The federal government is currently seeking recommendations about its plan to introduce solvency reserve accounts for federally regulated defined benefit pension plans.
Under the government’s proposed model, first announced in 2022, these accounts would be optional and constitute a separate account within a DB plan. In a press release, the government said solvency reserve accounts could help improve the sustainability of DB plans by providing employers with more funding flexibility by removing “disincentives from making higher payments then required when plan sponsors may have more funds available.”
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Following the decision of some provinces to establish this model, the federal government is looking to introduce a funding tool that would make it easier for plan sponsors to regain some of the funds they’ve paid into their plan.
If a DB plan elects to introduce solvency reserve accounts as part of this new policy, it would then be mandated to amend its own plan text and offer additional disclosures to their actuarial valuation report and annual statements to plan members and retirees. Plan sponsors would be required to report the amount of funds in the account, any payments or withdrawals, as well as the impact from these actions to the overall funding status of the plan, during the preceding plan year.
The government is also proposing strict guidelines around fund withdrawal from solvency reserve accounts. Any withdrawal can’t cause the plan’s going concern ratio or its solvency ratio to fall below 105 per cent funded. In addition, plan sponsors wouldn’t be allowed to withdraw more than 20 per cent of the solvency reserve account’s eligible surplus in a given year. The rules would set the stipulation that on the termination of the pension plan, an employer may withdraw any remaining funds in the solvency reserve account only after all benefit obligations are fully paid.
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According to a statement from Normandin Beaudry, solvency reserve accounts would help streamline funding rules for DB pension plans and could encourage employers to contribute more than the minimum required funding.
However, the consultancy noted the measure could raise questions on the rules of surplus use and the order in which they should apply. It also noted that a solvency funding requirement for federally regulated DB plans could mean that minimum contributions remain more volatile for these plans, compared to Ontario- and Quebec-based plans, which are exempt from this requirement.
The public consultation period will officially close on Oct. 14, 2024.
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