédit)” at the end of the definition “cooperative credit society” in subsection 1(1) of the English version of the Regulations is replaced by the expression “(coopérative de crédit)”.

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

« coopérative de crédit » Coopérative de crédit régie par la Loi sur les associations coopératives de crédit ou constituée en personne morale sous le régime d’une loi provinciale et régie par une telle loi. (cooperative credit society)

18. Section 11 of the Regulations is replaced by the following:

11. For the purposes of paragraph 10.1(2)(b) of the Act, the prescribed solvency ratio level for the first five plan years of funding in accordance with this Part is the solvency ratio calculated on the basis of the most recent actuarial report.

19. Subsection 20(2) of the Regulations is replaced by the following:

(2) A letter of credit shall be obtained not later than the day on which the actuarial report is filed with or provided to the Superintendent for the first plan year of funding, and at least 30 days before the beginning of each subsequent plan year that is covered by it.

20. Paragraph 26(1)(a) of the Regulations is replaced by the following:

1. (a) the amount by which the aggregate amount of payments that the employer has made to the pension fund in the previous plan year exceeds the total of the required special payments and the normal cost of the plan for that year as shown in an actuarial report; or

21. Subsection 29(2) of the Regulations is replaced by the following:

(2) Except if a plan is fully terminated, the administrator shall have an actuarial report prepared — in which the present value of the special payments referred to in subsection 19(1) shall be zero — valuing the plan as at the last day of the plan year in which the default occurs.

22. Section 30 of the Regulations is renumbered as subsection 30(1) and is amended by adding the following:

(2) Paragraphs (1)(b) and (c) do not apply if the face amount of the letters of credit obtained to fund the plan under this Part is included as a solvency asset as defined in subsection 2(1) of the Pension Benefit Standards Regulations, 1985.

SOLVENCY FUNDING RELIEF REGULATIONS, 2009

23. (1) The definition “société coopérative de crédit” in subsection 1(1) of the French version of the Solvency Funding Relief Regulations, 2009 (see footnote 4) is repealed.

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

« émetteur » Banque ou coopérative de crédit qui détient une note acceptable et qui n’est ni l’employeur, ni un membre du même groupe — au sens du paragraphe 2(2) de la Loi canadienne sur les sociétés par actions — que l’employeur. (issuer)

(3) Paragraph (c) of the definition “default” in subsection 1(1) of the Regulations is replaced by the following:

1. (c) the Superintendent’s declaration under subsection 29(2) or (2.1) of the Act that terminates the whole plan;

(4) The expression “(société coopérative de crédit)” at the end of the definition “cooperative credit society” in subsection 1(1) of the English version of the Regulations is replaced by the expression “(coopérative de crédit)”.

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

« coopérative de crédit » Coopérative de crédit régie par la Loi sur les associations coopératives de crédit ou constituée en personne morale sous le régime d’une loi provinciale et régie par une telle loi. (cooperative credit society)

24. Section 7 of the Regulations is replaced by the following:

7. For the purposes of paragraph 10.1(2)(b) of the Act, the prescribed solvency ratio level for the 2009 plan year is the solvency ratio calculated on the basis of the actuarial report that reported the deficiency.

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

13. For the purposes of paragraph 10.1(2)(b) of the Act, the prescribed solvency ratio level for the first five plan years of funding in accordance with Part 1 and this Part is the solvency ratio calculated on the basis of the most recent actuarial report.taras

26. Paragraph 28(1)(a) of the Regulations is replaced by the following:

1. (a) the amount by which the aggregate amount of payments that the employer has made to the pension fund in the previous plan year exceeds the total of the annual special payments made in accordance with this Part and the normal cost of the plan for that year as shown in the actuarial report; or

27. Subsection 31(2) of the Regulations is replaced by the following:

(2) Except if a plan is fully terminated, the administrator shall have an actuarial report prepared — in which the present value of the special payments referred to in subsection 21(1) shall be zero — valuing the plan as at the last day of the plan year in which the default occurs.

28. Section 32 of the Regulations is renumbered as subsection 32(1) and is amended by adding the following:

(2) Paragraphs (1)(b) and (c) do not apply if the face amount of the letters of credit obtained to fund the plan under this Part is included as a solvency asset as defined in subsection 2(1) of the Pension Benefit Standards Regulations, 1985.

COMING INTO FORCE

29. These Regulations come into force on the day on which section 1795 of the Jobs and Economic Growth Act , chapter 12 of the Statutes of Canada, 2010, come into force, but if they are registered after that day, they come into force on the day on which they are registered.

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. On 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 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 further 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 to funding 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.

On October 27, 2009, 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 announcement notably proposed to make it easier for participants to negotiate changes to their pension arrangements and to allow sponsors to better manage their funding obligations, while at the same time protecting member benefit security. To put these measures into effect, legislative and regulatory changes are required.

In respect of legislative amendments, the Jobs and Economic Growth Act, adopted by Parliament in July 2010, included amendments to the Act which implemented a number of the announced pension proposals, such as the enabling legislative provisions to permit letters of credit and void amendments, as well as those related to disclosure on plan termination.

In June 2010, a number of amendments to the Regulations, which did not require the Royal Assent of the Jobs and Economic Growth Act, were finalized. These amendments included (1) the adoption of 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; (2) the introduction of a solvency margin which precludes plan sponsors from taking contribution holidays, unless the solvency ratio exceeds full funding plus a margin, which is set at a level of 5% of solvency liabilities; and (3) the removal of the quantitative investment limits in respect of resource and real property investments.

With the Royal Assent of the Jobs and Economic Growth Act, the Government is now proceeding with further regulatory changes.

Objectives

The regulatory amendments contain the details concerning a number of amendments made to the Act through the Jobs and Economic Growth Act (i.e. allowance of letter of credit, full funding on plan termination and the creation of the workout scheme). It also puts into force the void amendment provision in setting out the prescribed threshold for voiding plan amendments that reduce the solvency position of the plan.

The amendments to the Regulations seek to achieve three main objectives. First, amendments are made to the Regulations to allow sponsors to better manage their funding obligations through the use of letters of credit in order to provide more flexibility in fulfilling their funding obligation. Second, a workout scheme for distressed pension plans is established to facilitate the resolution of plan-specific problems that arise in circumstances where a particular plan sponsor cannot meet near-term funding requirements. Finally, the requirement for full funding on plan termination and the void amendment regulations are directly designed to enhance benefit protection for plan members.

Overall, these amendments ensure that the rights and interests of pension plan members, retirees and their beneficiaries are protected.

Description

Letters of credit

Amendments to the Act passed in July 2010 permit employers to provide letters of credit instead of making required payments to a pension plan. The amendments to the Regulations set out requirements and limits for letters of credit to be used to satisfy solvency payments.

The amendments to the Regulations allow plan sponsors to satisfy solvency payments up to a limit of 15% of plan assets. Letters of credit could be reduced by the plan sponsor upon a return to fully funded status, subject to a 5% solvency margin remaining in the plan. If the plan returns to full funding plus the solvency margin without factoring in the value of the letters of credit, any outstanding letters of credit would be allowed to expire as they would no longer be required. The amendments also set out that letters of credit need to be properly structured to qualify as a solvency funding asset. This includes what entity (e.g. banks and cooperative credit societies) can issue a qualifying letter of credit and ensuring that a letter of credit would be called in certain circumstances, such as insolvency, with a view to protecting benefit security.

Requirement for full funding on plan termination

Existing pension regulations permit defined benefit pension plans to be less than fully funded provided that the plan sponsor is making required special payments. This provides reasonable benefit security for plan members while providing plan sponsors with the flexibility to address any funding shortfall over a manageable period of time. However, there is the possibility that a pension plan could be terminated at a time when plan assets are not sufficient to pay the full amount of promised benefits.

The Jobs and Economic Growth Act amended the Pension Benefits Standards Act, 1985 to require plan sponsors to fund any deficiency that exists at the date of plan termination, subject to the Regulations. The amendments to the Regulations set out a payment schedule to fund the termination deficiency. In particular, the amendments require that the solvency deficiency that exists at the time of termination be amortised in equal payments over no more than five years. Unlike the solvency funding requirements for ongoing plans, the annual consolidation of payment schedules and the average solvency ratio method of determining solvency payments will not apply where a termination deficiency is being amortised. Annual actuarial reports and contributions following the plan termination will be required until all promised benefits are funded in full.

As with other required contributions to a pension plan, payments required under this schedule are subject to the deemed trust provisions under subsection 8(1) of the Act. As such, any contributions that are due but have not been remitted to the pension fund by the sponsor are subject to a deemed trust and thus have an enhanced status in bankruptcy proceedings. If the sponsor were to become bankrupt at some point during the payment schedule to make up the termination deficiency, any payments that were not yet due according to that schedule are not subject to the deemed trust provisions of the Act. The amount of any remaining shortfall will then be considered an unsecured debt of the plan sponsor.

Void amendments

Section 10.1(2) of the Act voids any plan amendment that has the effect of reducing pension benefits accrued before the date of the amendment, or if the solvency ratio of the pension plan is or would fall below a prescribed solvency ratio level set out in the Regulations. The latter provision aims at preventing significantly underfunded plans from implementing amendments if they further reduce the plan’s funded position.

The amendments to the Regulations prescribe that the solvency ratio level be set at 85%. As well, they stipulate that, to put into effect a plan amendment that otherwise be voided under this provision, the sponsor could fund the benefit up front such that the amendment would not have the effect of lowering the solvency ratio of the plan.

Distressed pension workout scheme

The amendments establish a workout scheme that provides a framework for parties of a pension plan sponsored by a distressed employer to put in place a negotiated settlement agreed to by members, retirees and the plan sponsor, which may, subject to the Minister of Finance’s approval, include a funding schedule different from what is required by normal funding rules. The workout scheme is intended to be used by plan sponsors who are legitimately at risk of immediate insolvency unless relief on pension obligations is forthcoming.

The amendments incorporate a provision in the framework for distressed plans to commence negotiations between the plan sponsor, members and retirees to come to their own arrangements respecting pension obligations in order to facilitate a plan restructuring.

To trigger entry into the distressed pension plan workout scheme, a declaration by the Board of Directors stating that the plan sponsor does not anticipate being able to meet its upcoming special payment, is required. Upon entry, the plan sponsor will be eligible for a short moratorium on special payments of up to nine months after the filing date of its actuarial report. The moratorium is a “quick-response” to immediate pressures, such as a severe cash crunch rendering a company unable to meet its payment obligations, while the negotiated workout will respond to longer term concerns.

The parties will then be at liberty to negotiate changes to their pension arrangements, including the schedule of special payments, with representation provided for plan members, deferred vested members and retirees. Where a workplace is unionized, the bargaining agent will provide representation, while in non-unionized environments and for retirees and other beneficiaries, the Act provides that a representative will be appointed for these groups by the appropriate Court, with the consent of members and retirees required.

Consequential amendments

In 2007, as part of a package of amendments to financial services legislation included in the Act to amend the law governing financial institutions and to provide for related and consequential matters, a change was made to the Insurance CompaniesAct (ICA) to clarify that the ICA governs risks insured in Canada by foreign insurers, whether or not the risks that they insure are Canadian risks. The amendments to the Regulations are consequential to ensure that their provisions are consistent with this change (i.e. replacement of the expression “the insurance of risks in Canada” with “the insurance in Canada of risks”).

In addition, consequential amendments are made to reflect the name change of the “Canadian Depository for Securities Limited” to the “CDS Clearing and Depository Services Inc.”

Regulatory and non-regulatory options considered

Letters of credit

Allowing letters of credit to satisfy solvency payments provides additional flexibility to sponsors in order to meet their funding obligations. As an alternative, the option of extending the solvency funding payment schedule from five to ten years was considered. However, such an extension of the period for an employer to fund its deficiencies could 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. Allowing the use of letters of credit for solvency funding purposes has the advantage of not compromising benefit security while providing additional flexibility to sponsors.

Requirement for full funding on plan termination

Maintaining the status quo and not implementing full funding on plan termination was considered. Without a requirement to fully fund on plan termination, if a defined benefit pension plan is terminated for any reason, the plan sponsor is required to pay any outstanding payments to the plan, such as contributions that have been deducted from employees but not yet paid into the plan, and/or employer contributions owing but not yet remitted. This provides a certain level of security of benefits in case of a plan termination. However, there is the possibility that a pension plan could be voluntarily terminated by the sponsor at a time when plan assets are not sufficient to pay the full amount of promised benefits.

In contrast to maintaining the status quo, amending the Regulations to require full funding of pension benefits on plan termination improves incentives for plan sponsors to fund their pension plans because it removes the possibility of terminating a defined benefit pension plan as a way of not addressing a funding deficiency. Accordingly, this option also enhances benefit security for plan members.

Void amendments

Different thresholds for the solvency ratio level — higher or lower — than 85% were examined. A solvency ratio threshold of 85% represents a balanced option that is generally supported by stakeholders. This threshold is based on the judgment that plans with solvency ratios below this level could generally be considered significantly underfunded to restrict plan benefit improvements and by the fact that plans with solvency ratios above this level do not necessarily compromise the level of benefit security in improving plans’ benefits.

Distressed pension workout scheme

Under the previous rules, no specific mechanism existed for a sponsor to facilitate the resolution of plan-specific problems that may arise in financially difficult circumstances. Accordingly, the previous regulatory framework could have imposed near-term funding requirements that could not have been reasonably met, which also may have been detrimental to benefit security.

In the last few years, two major sponsors took advantage of special regulations which granted funding relief to facilitate the company’s ongoing operations in the near-term. With the same objective, temporary solvency funding relief regulations were also implemented to provide relief to a wider range of sponsors. Bringing forward temporary funding relief regulations or special company-specific regulations can be inefficient due to the substantial resources that are required to put the regulations into effect. Moreover, this can result in a lack of certainty over the regulatory framework and could have been requested by many sponsors facing different situations.

The adoption of the pension workout scheme presents many advantages. For sponsors, the benefit of the pension workout scheme is similar to special regulations and funding relief regulations in allowing them more flexibility to meet their obligation. In addition, the workout scheme process is more efficient than putting in place special regulations. The workout scheme also provides more equitable treatment of different sponsors and sets common principles that can be followed by any sponsor. Furthermore, it limits the need for special regulations since a clear scheme is available for all sponsors. By facilitating the resolution of plan specific problems that could lead to plan termination, the distressed pension workout scheme is also beneficial for members and retirees.

Benefits and costs

Benefits

Overall, the key benefits of the amendments are that they provide sponsors with tools to better manage their funding obligations while giving them greater flexibility to fulfill their obligation to protect the interests of plan members and other beneficiaries. Additionally, with the workout scheme, the amendments to the Regulations reduce the probability of having to adopt other temporary regulations.

Costs

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

Plan sponsors may incur some costs in relation to the amendments depending on whether the plan sponsor chose to avail themselves of the additional options that the amendments propose. Specifically, costs in relation to obtaining a letter of credit are assumed by plan sponsors. In the case of agent Crown corporations, there could be a cost associated with the fee to the Government that would be comparable to the fee that would be paid to obtain a letter of credit.

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

Rationale

Letters of credit

Amending the Regulations governing the use of properly structured letters of credit permits employers to provide increased security to plan members in the event of, for example, insolvency, while providing greater funding flexibility to plan sponsors.

It aims to ensure that a letter of credit provides a level of security generally comparable to the payment of money into the pension fund.

Full funding on plan termination

The requirement to fully fund pension benefits on plan termination is consistent with the policy view that promised benefits ought to be funded and paid. The amendments provide the plan sponsor with up to five years after the termination of the plan to make the necessary payments to fund the promised benefit, as requiring immediate payments could be too onerous in some cases.

Void amendments

Plan members should have a realistic expectation of receiving promised benefits. It is consequently reasonable to apply restrictions and conditions on benefits improvements. While current Regulations require that pension plans make special payments to fund 20% of the solvency deficiency every year, they do not restrict even significantly underfunded plans from making plan improvements that further weaken the plan’s funded status. Putting into effect the void amendments provision with a prescribed solvency ratio of 0.85 limits the ability to make benefit improvements in such situations and thus reduce the risk that the promised benefits will not be paid.

Distressed pension workout scheme

In allowing a plan sponsor to negotiate an agreement with plan members and other beneficiaries in situations where funding requirements cannot be reasonably met, the pension workout scheme facilitates a plan restructuring with a view to increasing benefit security. In addition, it provides some certainty in respect of the regulatory framework and reduces the possibility of having to create special regulations.

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, then 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 incorporate, in a balanced fashion, comments and suggestions that were made by these various stakeholders.

The amendments to the Pension Benefits Standards Regulations, 1985 were set out in proposed Regulations that were pre-published for a 30-day comment period in the Canada Gazette, Part I, on December 18, 2010. The Department of Finance received 10 written submissions regarding the Regulations during the consultation period. The submissions were from plan sponsors, a pensioner organisation, a union, pension actuaries firms, a pension lawyer, a financial institution and the government of a Canadian territory.

One comment pointed out that the Regulations inadvertently exclude ATB Financial as an eligible issuer of letters of credit. Since allowing ATB Financial to issue letters of credit will not increase risk for plan members or beneficiaries and will be beneficial for some plan sponsors in facilitating the acquisition of letters of credit, the definition of “issuer” of letters of credit was extended to include ATB Financial.

In response to a number of technical comments, adjustments and clarifications to the Regulations have been made. In particular, wording in respect of the aggregate amount of Crown corporation reductions was clarified, a provision was added to allow adjustments to the aggregate amount of Crown corporation reductions in a manner consistent with adjustments to letters of credit, the word “aggregate” was added in 9.1(2)(b) of the English version and it was clarified that the face value of letters of credit can be increased or decreased at times other than renewal in circumstances prescribed under the Regulations. In respect of the void amendment measure, adjustments were made to recognize the effect of a lump sum payment before the filing of the actuarial report dealing with the cost of amendments. The language surrounding the workout scheme negotiation period was also modified to better clarify the policy intent.

In addition, in accordance with amendments that were made in the Jobs and Economic Growth Act, the French expression “exercice”, which was previously used in the Regulations, was replaced by “exercice du régime,” which is the equivalent of the English expression “plan year.”

None of these modifications changes the policy intent of the Regulations.

A request to create exceptions in respect of funding requirements, notably an exemption from solvency valuation for pension plans sponsors backed by territorial governments was reviewed and considered. The funding requirements under the Pensions Benefits Standards Act, 1985 and its associated regulations apply independently to private and government-backed pension plans sponsors, including Crown corporations. These requirements aim to ensure that pension plan assets are adequate to provide members with promised benefits, should the plan sponsor terminate the plan, which can occur at times other than insolvency or cessation of business. Accordingly, the Government considers the solvency basis to be an appropriate and prudent measure to use when seeking to ensure the protection of member benefits.

Implementation, enforcement and service standards

OSFI’s current supervisory processes, which include conducting examinations, regular reporting by plan administrators and risk assessments, will enable OSFI to administrator the amended Regulations. 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, East Tower, 20th Floor
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. 2010, c. 25, s. 196

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

Footnote 1
SOR/87-19

Footnote 2
SOR/2004-174

Footnote 3
SOR/2006-275

Footnote 4
SOR/2009-182