More than 6 months have passed since the onset of the economic turmoil resulting in funding difficulty for plan sponsors of defined benefit pension plans. Solvency funding relief is currently available in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Quebec and Saskatchewan. Nova Scotia has not introduced any funding relief measures (except for certain university plans, municipality plans and specified multi-employer pension plans) and is not currently proposing any but the Pension Review Panel, in its final report "Promises to Keep" (January 27, 2009), recommended permanent changes to the funding rules applicable to all defined benefit pension plans.

Recently, both the federal and the Ontario budgets contain information about proposed funding relief measures. This Pension Alert discusses the recent developments relating to solvency funding relief measures for defined benefit pension plans governed by the Ontario or the federal pension legislation.

Ontario. The Ontario government announced in December 2008 that the government would provide temporary solvency funding relief to pension plans affected by the financial market turmoil. The 2009 Ontario budget tabled by the Ontario Minister of Finance on March 26, 2009 contained a number of initiatives relating to solvency funding relief and permanent changes to modernize Ontario's pension system. The Ontario budget anticipates the introduction of relief measures through new regulations to the Pension Benefits Act (Ontario), with retroactive effect to September 30, 2008. The relief, when introduced, will provide a plan administrator with an election to:

  • consolidate existing solvency payment schedules into a new 5-year payment schedule;
  • defer for one year from the valuation date, the start of new going-concern and solvency special payments identified in the valuation report; and
  • subject to member consent, extend the solvency payment schedule to a maximum of 10 years for a new solvency deficiency determined in the report.

In addition, up to 10 years of going-concern special payments could be taken into account to determine the net solvency deficiency where the special payment schedule is extended to a maximum of 10 years. Also, if a plan administrator makes an election, a solvency excess identified in subsequent valuation reports could be used to reduce or eliminate solvency special payments identified in the initial report.

To balance these proposed relief measures against the security of pension benefits, enhanced member notice regarding the plan's funded status and the effect of the election is required. If solvency payment schedules are consolidated and extended, future benefit enhancements are required to be funded over a maximum of 5 years on both a solvency and going-concern basis. Contribution holidays in fiscal years ending in 2010 to 2012 will not be permitted unless certain conditions are satisfied.

There are a number of observations regarding the relief measures mentioned in the Ontario budget:

  1. The time-frame for the Ontario legislature to introduce the regulations to the Pension Benefits Act (Ontario) to implement the relief measures is still unknown. The timeliness of implementation is crucial as there is no other practical alternative funding relief available to plan sponsors.
  2. Member consent requirement for the extension of the funding payment schedule is satisfied if not more than one-third of the aggregate of all active, deferred and retired plan members indicate that they do not consent. Beneficiaries entitled to payments under a pension plan (e.g., a spouse of a deceased member entitled to survivor pension or pre-retirement death benefits in the form of an immediate or deferred pension) are not included in this group of individuals for the purpose of determining whether the consent requirement is met.
  3. The Ontario budget states that collective bargaining agents would be able to provide consent only for the proportionate share of active members whom they represent. It seems that collective bargaining agents would not be able to provide consent for deferred vested and retired members.

Federal. Following the November 2008 Economic and Fiscal Statement and the 2009 federal budget tabled by the federal Minister of Finance on January 27, 2009, the proposed Solvency Funding Relief Regulations, 2009 (the "Proposed 2009 Regulations") were published in Part I of the Canada Gazette on April 4, 2009. Interested persons are invited to make representations concerning the Proposed 2009 Regulations within 30 days after the date of publication of the notice. The relief introduced by the Proposed 2009 Regulations is available to only those federally-regulated pension plans with a solvency deficiency reported at a plan year-end date from November 1, 2008 to October 31, 2009. The relief provides a plan sponsor with an election to:

  • extend the solvency funding payment period from 5 years to 10 years with member consent (subject to restrictions on benefit improvements) or with the difference each year between the 2 levels of payment secured by a letter of credit; or
  • if such member consent or letter of credit cannot be secured by the next plan year, the outstanding deficiency is required to be funded over a new 5-year schedule commencing on that date.

A specific option of extending the solvency funding payment period to 10 years is available to agent Crown corporations. In addition to these relief measures, federally regulated pension plans are permitted to take advantage of asset smoothing over a period of not more than 5 years, using market values above the 110% limit.

To balance these relief measures against the security of pension benefits, the difference between 5-year and 10-year level of payments in the extension of solvency funding payment period with member consent is subject to a deemed trust and any deferral of funding resulting from the use of an asset value (in smoothing) in excess of 110% is also subject to a deemed trust.

There are a number of observations relating to the Proposed 2009 Regulations:

  1. According to the Analysis Statement accompanying the Proposed 2009 Regulations, the proposals have benefited from the consultations in 2005 in respect of the Solvency Funding Relief Regulations, 2006 (the "2006 Regulations"). There are a number of conceptual and functional similarities between the relief measures and required formalities in the 2006 Regulations and those in the Proposed 2009 Regulations.
  2. Like the 2006 Regulations, the relief measures in the Proposed 2009 Regulations are available only to plan sponsors which are up to date in their funding payments.
  3. For a pension plan which is unable to secure a letter of credit or member consent by the following plan year, it is in effect granted a one-year payment moratorium because its outstanding deficiency is required to be funded over a new 5-year period only after it is determined that the letter of credit or member consent cannot be obtained.
  4. To satisfy the member consent requirement, "no objection" of active members and beneficiaries must be considered separately, i.e., less than one-third of members and less than one-third of beneficiaries (excluding members) object to the extension of payment period. Beneficiaries include deferred vested members, retirees and other beneficiaries entitled to pension benefits under the pension plan. Further, a union representative or a court-appointed representative which has authority to act on behalf of retirees, deferred vested members and other persons entitled to benefits (i.e., not only active members) has authority to indicate "no objection" for them.