This week the federal government announced that it is amending the Pension Benefits Standards Regulations (the Regulations) to provide federally-regulated plan sponsors with greater flexibility when meeting their funding obligations, while protecting the benefits of plan members and retirees.
The federal government began on the road to pension reform with the introduction of Bill C-9 – this year’s budget bill – which received royal assent on July 12, 2010. (See our April 1, 2010 blog post.)
Bill C-9 included a number of funding-related provisions that required separate amendments to the Regulations. A number of these outstanding issues appear to have been addressed in this latest round of amendments. The amendments to the Regulations will add the following details:
- Letters of Credit: Bill C-9 permitted plan sponsors to use letters of credit in lieu of making solvency payments to the pension fund. The Regulations will specify that such letters of credit are limited to 15% of plan assets.
- Funding on Termination: Per Bill C-9, plan sponsors are required to fully fund pension benefits on plan termination. The proposed amendments to the Regulations will set out a payment schedule to fund the termination deficiency. In particular, the Regulations would require that the solvency deficiency that exists at the time of termination be amortised in equal payments over no more than five years.
- Void Amendments: Unless permitted by the Superintendent, Bill C-9 provided that amendments which would reduce a plan solvency ratio below a prescribed level will be void. The draft Regulations would set the solvency ratio level at 85%. In addition, they would stipulate that, to put into effect a plan amendment that would 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.
- Workout Schemes: Bill C-9 set out a framework which would permit employers and members of plans to agree to a “workout scheme” (i.e., a short moratorium on deficit payments and changes to the pension arrangements) where the employer is unable to meet the statutory funding requirements. The Regulations will provide further details of how these schemes will work and the process that the parties will have to follow.
Once these amendments to the Regulations are finalized – a consultation period will be open for 30 days after their publication – the federal government will have completed much of the reforms that it had originally announced in October of 2009.
The most innovative aspect of the new regulatory regime is the framework for pension workout schemes to facilitate the implementation of a negotiated settlement between a “distressed employer” and the plan members. This proposal makes a process that frequently takes place informally or “below the radar screen” transparent to all concerned, and avoids the need for “one off” regulations to deal with specific plans. It would be helpful if the Ontario government introduced a similar scheme for Ontario-registered pension plans.