Amendments to Pension Benefits Standards Regulations, 1985 (the Regulations) came into force on April 1, 2011. These amendments apply to federally-registered pension plans.
The amendments include provisions that:
- permit employers to provide letters of credit in lieu of making solvency payments to the pension fund, up to a limit of 15% of plan assets,
- require the plan sponsor to fully fund pension benefits on plan termination,
- void any plan amendments that have the effect of reducing the solvency ratio of the pension plan below 85%,
- permit sponsors, plan members and retirees of a distressed pension plan to negotiate their own funding arrangements to facilitate a plan restructuring.
Letters of Credit
Plan sponsors are now able to use letters of credit to satisfy solvency payments up to 15% of plan assets. The 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. Where 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.
Requirement for Full Funding on Plan Termination
The Pension Benefits Standards Act, 1985 (Canada) was amended to require plan sponsors to fund any deficiency existing at the date of plan termination. The amendments to the Regulations set out a payment schedule to fund the deficiency. In particular, any solvency deficiency that exists at the date of plan termination must be amortized in equal payments over 5 years.
Void Plan Amendments
The Pension Benefits Standards Act, 1985 (Canada) voids any plan amendment that has the effect of reducing pension benefits that accrued before the amendment date, or where the solvency ratio is or would fall below 85%. These provisions are aimed at preventing underfunded plans from adopting amendments that would further reduce the plan’s funded position.
Distressed Pension Plan Workout Scheme
An employer in financial difficulty may elect to enter into a distressed pension plan workout scheme agreed to by members and beneficiaries of the plan. The agreement, subject to the approval by the Minister of Finance, may include a funding schedule that is different from what is required by normal funding rules.