Provincial Solvency Relief Update

According to Morneau’s News and Views report, the Ontario, Quebec, Manitoba and federal governments have announced proposals to provide temporary solvency funding relief to sponsors of DB plans affected by the financial crisis, while Saskatchewan and Alberta have also issued discussion papers on this subject.

To date, solvency amortization periods have been seen as the quickest fix for struggling pension plans and, as a result, most jurisdictions have enacted measures to address this issue. Solvency deficits may now be amortized over 10 years—compared to the current five years—subject to certain conditions, for plans registered in the following jurisdictions.

• Federal: Members and retirees must agree to the extended schedule, or a letter of credit must be obtained to cover the difference between the five- and 10-year payment schedules.
• Quebec: Some conditions apply.
• Ontario: Active members or their collective-bargaining agents and retired plan members must agree to the extended schedule.
• Manitoba: No more than one-third of members and one-third of beneficiaries may object to the extension.
• New Brunswick: Solvency amortization periods may be extended to 2018 with the Superintendent’s permission. This effectively amounts to a 10-year amortization period for actuarial reports filed in 2008.
• Newfoundland and Labrador: No more than one-third of members and one-third of former members may file an objection to the extension. Extension is only permitted for plans with solvency deficiencies in actuarial reports dated between Jan. 1, 2007 and Jan. 1, 2009, while the rules are more lenient for multi-employer pension plans.

The report cautions that member consent, where required, may be difficult to obtain, especially with respect to retirees. And, in the federal, Quebec and Ontario jurisdictions, these measures will require formal changes to legislation or regulations, but Morneau Sobeco does not foresee any major obstacles.

The Canadian Institute of Actuaries Revised Standard of Practice for Pension Commuted Values in Solvency Valuations

The Canadian Institute of Actuaries (CIA) has issued a revised standard of practice for pension commuted values, which will come into force on April 1, 2009. On average, this new standard would decrease solvency liabilities by roughly 5% to 10% for active members, or 2% to 5% of total plan liabilities including retirees, according to the report.

Ontario and Quebec intend to amend legislation to allow for the early implementation of this new standard for solvency valuations, which could mean lower solvency deficiencies for valuations as at Dec. 31, 2008, than would otherwise have been the case. New Brunswick must follow suit, as no announcement of change to the new standard has yet been made.

While other jurisdictions do not require legislative amendments, application of this new standard to valuations prior to April 1, 2009, must receive regulatory approval. The Office of the Superintendent of Financial Institutions has allowed federally registered plans to apply the new standard for valuations at effective dates on or after Dec. 31, 2008, as long as the report is submitted on or after April 1, 2009, and the plan is not terminated before that date. British Columbia and Saskatchewan regulators are expected to follow suit, but have not yet formally done so.

Other Relief Measures and Conditions

Ontario and Quebec will allow for the consolidation of previous solvency amortization schedules, which will lengthen amortization schedules and should lower contribution payments, according to the report.

Ontario measures also include a one-year deferral of the start of catch-up payments required on the filing of valuation reports until the beginning of the next fiscal year and the use of actuarial gains to reduce annual cash payments.

In Quebec, the smoothing of assets over five years will be permitted, which should increase solvency assets of Quebec plans, thereby decreasing the solvency deficit.

Saskatchewan and Alberta Discussion Papers

The Saskatchewan Financial Services Commission published a discussion paper in December 2008 proposing two options for temporary solvency funding relief. The province is considering either a temporary solvency deficiency payment moratorium or an extension of the amortization period for solvency deficiencies from five to 10 years. These measures would apply only to newly arising solvency deficiencies, and not to solvency deficiencies previously established, notes the report.

Also, they would apply to a single actuarial valuation with a review date between Dec. 31, 2008 and Dec. 31, 2009. The province is also considering allowing letters of credit for solvency funding purposes and might review its pension legislation.

Alberta’s discussion paper, also issued in December 2008, proposes three measures for single employer pension plans. These would apply only to plans that file reports with valuation dates between Sept. 1, 2008 and Jan. 1, 2010. The first measure would apply the CIA revised Standard of Practice for Pension Commuted Values to solvency valuations with valuation dates prior to April 1, 2009, while the second measure would extend the amortization period for solvency deficiencies attributable to the 2008 economic environment from five to 10 years.

The third measure would offer plan sponsors the opportunity to apply for a three-year exemption from making solvency payments, similar to that currently in place for specified multi-employer pension plans, up to Dec. 31, 2011, subject to certain conditions. Plan sponsors that take advantage of the solvency moratorium or extended amortization option would be required to advise members of these remedies on their annual statements.

In Alberta, changes in going-concern valuation assumptions may not make funding less conservative than in the previously filed report, unless there is an acceptable justification. If asset value smoothing is used, the smoothed asset value cannot exceed 110% of market value, and contribution holidays cannot be extended after Dec. 31, 2008, unless the plan can prove that it continues to have excess assets.

To download the Morneau Sobeco News and Views report, click here.

To comment on this story, email jody.white@rci.rogers.com.