Vol. 151, No. 14 — July 12, 2017

Registration

SOR/2017-145 June 23, 2017

PENSION BENEFITS STANDARDS ACT, 1985
POOLED REGISTERED PENSION PLANS ACT

Regulations Amending the Pension Benefits Standards Regulations, 1985 and the Pooled Registered Pension Plans Regulations

P.C. 2017-963 June 22, 2017

His Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to subsection 39(1) (see footnote a) of the Pension Benefits Standards Act, 1985 (see footnote b), and section 76 of the Pooled Registered Pension Plans Act (see footnote c), makes the annexed Regulations Amending the Pension Benefits Standards Regulations, 1985 and the Pooled Registered Pension Plans Regulations.

Regulations Amending the Pension Benefits Standards Regulations, 1985 and the Pooled Registered Pension Plans Regulations

Pension Benefits Standards Regulations, 1985

1 The description of B in the definition solvency assets in subsection 2(1) of the Pension Benefits Standards Regulations, 1985 (see footnote 1) is replaced by the following:

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 solvency liabilities of the plan as determined at the valuation date, and

2 The portion of subsection 7.1(1) of the French version of the Regulations before paragraph (a) is replaced by the following:

7.1 (1) Avant la date d’agrément du régime, l’administrateur de celui-ci établit par écrit, en tenant compte de tous les facteurs susceptibles d’avoir un effet soit sur la capitalisation et la solvabilité du régime, soit sur la capacité de celui-ci à remplir ses obligations financières, un énoncé des politiques et des procédures de placement applicables au portefeuille de placements et de prêts — à l’exception de celles applicables à tout compte accompagné de choix —, notamment en ce qui a trait aux aspects suivants :

3 (1) Subsection 9(13.2) of the Regulations is replaced by the following:

(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 exceeds, or would exceed, 15% of the solvency liabilities of the plan as determined at the valuation date.

(2) Paragraph 9(13.3)(c) of the Regulations is replaced by the following:

4 (1) The portion of subsection 9.1(2) of the Regulations before paragraph (a) is replaced by the following:

(2) If the aggregate face value of the letters of credit held for the benefit of the plan exceeds 15% of the solvency liabilities of the plan as determined at the valuation date and if, based on the most recent actuarial report,

(2) Subparagraph 9.1(2)(a)(i) of the Regulations is replaced by the following:

5 (1) Subparagraph 20(1)(a)(ii) of the Regulations is replaced by the following:

(2) Subparagraph 20(1)(b)(ii) of the Regulations is replaced by the following:

(3) Subsection 20(1) of the Regulations is amended by striking out “and” at the end of paragraph (c) and by adding the following after paragraph (d):

(4) Subsection 20(4) of the Regulations is replaced by the following:

(4) A locked-in registered retirement savings plan shall provide that, where a physician certifies that owing to mental or physical disability the life expectancy of the holder of the plan is likely to be shortened considerably, the funds may be paid to the holder in a lump sum.

6 (1) Subparagraph (i) of the description of F in paragraph 20.1(1)(d) of the Regulations is replaced by the following:

(2) Subsection 20.1(1) of the Regulations is amended by striking out “and” at the end of paragraph (l), adding “and” after paragraph (m) and by adding the following after paragraph (m):

(3) Subsection 20.1(3) of the Regulations is replaced by the following:

(3) A life income fund shall provide that, where a physician certifies that, owing to mental or physical disability, the life expectancy of the holder of the life income fund is likely to be shortened considerably, the funds in the life income fund may be paid to the holder in a lump sum.

7 (1) Subparagraph 20.2(1)(a)(ii) of the Regulations is replaced by the following:

(2) Subparagraph 20.2(1)(b)(ii) of the Regulations is replaced by the following:

(3) Subsection 20.2(1) of the Regulations is amended by striking out “and” at the end of paragraph (d), adding “and” after paragraph (e) and by adding the following after paragraph (e):

(4) Subsection 20.2(4) of the Regulations is replaced by the following:

(4) A restricted locked-in savings plan shall provide that, if a physician certifies that owing to mental or physical disability the life expectancy of the holder of the plan is likely to be shortened considerably, the funds may be paid to the holder in a lump sum.

8 (1) Subparagraph (i) of the description of F in paragraph 20.3(1)(d) of the Regulations is replaced by the following:

(2) Subsection 20.3(1) of the Regulations is amended by striking out “and” at the end of paragraph (m), adding “and” at the end of paragraph (n) and by adding the following after paragraph (n):

(3) Subsection 20.3(3) of the Regulations is replaced by the following:

(3) A restricted life income fund shall provide that, if a physician certifies that owing to mental or physical disability the life expectancy of the holder of the fund is likely to be shortened considerably, the funds in that fund may be paid to the holder in a lump sum.

9 Subparagraph 21(2)(b)(ii) of the Regulations is replaced by the following:

10 Paragraph (a) of the description of F in subsection 21.1(2) of the English version of the Regulations is replaced by the following:

Pooled Registered Pension Plans Regulations

11 Paragraph (a) of the description of F in subsection 37(2) of the English version of the Pooled Registered Pension Plans Regulations (see footnote 2) is replaced by the following:

12 (1) Subsection 38(1) of the Regulations is amended by striking out “and” at the end of paragraph (d) and by adding the following after paragraph (e):

(2) Subsection 38(3) of the Regulations is replaced by the following:

Lump sum

(3) The locked-in RRSP shall provide that the funds may be paid to the holder in a lump sum if a physician certifies that, owing to mental or physical disability, the holder’s life expectancy is likely to be considerably shortened.

13 (1) Subsection 39(1) of the Regulations is amended by striking out “and” at the end of paragraph (e), adding “and” at the end of paragraph (f) and by adding the following after paragraph (f):

(2) Subsection 39(2) of the Regulations is replaced by the following:

Lump sum

(2) The restricted locked-in savings plan shall provide that the funds may be paid to the holder in a lump sum if a physician certifies that, owing to mental or physical disability, the holder’s life expectancy is likely to be considerably shortened.

14 (1) Subsection 40(1) of the Regulations is amended by striking out “and” at the end of paragraph (k), adding “and” at the end of paragraph (l) and by adding the following after paragraph (l):

(2) Subsection 40(2) of the Regulations is replaced by the following:

Lump sum

(2) The restricted life income fund shall provide that the funds may be paid to the holder in a lump sum if a physician certifies that, owing to mental or physical disability, the holder’s life expectancy is likely to be considerably shortened.

15 (1) Subsection 41(1) of the Regulations is amended by striking out “and” at the end of paragraph (j), adding “and” at the end of paragraph (k) and by adding the following after paragraph (k):

(2) Subsection 41(2) of the Regulations is replaced by the following:

Lump sum

(2) The life income fund shall provide that the funds may be paid to the holder in a lump sum if a physician certifies that, owing to mental or physical disability, the holder’s life expectancy is likely to be considerably shortened.

Coming into Force

16 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

Sponsors of federally regulated defined benefit pension plans are required to make solvency deficit payments into their plans. These payment amounts can be large and volatile as a result of the low interest rate environment and market volatility. The financial burden of these solvency deficit payments can impair sponsors’ capacity to invest in their businesses, and can jeopardize the long-term sustainability of their businesses and defined benefit plans alike. Currently, plan sponsors of federally regulated defined benefit plans may use the letter of credit or solvency payment reduction provisions of the Pension Benefits Standards Act, 1985 (PBSA) to reduce some of their required solvency payments. The Pension Benefits Standards Regulations, 1985 (PBSR) prescribe that plan sponsors may use these provisions to reduce their solvency payments up to a specified limit. However, a number of federally regulated pension plans have reached, or are close to reaching, the previously prescribed limit on the use of these provisions, which could require their plan sponsors to make large solvency payments that they may not be able to afford. For the plan sponsors that have reached the previous limit, having to make large solvency payments could challenge their ability to invest in their businesses and remain profitable, thereby threatening the sustainability of their business, and by extension their defined benefit plans.

In addition, a few technical amendments to the PBSR and the Pooled Registered Pension Plans Regulations (PRPP Regulations) were needed to clarify some provisions and ensure consistency between the French and English versions. Finally, a technical amendment was needed to ensure that funds transferred to Registered Savings Plans (RSPs) could be withdrawn if the holder has a medical condition that reduces their life expectancy.

In response to these issues, the Regulations Amending the Pension Benefits Standards Regulations, 1985 and the Pooled Registered Pension Plans Regulations (the amending regulations) increase the prescribed limits on letters of credit and solvency payment reductions from 15% of plan assets to 15% of plan liabilities, in addition to introducing the required technical amendments.

Background

Letters of credit and solvency payment reduction limits

The federal PBSA and PBSR apply to pension plans that are linked to employment that falls under federal jurisdiction. Areas of employment that fall under federal jurisdiction include work in connection with navigation and shipping, banking, interprovincial transportation and communications, and all employment in federal Crown corporations, Yukon, the Northwest Territories and Nunavut.

The PBSA requires that federally regulated pension plans fund promised benefits in accordance with the prescribed tests and standards for solvency that are set out in the PBSR. Defined benefit pension plans must file actuarial valuations using two different sets of actuarial assumptions. “Solvency valuations” use assumptions consistent with a plan being terminated and all promised benefits being paid out on the valuation date, while “going concern valuations” are based on the assumption that the plan will continue to operate. Where these valuations show a pension plan’s assets to be less than its liabilities, special payments must be made into the plan to eliminate the deficiency over a period of 5 years for solvency deficits, and 15 years for going concern deficits. Solvency funding requirements are meant to provide benefit security to members of defined benefit plans by ensuring that plans have sufficient funds to pay out the promised pension benefits to all plan members if the plan terminates.

Solvency deficits are heavily influenced by interest rates; a decrease in interest rates causes an increase in the solvency deficit of a plan. The prolonged low interest rate environment that began following the 2008 financial crisis has therefore put plan sponsors under greater financial strain to fund their solvency deficits and jeopardized the sustainability of their defined benefit plans. As a relief measure for plan sponsors from the low interest rate environment and to improve the sustainability of defined benefit plans, the federal government introduced “letters of credit” and “solvency payment reduction” provisions in 2010.

The PBSA and PBSR permit sponsors of federally regulated single-employer defined benefit pension plans to secure letters of credit from a credit-worthy financial institution in lieu of the plan sponsor making solvency deficit payments, previously up to a cumulative limit of 15% of plan assets. Plan sponsors pay a fee to the financial institution for the letters of credit they obtain. By reducing the required solvency deficit payments, letters of credit can make defined benefit plans more affordable, reduce the risk of employer insolvency as a result of large pension deficits payments and free up cash for productive business investments. Affordable defined benefit plans sponsored by financially healthy employers are more sustainable in the long run, so letters of credit can also help employers keep their plans open. Finally, letters of credit are held in trust for the pension plan and become due if and when the plan terminates, at which point the financial institution is responsible for paying the amount of the letters of credit into the plan. Consequently, letters of credit help protect the benefit security of plan members in the event of employer insolvency and plan termination.

Plan sponsors that are federal Crown corporations cannot obtain letters of credit for their pension plans. In the case of plan sponsors that are federal Crown corporations, solvency payment reduction provisions permit the plan sponsor to reduce its solvency payments up to a limit, which was previously 15% of plan assets, with the approval of the Minister of Finance and the Minister responsible for the Crown corporation. Crown corporations pay a fee to the Government of Canada to obtain solvency payment reductions, similar to the one paid on letters of credit. Also, similar to letters of credit, solvency payment reductions make the defined benefit plans of Crown corporations more affordable, thereby reducing costs and freeing up cash for productive uses, which improves the financial health and efficiency of Crown corporations and the sustainability of their plans. The limits on the two provisions are the same in order to provide all sponsors of federally regulated defined benefit plans with similar relief from large solvency deficit payments.

Technical amendments

Both the PBSR and the PRPP Regulations allow non-residents (those who have lived outside of Canada for at least two years) who are no longer members of a federally regulated pension plan to transfer their funds out of the plan without being subject to the “locking-in” provisions that normally restrict the transfer options to other locked-in retirement savings plans (RSPs) [e.g. locked-in RRSPs and life income funds], where the funds cannot be withdrawn as a lump sum. However, absent the amending regulations, it was unclear if the funds transferred from a pension plan to a locked-in RSP could be withdrawn without constraints when the holder becomes a non-resident.

Under certain circumstances, the PBSR allow for funds previously held in a pension plan and now held in an RSP to be transferred to a pension plan or to another RSP, either by the holder of the plan or their survivor. However, these provisions unintentionally prevented transfers from RSPs to pension plans under provincial jurisdictions, PRPPs and “excepted plans” (i.e. pension plans that are linked to employment in federal government departments and agencies). Funds held in pension plans (other than RSPs) may be transferred to the aforementioned three types of plans, so there was an inconsistency between the transfer options for funds held in pension plans and RSPs. Additionally, when survivors receive the commuted value of a deferred life annuity that was purchased with funds from an RSP, they may transfer that amount to a pension plan or to another RSP, but a similar restriction unintentionally prevented transfers to provincially regulated plans, PRPPs and “excepted plans.”

Finally, the PBSR and PRPP Regulations, absent the amending regulations, made it optional for RSPs to allow the withdrawal of funds when the holder has a considerably shortened life expectancy, which could have unnecessarily prevented holders from withdrawing their funds if a medical condition substantially reduced their life expectancy.

Objectives

The objective of the amending regulations is to further ease the burden of solvency deficit payments on the sponsors of federally regulated defined benefit plans and improve the long-term sustainability of defined benefit plans by increasing the limits on letters of credit and solvency payment reductions from 15% of assets to 15% of liabilities. For plans in deficit, liabilities exceed assets, so changing the base of the limits from assets to liabilities will grant plan sponsors additional letter of credit space and permit them to take greater solvency payment reductions. As a result, plan sponsors will be able to further reduce their solvency deficit payments, taking financial pressure off of their businesses and improving the affordability and sustainability of defined benefit plans.

The amending regulations address stakeholders’ requests for clarification of certain provisions in the PBSR and the PRPP Regulations. They also address inconsistencies between the French and English versions of the PBSR and the PRPP Regulations, respectively, and they ensure that these regulations do not unnecessarily prevent the holder of an RSP from withdrawing funds if a medical condition substantially reduces their life expectancy.

Description

Amending the letters of credit and solvency payment reduction limits in the PBSR

Subsection 9(13.2) of the PBSR is amended to change the letter of credit limit from 15% of plan assets to 15% of a plan’s solvency liabilities. Additionally, subsection 9.1(2) of the PBSR that allows plans to reduce the face value of the letters of credit they hold if it is in excess of the limit, (see footnote 3) and the definition of “solvency assets” in subsection 2(1) of the PBSR are amended to reflect the new limit of 15% of liabilities.

Subsection 9(13.3) of the PBSR is amended to change the solvency reduction limit applicable to the pension plans of Crown corporations from 15% of plan assets to 15% of a plan’s solvency liabilities.

Technical amendments to the PBSR and the PRPP Regulations

The amending regulations clarify provisions common to both the PBSR and PRPP Regulations that relate to the unlocking of pension benefit credits for non-residents. They make these provisions applicable to funds held in RSPs that were transferred from a pension plan, in the same way that they apply to funds held in a pension plan. Therefore, non-residents will not be subject to the “locking-in” provisions when transferring funds out of an RSP. Additionally, the PBSR are amended to allow for funds previously held in a pension plan and now held in an RSP to be transferred (by the plan holder or their survivor) to pension plans under provincial jurisdictions, Pooled Registered Pension Plans (PRPPs) and “excepted plans.” This will provide consistent transfer options for pension plans and RSPs. The amending regulations also provide the above transfer options to survivors who receive the commuted value of a deferred annuity that was purchased using funds from an RSP.

The amending regulations also amend the unlocking provisions of the PBSR and PRPP Regulations relating to shortened life expectancy to make it mandatory, as opposed to optional, for RSPs to allow the withdrawal of funds when the holder has a considerably shortened life expectancy.

A sentence is added to subsection 7.1(1) in the French version of the PBSR that was previously missing to make it consistent with the English version. Finally, subsection 21.1(2) in the English version of the PBSR and the equivalent subsection, 37(2), in the PRPP Regulations are amended to ensure consistency with the French versions.

“One-for-One” Rule

The “One-for-One” Rule does not apply, as the amendments do not affect administrative costs to business.

Small business lens

The small business lens does not apply, as the amendments do not impose costs on small businesses.

Consultation

Large and volatile solvency payments can divert cash away from other productive uses, such as business investment, and can impair the profitability and sustainability of businesses that sponsor defined benefit plans. To ease these solvency funding pressures, plan sponsors and industry professionals have argued that the Government of Canada should consider basing the 15% letter of credit limit on liabilities as opposed to assets, or eliminate the limit completely, in order to provide plan sponsors with additional credit space to further reduce their solvency payments. As the amounts on letters of credit are paid to the pension plan by the issuing financial institution in the event of plan termination, they do not materially increase the risk that members’ pension benefits will not be paid in full if the plan terminates. Increasing the limits on letters of credit would therefore benefit plan sponsors without increasing the risk of members receiving benefit reductions if the plan terminates.

Crown corporations that sponsor defined benefit plans face the same solvency funding pressures as the sponsors that are private businesses. Large solvency payments can divert cash away from more productive uses by Crown corporations and increase costs, making it more difficult for Crowns to provide efficient, affordable services to Canadians. In the past, some Crown corporations have requested an increase to the solvency payment reduction limit in order to obtain greater relief from the requirement to make large pension payments. A third-party actuarial consulting firm has made a similar request on behalf of Crown corporations who sponsor defined benefit pension plans. Granting greater solvency payment reductions would improve the affordability of Crown corporations’ defined benefit plans, thereby reducing overall costs and helping contribute to the efficient operation of Crown corporations. Improving the financial health of Crown corporations and lowering their pension costs also improves the sustainability of their pension plans.

Stakeholders requested clarifications to the provisions of the PBSR and PRPP Regulations addressed in the technical amendments.

Canada Gazette, Part I

The amending regulations were prepublished on April 29, 2017, in the Canada Gazette, Part I, for a 30-day comment period. Over the course of the consultation period, the Department of Finance Canada received 13 submissions from various stakeholders, including retiree organizations, plan sponsors, actuarial consulting firms and industry associations. Overall, the submissions indicated support for the amending regulations, particularly the main proposed amendment — to increase the limits on letters of credit and solvency payment reductions from 15% of assets to 15% of liabilities. The comments and suggestions received from stakeholders are summarized below.

One stakeholder noted that in the prepublished regulations, the technical amendment which clarified that funds held in RSPs could be transferred to provincially regulated plans, PRPPs and “excepted plans” only applied to the holders of the plans, and not to their survivors, which was inconsistent. Therefore, the amending regulations were changed to extend these transfer options to the survivors. Additionally, it was noted by the same stakeholder that similar transfer options should be allowed in respect of survivors transferring the lump sum value of a deferred life annuity that was purchased using funds from an RSP. This amendment has also been included in the final version of the amending regulations.

Additionally, one stakeholder pointed out an inconsistency in the small balance unlocking provision in the PBSR regarding locked-in registered retirement savings plans (RRSPs). For every type of federally regulated locked-in plan except for locked-in RRSPs, small balance unlocking provisions allowed the holders to withdraw their account balance in a lump sum in the year they turn 55, and every subsequent year, if the total value of all their federally regulated locked-in accounts is less than or equal to 50% of the year’s maximum pensionable earnings. To address this inconsistency, the amending regulations were changed following prepublication to allow for the similar unlocking of funds held in RRSPs under the PBSR and the PRPP Regulations.

While not part of the proposed draft regulations, three stakeholders identified an existing technical issue in the PBSR which results in Crown corporations reaching the limit on solvency payment reductions faster than private plan sponsors using comparable letters of credit. They noted that this discrepancy puts Crown corporation pension plans at a disadvantage and requested that the amending regulations address this issue, which would effectively grant Crown corporations more solvency payment relief on top of the relief already provided by increasing the limit to 15% of liabilities. This change was not made as it requires further analysis and consultation — particularly on the long-term implications of giving all Crown corporations further room to take solvency payment reductions.

A minor change was proposed by one stakeholder to clarify that the “valuation date” refers to the date of the most recent actuarial report, which would remove any ambiguity about how pension plans would determine whether they are still within the 15% of liabilities limit in between the filing of annual valuation reports. However, this change was not deemed necessary by the Department of Finance Canada, as “valuation date” under the PBSR implicitly relates to the most recent actuarial report. The Office of the Superintendent of Financial Institutions will provide guidance to plan administrators in this respect.

Three stakeholders suggested that no limit should be imposed on letters of credit, as they have no negative impact on members’ benefit security and that market forces (e.g. the sponsor’s ability to obtain letters of credit and fees) would effectively determine the threshold that sponsors can practically afford. One of those stakeholders also suggested having a 50% letter of credit limit (based on liabilities), should there be a limit at all. Ultimately, no change to the amending regulations was made in response to this comment — the limit for letters of credit remains 15% of liabilities to be consistent with the limit on solvency payment reductions and because having no limit on letters of credit could potentially allow plan sponsors to rely too heavily on letters of credit and cease making solvency payments altogether, resulting in less actual money going into the plan.

Two stakeholders commented that allowing survivors to waive their spousal death benefit from an RSP and designate a beneficiary, as it was proposed during prepublication, would create operational complexities for the financial institutions that provide RSPs. Because of these issues, the stakeholders requested that the proposed amendment be optional, rather than mandatory, and to delay the coming-into-force date of this amendment to provide sufficient time to assess its impact and to operationalize it. As a result, these amendments were removed from the amending regulations, in order to allow for further consultations on this issue.

Several comments received were outside the scope of the amending regulations. These included requests for the Government to consider broad reforms to the federal solvency funding framework, a request to implement target benefit plans and buyout annuities through legislative amendments, and one stakeholder noted a potential inconsistency between the English and French versions of a PBSA provision, which would require a legislative amendment to address.

Finally, stakeholders identified one minor drafting error in the English version of the amending regulations that has been corrected.

Rationale

To provide plan sponsors of defined benefit plans with greater relief from large solvency payments, the amending regulations increase the limits on letters of credit and solvency payment reductions. This will help improve the affordability and sustainability of defined benefit plans in addition to benefiting plan sponsors by reducing their risk of insolvency as a result of large pension deficit payments and potentially freeing up cash for business investments.

However, excessive reliance on either of these provisions could compromise the funded position of pension plans if the limits were removed and plan sponsors ceased making solvency payments altogether. To ensure that federal solvency funding requirements continue to provide benefit security to plan members, the limits are set at 15% of plan liabilities. Further, letters of credit and solvency payment reduction provisions are broad-based measures intended to provide comparable solvency funding relief to all sponsors of federally regulated defined benefit plans. In keeping with that intent, the new limit of 15% of liabilities continues to apply equivalently to both letters of credit and solvency payment reductions in order to maintain a level playing field between private and Crown corporation pension plans.

Accordingly, the new limits strike an appropriate balance between easing the burden of solvency payments on plan sponsors and maintaining the benefit security for plan members, which is provided by having a well-funded plan under the federal solvency funding framework.

Additionally, the previous federal provisions relating to letters of credit were more restrictive than provisions in a number of provinces. Ontario, Quebec and Nova Scotia limit the face value of letters of credit in their jurisdictions to 15% of a plan’s solvency liabilities, while Alberta, British Columbia and Manitoba impose no limit. While the intent of the amendments is not to reduce regulatory differences between federally regulated and provincially regulated pension plans, changing the federal letters of credit limit to 15% of liabilities is consistent with the letters of credit limit for provincially regulated pension plans in Ontario, Quebec and Nova Scotia.

The technical amendments to the PBSR and PRPP Regulations, including those added after the prepublication period, were required to address stakeholders’ requests for clarification of some provisions of the PBSR and PRPP Regulations, to remove unintended inconsistencies, and to ensure consistency between the French and English versions of the PBSR and PRPP Regulations, respectively.

Contact

Lisa Pezzack
Director
Financial Systems Division
Department of Finance Canada
90 Elgin Street, 13th Floor
Ottawa, Ontario
K1A 0G5
Email: Lisa.Pezzack@canada.ca