Back in 2009, the Quebec government adopted measures to alleviate the effects of the 2008 financial crisis on the funding of defined benefit (DB) plans. These measures allowed an employer to instruct a plan’s pension committee to implement one or more of the following measures for the first complete actuarial valuation dated after December 30, 2008:
- Use of a “smoothing” method (i.e., averaging method) to value plan assets on a solvency basis over a 5-year period rather than using the current market value;
- Consolidate certain solvency deficiencies; and
- Extend the amortization period to eliminate the new solvency deficiency from 5 to 10 years.
These measures were due to expire at the end of 2011. Considering the historically low interest rates now prevailing and the mixed investment returns over the last few years, many DB plan sponsors would be placed in a very difficult situation if they were required to perform their next valuation in accordance with the regular solvency funding rules.
Last week, the Quebec government announced its intention to extend the temporary solvency relief measures for an additional period of two years (i.e., until December 31, 2013). The other details of the proposal have not yet been released.
The government will also extend for two more years the special settlement option available to certain plan members and beneficiaries who participate in an underfunded plan that is terminated in connection with the bankruptcy or insolvency of their employer. In these circumstances, such members and beneficiaries can elect to have their reduced benefits paid by the Régie des rentes du Québec. The assets attributable to those who elect this option are to be administered and invested by the Régie during a prescribed period and will then be used to purchase annuities at a time when the annuity market is (hopefully) more favourable. The Régie is thereby assuming the risk of a further deterioration in economic conditions.
Further Pension Reform on the Horizon?
As part of its announcement, the government also indicated that it would take the two-year extension as an opportunity to review the Quebec Supplemental Pension Plans Act in light of the new economic and demographic realities. The government has directed the Régie to establish an independent expert committee to study the various problems affecting DB plans, and to propose a series of changes to the current legislation that would improve the viability of DB plans in Quebec. That being said, no reform is expected to occur before 2014.