INFORMATION TO BE PROVIDED TO BENEFICIARIES

10. (1) Subject to subsection (2), the administrator shall provide the following information to the beneficiaries:

(a) the solvency ratio of the plan as at the day on which the deficiency funded in accordance with section 5 emerged;

(b) the amount of the deficiency to be funded in accordance with this Part;

(c) a description of the extent to which the beneficiaries’ benefits would be reduced if the plan were fully terminated and wound up with the solvency ratio referred to in paragraph (a);

(d) a statement indicating that extending the period for funding the deficiency as permitted by this Part may result in a lower value of the plan assets during the funding period than would be the case if the deficiency were funded over a period not exceeding five years and that the longer funding period may also extend the period during which the plan assets are less than the plan liabilities;

(e) the special payments that would have been made during the first plan year covered by the actuarial report referred to in paragraph 6(b) if the deficiency were to be funded in accordance with section 9 of the Pension Benefits Standards Regulations, 1985;

(f) the special payments in respect of the deficiency that will be made during the 2009 plan year;

(g) a statement indicating that an actuarial report will be filed at least annually with the Superintendent while the plan is being funded in accordance with this Part;

(h) a statement indicating that the plan may continue to be funded in accordance with this Part following the 2009 plan year end only if less than one third of the members object and less than one third of the beneficiaries excluding members object;

(i) a statement indicating that the Superintendent’s approval is not required to fund the deficiency in accordance with this Part;

(j) a statement indicating that the beneficiaries may object to the proposal to fund the plan in accordance with this Part by sending an objection to the administrator at the address and by the date indicated in the statement, which date shall not be less than 30 days after the day on which the other information required to be provided under this subsection is provided by the administrator;

(k) a statement indicating that amendments to the plan that increase the pension benefits have been restricted during the 2009 plan year and that, if the deficiency of the plan is funded in accordance with this Part, those benefits will continue to be restricted for the following four plan years of funding following the 2009 plan year end; and

(l) a statement setting out the right of access to the documents described in paragraph 28(1)(c) of the Act.

(2) If a beneficiary is represented by a beneficiary representative, the administrator shall provide the information set out in subsection (1) to the beneficiary representative.

11. If a beneficiary representative has the authority to act on behalf of a beneficiary with respect to any matter under this Part, the administrator shall deal with the beneficiary representative.

DOCUMENTS TO BE FILED WITH SUPERINTENDENT

12. If the plan is to be funded in accordance with this Part, the administrator shall file the following documents with the Superintendent within 60 days after the end of the 2009 plan year:

(a) other than in the case of a multi-employer pension plan, a written statement confirming that a resolution of the board of directors of the employer has been passed, if the employer is a corporation, or, if the employer is not a corporation, an approval of the persons who have the authority to direct or authorize the actions of that body has been given, authorizing the special payment schedule calculated in accordance with this Part;

(b) a written statement confirming that the information set out in subsection 10(1) has been provided to the beneficiaries or to the beneficiary representatives; and

(c) a written statement confirming that less than one third of the members have objected and less than one third of the beneficiaries excluding members have objected.

PRESCRIBED SOLVENCY RATIO

13. For the purposes of paragraph 10.1(2)(b) of the Act, the prescribed solvency ratio level for the first five plan years of funding in accordance with Part 1 and this Part is the solvency ratio calculated on the basis of the most recent actuarial report that is filed with the Superintendent in accordance with subsection 12(3) of the Act.

NEW SOLVENCY DEFICIENCY

14. If this Part applies and if a solvency deficiency, as defined in subsection 9(1) of the Pension Benefits Standards Regulations, 1985, emerges after the day on which the deficiency emerged, the new solvency deficiency shall be calculated for the purposes of subsection 9(4) of those Regulations in accordance with that definition and that definition shall be interpreted as including

(a) the present value of the special payments referred to in section 5; and

(b) the present value of the special payments that are due in the period that is the greater of

(i) the five years following the emergence of the new solvency deficiency, and

(ii) the period then remaining of the 10 years following the emergence of the deficiency that was funded in accordance with Part 1.

TERMINATION OF PLAN

15. If a plan is fully terminated and on the day on which it is terminated the liabilities of the plan exceed its assets, the lesser of the amounts determined under subsection 5(4) and the amount by which the liabilities of the plan exceed its assets shall immediately be remitted to the pension fund.

CEASING 10 - YEAR FUNDING

16. (1) A plan may cease to be funded in accordance with this Part, beginning on the first day of a plan year, by the administrator giving written notice to the Superintendent not later than six months after the beginning of that plan year.

(2) The notice shall indicate whether the plan has a surplus on the first day of the plan year.

(3) If funding ceases, section 9 of the Pension Benefits Standards Regulations, 1985 applies in respect of the plan except as otherwise provided in this Part.

CALCULATING SURPLUS

17. A surplus in respect of a plan shall be determined in the manner set out in subsection 16(1) of the Pension Benefits Standards Regulations, 1985 as if the plan had been fully terminated.

PLAN WITH SURPLUS

18. If a plan ceases to be funded in accordance with this Part and the plan has a surplus on the first day of the plan year, this Part ceases to apply to the plan on the first day of that plan year.

PLAN WITHOUT SURPLUS

19. (1) If a plan ceases to be funded in accordance with this Part and the plan does not have a surplus on the first day of the plan year, section 9 of the Pension Benefits Standards Regulations, 1985 applies to the plan except as follows:

(a) when funding ceases before the sixth plan year,

(i) the administrator shall have an actuarial report prepared — in which the present value of the special payments referred to in section 5 shall be zero — valuing the plan as at the first day of the plan year in which funding ceases,

(ii) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 from the day on which the deficiency emerged to the day on which funding ceases, as adjusted to take into account the actuarial gains that were applied under paragraph 9(9)(a) of those Regulations, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with Part 1 and this Part, plus interest, shall immediately be remitted to the pension fund,

(iii) any remaining deficiency disclosed by the actuarial report, which shall be calculated by including as an asset any amount remitted in accordance with subparagraph (ii), shall be considered to have emerged as at the day on which the deficiency emerged,

(iv) the remaining deficiency calculated under subparagraph (iii) shall be funded by special payments sufficient to liquidate it by equal annual payments over a period not exceeding five years minus the number of years that the plan was funded in accordance with Part 1 and this Part, and

(v) the special payments set out in section 5 shall continue to be made until the first special payment required to fund the remaining deficiency referred to in subparagraph (iii) is made to the pension fund; and

(b) when funding ceases after the fifth plan year,

(i) the administrator shall have an actuarial report prepared as at the first day of the plan year in which funding ceases, and

(ii) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 from the day on which the deficiency emerged to the day on which funding ceases, as adjusted to take into account the actuarial gains that were applied under paragraph 9(9)(a) of those Regulations, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with Part 1 and this Part, plus interest, shall immediately be remitted to the pension fund.

(2) Interest shall be calculated by using the interest rate that was assumed in valuing the liabilities of the plan for the purpose of calculating the deficiency.

CROWN CORPORATIONS

20. (1) The administrator of a plan of a Crown Corporation with a deficiency that is funded in accordance with this Part shall not have to comply with sections 9, 10 and 12 if the administrator files the following documents with the Superintendent:

(a) the actuarial report valuing the plan as at the day on which the deficiency emerged;

(b) a written statement confirming that a resolution of the board of directors of the Crown Corporation has been passed authorizing the special payment schedule calculated in accordance with this Part;

(c) a written statement confirming that the board of directors of the Crown Corporation has notified the Minister and the Minister responsible for the Crown Corporation of the decision that the deficiency is to be funded in accordance with this Part; and

(d) a copy of letters from the Minister and the Minister responsible for the Crown Corporation acknowledging that they have been informed of the fact that the Crown Corporation intends to fund the deficiency in accordance with this Part.

(2) When the administrator provides the written statement under paragraph 28(1)(b) of the Act, the administrator shall also indicate the amount of the deficiency and that the deficiency is to be funded in accordance with this Part by equal annual payments over a period not exceeding 10 years.

(3) Section 13 shall not apply in respect of a plan if the documents set out in subsection (1) are filed with the Superintendent.

PART 3

10-YEAR FUNDING WITH LETTERS OF CREDIT

GENERAL FUNDING RULES

21. (1) Despite subsection 9(4) of the Pension Benefits Standards Regulations, 1985 and section 13 of the Air Canada Pension Plan Solvency Deficiency Funding Regulations, if the actuarial report that values a plan as at the end of the 2008 plan year indicates that there is a 2008 solvency deficiency and that there is a solvency deficienc, as defined in subsection 9(1) of the Pension Benefits Standards Regulations, 1985, the 2008 solvency deficiency may be funded by special payments sufficient to liquidate that deficiency by equal annual payments over a period not exceeding 10 years from the day on which the 2008 solvency deficiency emerged.

(2) If the actuarial report that values the plan as at the end of the 2008 plan year indicates that there is no 2008 solvency deficiency but that there is a solvency deficiency as defined in subsection 9(1) of the Pension Benefits Standards Regulations, 1985, the solvency deficiency may be funded by special payments sufficient to liquidate the solvency shortfall of the plan over a period not exceeding 10 years from the day on which that solvency shortfall was calculated.

(3) The deficiency may be funded in accordance with this Part if the employer

(a) obtains letters of credit up to the end of the fifth plan year of funding under this Part, for the amount representing the difference between the present value, at the end of each plan year, of the remaining special payments that are required to be made to liquidate the 2008 solvency deficiency or solvency shortfall, as the case may be, under this Part and the present value of the remaining special payments that would have been required to be made to liquidate the corresponding 2008 solvency deficiency or solvency shortfall, as the case may be, as if it had been funded under section 9 of the Pension Benefits Standards Regulations, 1985; and

(b) maintains letters of credit for the sixth plan year of funding and for each plan year after that year, for the amount representing the present value at the beginning of each plan year of the remaining special payments under this Part.

(4) The present value of the remaining special payments shall be determined by using the interest rate that was assumed in valuing the liabilities of the plan for the purpose of calculating the deficiency.

LETTER OF CREDIT

22. (1) A letter of credit required by this Part shall be an irrevocable, unconditional standby letter of credit that

(a) is in accordance with the rules of International Standby Practices 1998 (publication No. 590 of the International Chamber of Commerce), as amended from time to time;

(b) is payable only in Canadian currency;

(c) is issued or confirmed by an issuer who is a member of the Canadian Payments Association; and

(d) provides that

(i) the letter of credit is made out to the holder’s benefit,

(ii) the issuer will pay the face amount of the letter of credit on demand from the holder without inquiring whether the holder has a right to make the demand,

(iii) the bankruptcy of the employer shall have no effect on the rights and obligations of the issuer and the holder set out in the letter of credit,

(iv) the letter of credit will expire on the day on which the plan’s year ends,

(v) the letter of credit will automatically be renewed for the full face amount for further one-year periods on the expiry date referred to in subparagraph (iv) unless the issuer notifies the holder, in writing, of the non-renewal not less than 90 days before the expiry date, and

(vi) the letter of credit may not be amended, except to increase the face amount, during the term of the letter of credit and may not be assigned except to another holder.

(2) The initial letter of credit for funding under this Part shall be obtained by the end of the 2009 plan year and each subsequent letter of credit shall be obtained at least 30 days before the beginning of each subsequent plan year that is covered by it.

(3) The letter of credit shall immediately be provided to the holder.

(4) Subsection 5(4) shall not apply in respect of a plan if the letters of credit are obtained in accordance with this Part.

23. If separate letters of credit have been obtained for each plan year, a letter of credit is not required to be automatically renewed after the fifth year following the plan year for which it was obtained.

24. If the face amount of letters of credit obtained or maintained in accordance with this Part for a plan year is less than the amount required by subsection 21(3) for that plan year, the employer shall make up the difference either by increasing the amount of letters of credit or by making additional payments to the pension fund no later than on the day on which the next quarterly payment is made to the pension fund in accordance with subsection 9(14) of the Pension Benefits Standards Regulations, 1985.

TRUST AGREEMENT

25. (1) The employer and, if the employer is not the administrator of the plan, the administrator shall enter into a trust agreement or may amend any existing trust agreement they may have with the holder regarding the letters of credit referred to in this Part.

(2) The trust agreement shall provide that

(a) the holder shall hold the letters of credit in Canada in trust for the plan;

(b) the definition “default” in subsection 1(1) applies to the agreement;

(c) the employer shall immediately notify, in writing, the holder, the Superintendent and, if the employer is not the administrator of the plan, the administrator of a default;

(d) if not otherwise notified under paragraph (c), the administrator shall notify, in writing, the holder and the Superintendent of a default immediately after becoming aware of it;

(e) on receipt of the notice referred to in paragraph (c) or (d), the holder shall immediately make a demand for payment of the face amount of all of the letters of credit held in respect of the plan;

(f) on receipt of a written notice of default from any person other than the employer or the administrator, the holder shall

(i) immediately notify, in writing, the employer, the administrator and the Superintendent of the notice, and

(ii) make a demand for payment of the face amount of all of the letters of credit held in respect of the plan unless the administrator provides a written notice to the holder within 30 days after receipt of the notice that the default has not occurred;

(g) when a holder makes a demand for payment of a letter of credit held in respect of the plan, it shall notify, in writing, the employer, the administrator and the Superintendent that it has made the demand;

(h) the holder shall immediately notify, in writing, the employer, the administrator and the Superintendent if the issuer does not pay the face amount of a letter of credit after a demand for payment has been made;

(i) the holder shall not make a demand for payment if a letter of credit expires without being renewed, or the face amount is being reduced, in accordance with this Part;

(j) the administrator shall notify the holder of any circumstance in which a letter of credit may expire or the face amount of a letter of credit may be reduced in accordance with this Part; and

(k) the administrator shall provide the holder with a copy of the statements referred to in paragraph 26(1)(e) and subsection 26(2) and with a copy of the written notice referred to in paragraph 32(a).

DOCUMENTS TO BE FILED WITH SUPERINTENDENT

26. (1) For the first plan year of funding of the deficiency under this Part, the administrator shall file the following documents with the Superintendent within 60 days after obtaining letters of credit:

(a) written notification that the deficiency is to be funded in accordance with this Part;

(b) the actuarial report valuing the plan as at the day on which the deficiency emerged;

(c) a written statement confirming that a resolution of the board of directors of the employer has been passed, if the employer is a corporation, or, if the employer is not a corporation, an approval of the persons who have the authority to direct or authorize the actions of that body has been given, authorizing the special payment schedule calculated in accordance with this Part;

(d) a copy of each letter of credit in effect for the plan year;

(e) a written statement from the administrator that the letters of credit comply with this Part; and

(f) a copy of the trust agreement referred to in section 25 together with the name and address of the holder of the letters of credit.

(2) For each subsequent plan year of funding, the administrator shall file with the Superintendent copies of all subsequent letters of credit that have been obtained by the employer, within 60 days after they are obtained, together with a written statement, for each letter of credit filed, that it complies with this Part.

STATEMENT TO MEMBERS

27. When the administrator provides the written statement under paragraph 28(1)(b) of the Act while the plan is being funded in accordance with this Part, the administrator shall also provide the following information:

(a) the amount of the 2008 solvency deficiency or the solvency deficiency calculated in accordance with the definition “solvency deficiency” in subsection 9(1) of the Pension Benefits Standards Regulations, 1985, as the case may be, that is being funded under this Part;

(b) the fact that the deficiency is to be funded in accordance with this Part by equal annual payments over a period not exceeding 10 years; and

(c) the aggregate face amount of all of the letters of credit that are held by the holder in respect of the plan.

REDUCTION OF THE FACE AMOUNT OF A LETTER OF CREDIT

28. (1) The face amount of a letter of credit may be reduced, effective the beginning of a plan year, by

(a) the amount by which the aggregate amount of payments that the employer has made to the pension fund in the previous plan year exceeds the total of the annual special payments made in accordance with this Part and the normal cost of the plan for that year as shown in an actuarial report that was filed with the Superintendent for that year in accordance with subsection 12(3) of the Act; or

(b) the amount by which the aggregate face amount of all of the letters of credit that are held by the holder in respect of the plan exceeds the amount referred to in paragraph 21(3)(a) or (b), as the case may be.

(2) The face amount of the letter of credit shall not be reduced following a default.

NEW SOLVENCY DEFICIENCY

29. When a solvency deficiency emerges after the day on which the deficiency that is being funded in accordance with this Part emerged, the new solvency deficiency shall be calculated, for the purposes of subsection 9(4) of the Pension Benefits Standards Regulations, 1985, in accordance with the definition “solvency deficiency” in subsection 9(1) of those Regulations and that definition shall be interpreted as including

(a) the present value of the special payments referred to in subsection 21(1); and

(b) the present value of the special payments that are due in the period that is the greater of

(i) the five years following the emergence of the new solvency deficiency, and

(ii) the period then remaining of the 10 years following the emergence of the deficiency being funded under this Part.

FAILURE TO PAY LETTER OF CREDIT

30. On receipt of the notice from a holder that an issuer has not paid the face amount of a letter of credit after a demand for payment has been made, the employer shall remit to the pension fund, no later than 30 days after the day on which the demand for payment was made, an amount equal to the face amount of that letter of credit.

OCCURRENCE OF DEFAULT

31. (1) If a default occurs, the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 from the day on which the deficiency emerged, as adjusted to take into account the actuarial gains that were applied under paragraph 9(9)(a) of those Regulations, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with Part 1 and this Part, plus interest, shall immediately be remitted to the pension fund.

(2) Except when a plan is fully terminated, the administrator shall have an actuarial report prepared — in which the present value of the special payments referred to in subsection 21(1) shall be zero — valuing the plan as at the last day of the plan year in which the default occurs and shall file a copy of the report with the Superintendent in accordance with subsection 12(3) of the Act.

(3) Any remaining deficiency disclosed by the actuarial report prepared in accordance with subsection (2), which shall be calculated by including as an asset any amount remitted in accordance with subsection (1), shall be considered to have emerged on the day on which the deficiency emerged.

(4) The remaining deficiency calculated under subsection (3) shall be funded by special payments sufficient to liquidate that deficiency by equal annual payments over a period not exceeding five years minus the number of years that the plan was funded in accordance with Part 1 and this Part.

CEASING 10 - YEAR FUNDING

32. A plan may cease to be funded in accordance with this Part, beginning on the first day of a plan year, if

(a) the administrator gives written notice to the Superintendent not later than six months after the beginning of that plan year;

(b) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 from the day on which the deficiency emerged, as adjusted to take into account the actuarial gains that were applied under paragraph 9(9)(a) of those Regulations, plus interest, exceeds the aggregate amount of special payments made to the pension fund in accordance with Part 1 and this Part, plus interest, is remitted to the pension fund at least 30 days before the plan’s year end; and

(c) an actuarial report is prepared in accordance with subsection 31(2) and any remaining deficiency is calculated and funded in accordance with subsections 31(3) and (4) as if a default had occurred, except that the actuarial report shall value the plan as at the first day of the plan year in which funding ceases.

CEASE TO BE IN FORCE

33. These Regulations cease to be in force on November 1, 2019.

COMING INTO FORCE

34. These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issue

Under the Pension Benefits Standards Act, 1985 (the “Act”), the federal government regulates private pension plans covering areas of employment under federal jurisdiction, such as telecommunication, banking and inter-provincial transportation. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of such plans. OSFI supervises some 1 350 pension plans or about 7% of all pension plans in Canada, representing about 12% of trusteed pension fund assets in Canada; 446 of the federal plans are defined benefit pension plans.

The Act requires that federally registered pension plans fund promised benefits in accordance with standards set out in the Pension Benefits Standards Regulations, 1985 (Regulations). Defined benefit pension plans must file actuarial valuations every three years, or more frequently as required by the Superintendent of Financial Institutions (the “Superintendent”). Where these valuations show a pension plan’s assets to be less than its liabilities, payments must be made into the plan to eliminate the deficiency over a prescribed period of time, as described below. While private pension plans are voluntary, they must generally be registered, either federally or provincially. One of the main purposes of regulation is to set out standards for funding and investment of pension plans to ensure that the rights and interests of pension plan members, retirees and their beneficiaries are protected. In particular, regulation is intended to ensure that pension plan assets are sufficient to meet pension plan obligations.

Actuarial valuations of defined benefit plans are conducted using two different sets of actuarial assumptions: “solvency valuations” use assumptions consistent with a plan being terminated, while “going-concern valuations” are based on the plan continuing in operation. If a solvency valuation reveals a shortfall of plan assets to plan liabilities, the Regulations require the plan sponsor to make special payments into the plan sufficient to eliminate the deficiency over five years. Where a deficiency exists on the basis of a going-concern valuation, the Regulations require special payments to eliminate the going-concern deficiency over 15 years. In general, the payments that a plan sponsor must remit to a plan in a given year include the amount necessary to cover the ongoing current service costs associated with the plan, plus any “special payments” required in that year to pay down a funding deficiency over the relevant time period.

Pension plan funded levels have experienced much volatility in recent years. In the mid-part of this decade, a sharp decline in long-term interest rates along with changes in actuarial standards, such as the longevity assumptions, resulted in increased plan liabilities. Combined with poor investment returns, these factors led to many plans being underfunded on a solvency basis. To address the pressure that increased funding requirements put on plan sponsors, the government adopted the temporary Solvency Funding Relief Regulations (the “2006 Regulations”) in November 2006. The 2006 Regulations provided solvency funding relief through four temporary measures. These measures provided for the solvency deficiencies of federally regulated defined benefit pension plans to be addressed in an orderly fashion while providing safeguards for pension benefits. The options included: a consolidation of solvency payment schedules with amortization over a single, new, 5-year period; an extension of the solvency funding payment schedule from 5 to 10 years, subject to a condition of buy-in by plan members and retirees; an extension of the solvency funding payment schedule from 5 to 10 years with letters of credit; and, an extension of the solvency funding payment schedule from 5 to 10 years for agent Crown corporations, subject to terms and conditions that would ensure a level playing field. As of March 31, 2008, 75 plans availed themselves of the funding relief offered under the 2006 Regulations.

Since the 2006 Regulations were adopted, funding levels have strengthened. As of December 31, 2007, OSFI estimated that the average funded ratio for federally regulated defined benefit plans was 1.05, which was up from 0.90 as of December 31, 2005. The percentage of plans in an unfunded position improved during this time period as well, moving from 78% of plans as of December 31, 2005 to 56% as of December 31, 2007.

Recently, the funding levels of defined benefit pension plans have been deteriorating. As of December 31, 2008, OSFI estimates that the average funded ratio for federally regulated defined benefit plans was 0.85. As of December 2008, over 80% of plans were in deficit. Since June, the global credit crisis has led to a sharp decline in global equity markets that has reduced the funded status of federally regulated private pension plans. The decline in the market value of plan assets will result in many sponsors being required to make large special payments. The magnitude of these special payments could damage the financial condition of the companies that sponsor these pension plans and divert available funds away from operating capital. These problems would be especially pronounced given current conditions in credit markets.

Objectives

As announced in the 2008 Economic and Fiscal Statement, under the present extraordinary circumstances, the Solvency Funding Relief Regulations, 2009 (the “2009 Regulations”) will allow federal pension plans to extend their solvency funding payment schedule from 5 to 10 years in respect of a solvency deficiency reported at a plan year-end date from November 1, 2008 to October 31, 2009, subject to certain conditions. As announced in Budget 2009, plans will also be able to take advantage of higher asset-smoothing limits with the difference in required payments attributed to the use of the higher smoothing limit being subject to a deemed trust. Asset smoothing permits the valuation of a plan’s assets to be determined on an amount based on the average asset value over a certain period, subject to a limit related to the current market value.

The objective of the 2009 Regulations is to assist plan sponsors manage increases in solvency payments which are required under the current framework in light of the sharp decline in global equity markets that have reduced the funded status of federally regulated private pension plans, while incorporating terms and conditions intended to mitigate potential risks to plan members and retirees.

Description

Under the 2009 Regulations, a plan sponsor will be able to seek funding relief in respect of that deficiency by choosing one of the four temporary measures outlined below. Any prior or future solvency deficiencies would be funded in accordance with the Regulations, 2006 Regulations or Air Canada Regulations, as the case may be. The measures are only available for plan sponsors that are up to date in their funding payments. Sponsors may also choose to continue to fund under the rules set out in the Regulations.

Under the 2009 Regulations a plan sponsor will be able to seek funding relief by choosing one of the four temporary measures outlined below, depending on its particular circumstances.

• Extension of the Solvency Funding Payment Period by an Additional Year: All sponsors who are up to date in their regulatory payments will be eligible to extend their solvency funding payment period to 10 years when filing the valuation report for a year-end date between November 1, 2008 and October 31, 2009. However, if members and retirees do not consent, or a letter of credit cannot be secured, or the conditions applicable to agent Crown corporations below are not met by the next plan year, the sponsor will be permitted to fund the outstanding amount of that deficiency over a new five-year schedule commencing at that date.
  
  
• Extension of the Solvency Funding Payment Period to 10 Years with Member and Retiree Support: Plan sponsors will be permitted to extend the period for making solvency funding payments to 10 years from five, provided that no more than one-third of active plan members or non-active members and beneficiaries, including retirees, object. The support condition, which is based on plain language disclosure, will ensure that the parties are fully informed of the extended schedule and its implications.

Under this option, there will be a restriction on plan improvements in the first five years unless the improvements are pre-funded so that the solvency ratio of the plan is not reduced by the benefit improvement. Alternatively, a plan sponsor could make plan improvements by opting out of the 10-year funding schedule and returning to the normal 5-year funding schedule.

• Extension of the Solvency Funding Payment Period to 10 Years with Letters of Credit: Plan sponsors will be permitted to extend the period for making solvency funding payments to 10 years on the condition that the difference each year between the 5-year and 10-year level of payments is secured by a letter of credit obtained by the plan sponsor and held by a trustee. This option would reduce the level of annual solvency payments for plan sponsors while protecting pension benefits.

By issuing a letter of credit to a plan sponsor, the financial institution would essentially be guaranteeing the difference between the 5-year and 10-year level of payments. Should the plan sponsor, for example, terminate the plan, go bankrupt or file for protection under the Companies’ Creditors Arrangement Act during this period, the trustee would make a demand for payment from the financial institution issuing the letter of credit. The letter of credit would also be payable on the demand of the trustee if the letter of credit were not renewed or replaced on its expiry date. Upon receiving the demand for payment, the issuing financial institution would be required to immediately pay the full amount of the letter of credit to the pension fund. If the financial position of the pension plan improves due to changes in market performance and/or increase in long-term interest rates, plan sponsors would be able to reduce or eliminate the letters of credit to the extent that they are no longer required as set out in the 2009 Regulations.

The plan sponsor would normally have to pay an annual fee to the financial institution for obtaining a letter of credit. The fee typically would vary depending on the plan sponsor’s credit worthiness.

• Extension of the Solvency Funding Payment Period to 10 Years for Agent Crown Corporations: Agent Crown corporations with defined benefit pension plans governed by the PBSA represent a special case. Agent Crown corporations will be eligible for the option requiring member and retiree support, but not for the measure requiring letters of credit. In place of the option requiring a letter of credit, agent Crown corporations are permitted to extend the period for making solvency funding payments to 10 years subject to meeting the applicable terms and conditions in the 2009 Regulations. These terms and conditions include the filing of an acknowledgement in writing by the Minister of Finance and the Minister responsible for the agent Crown corporation that it intended to pursue this measure. In order to encourage a level playing field, it is anticipated that if the agent Crown corporation uses this option it would agree to pay a fee to the Government comparable to the fee that would be paid to obtain a letter of credit. There are 10 agent Crown corporations with an active defined benefit pension plan.

In addition to these funding relief measures, federally regulated pension plans are able, subject to guidance established by OSFI, to take advantage of the smoothing of asset value changes over a period of not more than five years to stabilize short-term fluctuations. As detailed in OSFI specifications issued on March 6, 2009, plans will be permitted to temporarily use asset-smoothing using market values above the 110% limit. As announced in Budget 2009, under the 2009 Regulations, any deferral of funding that results from the use of an asset value in excess of 110% will be subject to a deemed trust.

Plans that availed themselves of funding relief under the 2006 Regulations will be permitted to fund according to the terms of the 2009 Regulations. There is nothing in the 2009 Regulations that would impact the obligations or conditions imposed under the 2006 Regulations. Plans subject to the Air Canada Regulations would be eligible to be funded according to the 2009 Regulations with respect to the deficiency that emerged at a plan year-end between November 1, 2008 and October 31, 2009. Other deficiencies of such a plan would continue to be funded according to the terms applicable to those deficiencies.

Regulatory and non-regulatory options considered

The current economic environment is placing significant stress on many plan sponsors, which could affect the viability of defined benefit pension plans and benefit security. The relief that will be provided by the 2009 Regulations recognises the immediate impact of current market conditions by allowing all plans to benefit from one year of funding according to an extended schedule. It also strikes a balance between the status quo, whereby the current 5-year funding rules would be maintained, and simply extending the funding period to 10 years without conditions, as advocated by some sponsors.

Benefits and costs

Benefits

The implementation of the 2009 Regulations will help protect the interests of plan members and other beneficiaries by providing solvency funding flexibility in recognition of the difficult circumstances facing federally regulated defined benefit pension plans. The 2009 Regulations will provide some regulatory relief for plan sponsors by offering them a choice of options. These options allow for reduced annual solvency payments in the short-term while providing appropriate safeguards to protect plan member’s pension benefits, recognizing that the level of pension benefits is best secured through solid funding practices and a financially viable plan sponsor.

Costs

Only modest additional costs are anticipated for OSFI to administer the proposed 2009 Regulations, as the increased funding options will make the supervision of pension plans more complex and will require additional guidance be issued to plan administrators. Existing supervisory procedures and information systems will not require significant changes.

Potential costs to a pension plan sponsor would depend on whether it chose to avail itself of the 2009 Regulations, and which option it chose. For example, there would be a cost of obtaining a letter of credit for a plan sponsor that sought relief through this measure. In the case of agent Crown corporations, there could be a cost associated with the fee to the Government that would be comparable to the fee that would be paid to obtain a letter of credit. With respect to a sponsor who elected to pursue the buy-in measure, it would incur costs associated with disclosing the required information to active members, non-active members and beneficiaries including retirees and seeking their buy-in.

There will be no direct cost to beneficiaries of affected pension plans. However, because of potential risks associated with extending the period for funding solvency deficiencies, such as a plan termination with a deficiency, the 2009 Regulations include terms and conditions intended to mitigate potential risks to plan members. Accordingly, the 2009 Regulations will require that beneficiaries be informed of the implications of the longer amortization period for the solvency deficiency, and, for the extension with buy-in option, there will also be a requirement that no more than one third of active members or retirees object to the company’s election to come under the provisions of the 2009 Regulations.

Rationale

Maintaining the current funding requirements over the short-term in these difficult circumstances would result in continued financial stress for many plan sponsors, which could affect their business operations and on-going viability. The ongoing tightening of credit markets and economy further magnifies these difficulties. This could ultimately lead to a reduction in pension benefits.

The 5-year funding period is generally seen as an appropriate timeframe to eliminate any solvency deficiency, as it represents a balance between the funding of plans and the protection of pension benefits. Extending the solvency funding payment period to more than five years without any additional protections could negatively affect benefit security. As such, the 2009 Regulations provide protections to mitigate risks to plan members and retirees.

An assessment under the strategic environmental assessment policy has been conducted and concluded that there are no important environmental effects.

Consultation

The 2009 Regulations benefit from extensive consultations in 2005 conducted by the Department of Finance in respect of defined benefit pension plans, as well as specific consultations on the 2006 Regulations. The government also launched a public consultation on pension issues with the release of a consultation paper in January 2009 followed by public meetings held across Canada in March and April. Departmental officials are in regular contact with members of a wide range of stakeholder groups, including plan sponsors, retirees and labour unions. These consultations and ongoing communication with stakeholders have provided the basis for the 2009 Regulations. The 2009 Regulations were also pre-published on April 4, 2009 for a 30-day comment period.

Representations from plans sponsors underscore the immediate impact that anticipated funding requirements, absent funding relief, would have on both the plan and the financial needs of the sponsor. Many sponsors cautioned that the situation facing them as a result of current funding pressures is greater than what propelled the adoption of the 2006 Regulations, and as a result, enhanced relief is required. Some sponsors have indicated that with the tightening of credit markets, access to capital has diminished, and when available, the cost has significantly increased. As a result, some sponsors have indicated that letters of credit are no longer a readily accessible means of securing pension benefits. Several sponsors have raised concerns over deemed trust provisions indicating that a deemed trust can significantly restrict access to capital to fund ongoing operations. Some sponsors have argued that solvency funding relief should be provided without any condition given that funding relief only applies to 2008 deficiencies.

Representations from labour groups and retiree organizations also recognize the difficulties plans would face as a result of current market and economic difficulties, with certain groups also recommending funding relief. Support for the course of action followed in the 2006 Regulations was expressed by several groups. Some groups have cautioned that the temporary solvency funding relief could lead to more underfunded plans being wound-up. As well, some groups have suggested changing the requirement of having express consent by members and retirees rather than having no more than one-third of members or beneficiaries object.

In recognition of the serious impact that tighter credit markets is having on plan sponsors, the deferred funding resulting from extending the funding period to 10 years from 5 will not be subject to a deemed trust if member consent has been provided as prescribed. As well, deferred funding during the time leading up to the conditions being met under the letter of credit option and member and retiree support option will not be subject to a deemed trust. However, deferral of funding that results from the use of an asset value in excess of 110% will be subject to the deemed trust.

The Department received six submissions specifically in response to the pre-published Regulations in Part I of the Canada Gazette, comprised of three submissions from sponsors, one from a law firm, one from an actuarial firm and one from a union.

Implementation, enforcement and service standards

Valuation reports must be filed with the Superintendent within six months after the valuation date. For most plans, the reports will have effective date of December 31, 2008, meaning that they must be filed by June 30, 2009. In their valuation reports, plans may elect to file under one of the options permitted under the 2009 Regulations.

The 2009 Regulations will not require any significant change in OSFI procedures or significant additional personnel resources.

No compliance problems are anticipated with respect to the proposed 2009 Regulations. OSFI’s current supervisory process, which includes examining regular reporting and analyzing plans’ risk profile, will enable OSFI to monitor compliance with the proposed 2009 Regulations. The Superintendent has the authority to issue a direction of compliance to the administrator of a pension plan, an employer, or any person to ensure that the funding requirements are being met. Pension plans that do not meet the requirements of these 2009 Regulations must fund according to the normal 5-year funding rules.

Contact

Diane Lafleur
Director
Financial Sector Division
Finance Canada
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-5885
Fax: 613-943-8436
Email: Diane.Lafleur@fin.gc.ca