Vol. 148, No. 6 — March 12, 2014
SOR/2014-38 February 28, 2014
PENSION BENEFITS STANDARDS ACT, 1985
Canada Post Corporation Pension Plan Funding Regulations
P.C. 2014-168 February 28, 2014
His Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 39 (see footnote a) of the Pension Benefits Standards Act, 1985 (see footnote b), makes the annexed Canada Post Corporation Pension Plan Funding Regulations.
CANADA POST CORPORATION PENSION PLAN FUNDING REGULATIONS
Words and expressions
1. Except as otherwise provided, words and expressions used in these Regulations have the same meaning as in the Pension Benefits Standards Regulations, 1985 (the “PBSR”).
2. These Regulations apply to Canada Post Corporation’s defined benefit plan (the “plan”) in respect of which certificate of registration number 57136 has been issued by the Superintendent under the Act.
3. Section 8, subsections 9(1) to (13), paragraph 9(14)(b) and subsections 9.3(1) and (3) of the PBSR do not apply to the plan.
4. The funding of the plan is considered to meet the standards for solvency if the funding is in accordance with section 5.
5. The plan must be funded in each plan year by contributions equal to the normal cost of the plan and by the amounts required to be paid by the employer under a defined contribution provision.
Prescribed solvency ratio
6. For the purposes of paragraphs 10.1(2)(c) and (d) of the Act, the prescribed solvency ratio level is 1.0.
Prescribed information for subparagraph 28(1)(b)(iv) of Act
7. (1) In addition to the information referred to in subsection 23(1) of the PBSR, the following information is prescribed for the purposes of subparagraph 28(1)(b)(iv) of the Act:
- (a) the amount of the plan’s going concern deficit as shown in the last actuarial report filed with the Superintendent;
- (b) the amount of the plan’s solvency deficiency as shown in the last actuarial report filed with the Superintendent;
- (c) the amount of payments that are required to be made for the plan year covered by the statement after the day on which these Regulations come into force; and
- (d) the amount of payments that would have been made to the plan for the plan year covered by the statement if the plan had been funded in accordance with section 9 of the PBSR during that plan year.
Prescribed information for subparagraph 28(1)(b.1)(ii) of Act
(2) The information referred to in paragraphs (1)(a) to (d) is prescribed for the purposes of subparagraph 28(1)(b.1)(ii) of the Act.
(3) The prescribed information must be addressed to the member or former member of the plan and that person’s spouse — or, if that person is cohabiting with a common-law partner, that common-law partner — as shown on the records of the plan administrator and must be
- (a) given to the member of the plan at the place of employment; or
- (b) mailed to the residence of the member or former member of the plan and that person’s spouse or common-law partner, as the case may be.
8. These Regulations are repealed on December 31, 2017.
Coming into force
9. 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.)
Canada Post is responsible for making current service contributions to its pension plan as well as special payments to cover any funding shortfalls. As of December 31, 2012, Canada Post’s pension plan had a solvency deficit of $6.5 billion.
Amendments made to the Pension Benefits Standards Act, 1985 (PBSA) and Pension Benefits Standards Regulations, 1985 (PBSR) effective in April 2011 permit agent Crown corporations, such as Canada Post, to reduce solvency payments by up to 15% of plan assets with the consent of the Government, as the Government is ultimately responsible for the financial obligations of agent Crown corporations.
Canada Post had reduced its solvency special payments in accordance with the PBSA by $1.3 billion as of December 31, 2012. Canada Post expects to reach the 15% solvency reduction limit permitted under the PBSA by early 2014. Therefore, under the PBSA, Canada Post would need to make an additional cash solvency payment of approximately $1 billion in 2014 and an aggregate of over $2.5 billion by the end of 2017.
Canada Post is facing financial challenges due to Canadians’ decreasing use of traditional mail in favour of digital communications. Mail volumes are declining faster than Canada Post’s ability to reduce costs, given its current letter mail service obligations. According to Canada Post’s third quarter of 2013 financial projections, Canada Post will require additional liquidity by mid-2014 to support its operations, based on the expectation that it will reach the maximum permitted solvency reduction limit in early 2014. Canada Post’s current business model does not allow it to achieve sufficient profitability to support its operations, contributing to this cash shortfall.
Under the Office of the Superintendent of Financial Institutions Act, the PBSA and the PBSR, the Office of the Superintendent of Financial Institutions (OSFI) regulates and supervises private pension plans in federally regulated businesses such as banking, telecommunications and interprovincial transportation. The OSFI is also the regulator for pension plans established in respect of employment in the Yukon, the Northwest Territories and Nunavut. Canada Post’s defined benefit pension plan is subject to the PBSA and the PBSR.
The PBSA requires that federally regulated pension plans fund promised benefits in accordance with the prescribed tests and standards for solvency that are set out in the PBSR. Defined benefit pension plans must file actuarial valuations; where these valuations show a pension plan’s assets to be less than its liabilities, special payments must be made into the plan to eliminate the deficiency over a prescribed period of time.
Actuarial valuations are conducted using two different sets of actuarial assumptions: “solvency valuations” use assumptions consistent with a plan being terminated on the valuation date, while “going concern valuations” are based on the plan continuing in operation. If a valuation reveals a solvency deficiency, the PBSR requires the plan sponsor to make special payments into the plan sufficient to eliminate the deficiency. 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 normal costs associated with the plan, plus any “special payments” required in that year to pay down a funding deficiency over the prescribed period.
One of the main objectives of federal pension regulation is to set out standards for the funding and investments of pension plans so that pension plan assets are sufficient to meet pension plan obligations, which serves to protect the rights and interests of pension plan members, retirees and other beneficiaries. At the same time, the PBSA takes into consideration that pension plans may, at times, be in deficit positions as a result of a variety of factors such as changes in actuarial assumptions, resulting in actuarial losses to the fund, and downturns in the financial markets. These deficits may be too large for employers to absorb at once. The PBSA allows a plan to carry a deficit with the provision that the plan sponsor (the employer) make payments aimed at making up the shortfall within a period of 5 years for a solvency deficiency and 15 years for a going concern deficiency.
The objective of the Canada Post Pension Plan Funding Regulations (the Regulations) is to provide Canada Post with temporary relief from making special payments to its pension plan.
The Regulations provide Canada Post with particular funding requirements that apply on a temporary basis, and do not include the requirement to make special payments to its defined benefit pension plan. These requirements apply when the Regulations come into force and cease to apply on December 31, 2017. The funding requirements include the requirement that Canada Post pay its normal costs into the pension plan.
The Regulations prescribe a solvency ratio of one for the purposes of provisions of the PBSA that prohibit plan amendments in certain circumstances. These prohibition provisions apply to amendments that would have the effect of granting a benefit improvement unless the plan’s solvency ratio is above the prescribed level (set at one) and the amendment in question would not reduce the ratio below that level.
In addition to the usual disclosure requirements under the PBSR (e.g. a statement to plan members including contributions made to the plan, benefits accrued), Canada Post is required, under the Regulations, to provide information to members and retirees annually on the plan’s solvency deficit, on the fact that Canada Post is not required to make special payments in respect of plan years 2014 to 2017, and on the payments that would have been required under the normal funding rules.
The “One-for-One” Rule does not apply, as the Regulations do not affect administrative costs to businesses.
Small business lens
The small business lens does not apply, as the Regulations do not impose costs on small businesses.
Canada Post is supportive of the Regulations. Unions representing Canada Post employees (Public Service Alliance of Canada, Association of Postal Officials of Canada, Canadian Postmasters and Assistants Association, and Canadian Union of Postal Workers) and representatives of the Canada Post Pension Advisory Council were informed of the Government’s proposal to provide Canada Post with temporary funding relief on December 10, 2013, and were invited to submit comments as part of the prepublication process.
The Regulations were prepublished in the Canada Gazette, Part I, on December 21, for a 15-day comment period. Six submissions were received during the comment period: one from the Canadian Union of Postal Workers, one from the Public Service Alliance of Canada, two from retiree representatives of the Canada Post Pension Advisory Council, and two from employee representatives of the Canada Post Pension Advisory Council. There was a general recognition of the need for temporary funding relief, but some amendments were suggested.
Proposals were submitted in relation to the protection of retirees’ and active members’ pension benefits. A proposal to allow for voluntary special payments or require special payments as a fixed amount each year or as a percentage of profits was not incorporated into the Regulations. Given that the PBSA sets minimum standards, the Regulations do not prevent Canada Post from making voluntary special payments into the plan during the relief period. In addition, a proposal was received for the Government to provide a letter of credit as an alternative to funding relief. As an alternative to a letter of credit, which is an option for private corporations under the PBSA and PBSR, agent Crown corporations, including Canada Post, are permitted to take a solvency reduction of up to 15% of plan assets with the Government’s consent. Canada Post has done this, and is expecting that it would hit this maximum threshold in 2014. A solvency reduction, and similarly the Regulations, do not impact Canada Post’s obligation to provide retirees and members with their promised benefits, and have the effect of providing Canada Post with temporary relief from the requirement to make special payments.
A comment was received regarding the legislative authority of the Governor in Council to make the Regulations in question. To address this comment, the Regulations were amended to make the authority clearer. In addition, the termination section in the prepublished version of the Regulations was eliminated, since the Regulations must continue to apply to ensure that the termination rules under the PBSA and PBSR apply adequately to Canada Post’s circumstances.
A proposal was received that the Government should move forward with enhancements to the disclosure provision, including the requirement for an annual statement for retirees, announced in October 2009 by the Department of Finance Canada. The Government intends to propose, as soon as possible, amendments to the PBSR that would enhance the disclosure requirements, including the annual statement for retirees and former members, as part of the third tranche of regulatory amendments implementing the changes announced in 2009.
Canada Post has a mandate to provide a standard of postal service that meets the needs of Canadians by providing quality postal services to all Canadians in a secure and financially selfsustainable manner. A financially viable Canada Post is in the interests of Canada Post employees, pension plan beneficiaries, businesses that depend on mail service for their operations and all Canadians. However, Canada Post continues to face serious challenges due to declining revenues from the fundamental changes in the long-term viability of the postal business. At the same time, large pension liabilities are putting significant pressure on the Corporation’s financial resources. As a result, Canada Post is projecting that it will run out of cash in mid-2014 without the Regulations.
The short-term relief on special payments would reduce the pressure the pension plan is placing on Canada Post’s short-term cash flow in order for the Corporation to focus on transforming its business to deliver on its mandate within the context of the decreasing demand for traditional letter mail.
Implementation, enforcement and service standards
The Superintendent of Financial Institutions is responsible for the control and supervision of the administration of the PBSA. As a result, the Superintendent would be responsible for enforcing the Regulations.
Financial Sector Division
Department of Finance Canada
L’Esplanade Laurier, East Tower, 20th Floor
140 O’Connor Street