Regulations Amending the Pension Benefits Standards Regulations, 1985 (Negotiated Contribution Plans): SOR/2024-95

Canada Gazette, Part II, Volume 158, Number 12

Registration
SOR/2024-95 May 27, 2024

PENSION BENEFITS STANDARDS ACT, 1985

P.C. 2024-571 May 24, 2024

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending the Pension Benefits Standards Regulations, 1985 (Negotiated Contribution Plans) under subsection 39(1)^{footnote a} of the Pension Benefits Standards Act, 1985 ^{footnote b}.

Regulations Amending the Pension Benefits Standards Regulations, 1985 (Negotiated Contribution Plans)

Amendments

1 (1) The definitions going concern liabilities and normal cost in subsection 2(1) of the Pension Benefits Standards Regulations, 1985 ^{footnote 1} are replaced by the following:

going concern liabilities

means the present value of the accrued benefits of a plan as determined on the basis of a going concern valuation, including

• (a) amounts due and unpaid;
• (b) in the case of a negotiated contribution plan, a provision for adverse deviations; and
• (c) in the case of any other plan, a provision for adverse deviations, if any; (passif évalué en continuité)

normal cost

means the cost of benefits that are to accrue during a plan year, as determined on the basis of a going concern valuation, excluding special payments and including

• (a) in the case of a negotiated contribution plan, a provision for adverse deviations of at least 5%; and
• (b) in the case of any other plan, a provision for adverse deviations, if any; (coûts normaux)

(2) Subsection 2(1) of the Regulations is amended by adding the following in alphabetical order:

going concern ratio

means the ratio of the going concern assets to the going concern liabilities, on the basis of the most recent actuarial report, excluding those going concern assets and going concern liabilities that are attributable to benefits paid by means of an insurance contract or an annuity, other than a revocable annuity; (ratio de continuité)

2 Paragraphs 9(4)(c) and (d) of the Regulations are replaced by the following:

• (c) if the plan is not a negotiated contribution plan and there is a solvency deficiency, by annual solvency special payments equal to the amount by which the solvency deficiency divided by 5 exceeds the amount of going concern special payments that are payable during the plan year;
• (d) if the plan is not a negotiated contribution plan and there is an additional solvency deficiency referred to in subsection (12), by additional annual solvency special payments payable from the effective date of the amendment and equal to the amount by which the additional solvency deficiency divided by 5 exceeds the going concern special payment in respect of the unfunded liability emerging from the amendment to the plan; and

3 (1) Subsection 9.3(1) of the Regulations and the heading before it are replaced by the following:

Void Amendment

9.3 (1) For the purposes of subparagraph 10.1(2)(b)(ii) of the Act, the prescribed solvency ratio level is 0.85.

(2) The portion of subsection 9.3(2) of the Regulations before paragraph (a) is replaced by the following:

(2) For the purposes of subparagraph 10.1(2)(b)(ii) of the Act, the solvency ratio following the amendment is the solvency ratio set out in the most recent actuarial report adjusted to reflect

(3) The portion of subsection 9.3(3) of the Regulations before paragraph (a) is replaced by the following:

(3) For the purposes of subparagraph 10.1(2)(b)(iii) of the Act, the prescribed solvency ratio level is 1.0

(4) Section 9.3 of the Regulations is amended by adding the following after subsection (3):

(4) For the purposes of paragraph 10.1(2)(c) of the Act, if the amendment would increase pension benefits or pension benefit credits, the going concern ratio — as adjusted to reflect the increase in going concern liabilities resulting from the amendment — must not be below 1.05 after the amendment.

4 The Regulations are amended by adding the following after section 10.991:

Funding and Governance Policies

Funding policy

10.992 For the purposes of section 10 of the Act, the funding policy of a negotiated contribution plan shall set out

• (a) the funding objectives for the plan as they relate to benefit security, benefit levels and contribution levels;
• (b) the material risks that affect the plan’s funding requirements, the tolerance for those risks and the internal controls to manage them;
• (c) the objectives and expectations for reducing pension benefits in the event that a reduction is required; and
• (d) the procedures for the use of surplus.

Governance policy

10.993 For the purposes of section 10 of the Act, the governance policy of a negotiated contribution plan shall set out

• (a) the governance structures and processes for overseeing, managing and administering the plan;
• (b) what those structures and processes are intended to achieve;
• (c) the roles, responsibilities and accountabilities of all governance participants who have authority to make decisions in respect of those structures and processes;
• (d) the performance measures and the process established for evaluating, against those measures, the performance of each governance participant;
• (e) the procedures established to ensure that the administrator and, as necessary, other governance participants have access to relevant, timely and accurate information in order to meet their fiduciary and other responsibilities;
• (f) the code of conduct and the procedure established to disclose and address conflicts of interest of the administrator;
• (g) the ongoing process established to identify the educational requirements and skills necessary for the administrator to perform their duties in relation to the plan;
• (h) the material risks that apply to the plan and the internal controls established to manage those risks; and
• (i) the process established for the resolution of disputes involving members or other persons who are entitled to benefits under the plan.

5 Paragraph 22.1(a) of the Regulations is replaced by the following:

• (a) pension benefits or pension benefit credits may need to be reduced if negotiated contributions are insufficient to meet the funding requirements under the Act; and

6 (1) Clause 23(1)(q)(i)(B) of the Regulations is replaced by the following:

• (B) except in the case of a negotiated contribution plan, a description of the measures the administrator has implemented or will implement to bring that ratio to one, and

(2) Subparagraph 23(1)(s)(i) of the Regulations is replaced by the following:

• (i) pension benefits or pension benefit credits may need to be reduced if negotiated contributions are insufficient to meet the funding requirements under the Act, and

(3) Clause 23(1.1)(f)(i)(B) of the Regulations is replaced by the following:

• (B) except in the case of a negotiated contribution plan, a description of the measures the administrator has implemented or will implement to bring that ratio to one, and

(4) Subparagraph 23(1.1)(h)(i) of the Regulations is replaced by the following:

• (i) pension benefits or pension benefit credits may need to be reduced if negotiated contributions are insufficient to meet the funding requirements under the Act, and

7 Section 23.1 of the Regulations is replaced by the following:

23.1 For the purposes of paragraph 28(1)(c) of the Act, each person referred to in that paragraph may examine

• (a) the written statement of investment policies and procedures that pertain to the plan’s portfolio of investments and loans as described in subsection 7.1(1);
• (b) the funding policy of a negotiated contribution plan described in section 10.992; and
• (c) the governance policy of a negotiated contribution plan described in section 10.993.

Coming into Force

8 These Regulations come into force on the day on which Division 8 of the Budget Implementation Act, 2021, No. 1, chapter 23 of the Statutes of Canada, 2021, comes into force, but if they are registered after that day, they 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

Issues

All federally regulated defined benefit (DB) pension plans must meet both solvency and going concern funding requirements. Negotiated contribution (NC) pension plans are a type of federally regulated multi-employer DB pension plan where the amount of employer and employee contributions are not linked to the solvency of the plan. If an active NC plan is underfunded, federal pension regulations do not require employers to make additional contributions to fund the deficit. Instead, plans typically choose to reduce benefits to address the shortfall, as their other practical options are very limited. Similarly, any deficit that exists when a plan terminates would also likely result in reduced benefits for plan members and retirees. Therefore, solvency funding requirements can often result in benefit reductions for NC plans while they are in operation, which affects the retirement security of plan members and retirees.

Background

The Pension Benefits Standards Act, 1985 (the PBSA) and the Pension Benefits Standards Regulations, 1985 (the Regulations or the PBSR) apply to pension plans that are linked to employment that falls under federal jurisdiction, such as work in connection with navigation and shipping, banking, interprovincial transportation and communications, employment in certain federal Crown corporations and all private sector employment in Yukon, the Northwest Territories and Nunavut. Approximately 7% of private pension plans in Canada are federally regulated. The remaining 93% are provincially regulated. The PBSA and the Regulations do not apply to the federal public service, Canadian Forces or Royal Canadian Mounted Police pension plans.

The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of federally regulated pension plans under the PBSA. Plan administrators are responsible for the administration of their pension plan and for ensuring that their plan complies with the PBSA and the Regulations and with the terms of the plan.

Federally regulated pension plans are typically either DB or defined contribution (DC). Under a DB plan, employers and employees contribute to the plan and plan members receive a set level of regular payments from the plan after they retire until they die, usually based on their salary and years of service. Under a DC plan, employer and employee (if any) contributions are usually a fixed percentage of salary and the account balance at retirement is determined based on accumulated contributions and investment income.

Federally regulated DB plans are subject to strict funding rules to safeguard pension security. They are required to meet minimum funding standards using two different sets of assumptions. The first is “going concern,” which assumes the plan continues to operate indefinitely. The second is “solvency,” which assumes the plan is terminated and must pay out all benefits immediately. These funding requirements help ensure that plans have sufficient assets to provide all pension benefits to plan members and retirees while the plan is ongoing and in the event of plan termination. The PBSA requires plans to be fully funded over time and, when underfunded, to eliminate any deficit over a set period of time: five years for solvency deficits and 15 years for going concern deficits.

As part of Budget 2021, the government introduced legislative amendments to establish a revised framework for multi-employer NC pension plans that strengthens plan governance, transparency and sustainability of benefits.

NC pension plans are a type of multi-employer DB plan where contribution amounts are fixed by an agreement and employers are only required to contribute the amount set out in the agreement. Due to the limited nature of the negotiated contributions of participating employers, the underlying employer liability for NC plans is fundamentally different from that of single-employer DB plans. Underfunded NC plans do not require additional contributions to fund the deficit and will typically need to reduce plan members’ and retirees’ pension benefits (either for future or past service) to address shortfalls. There are 14 active federally regulated NC plans, with approximately 45 000 plan members, retirees and other beneficiaries. This represents approximately 4% of federally regulated plans with defined benefit provisions and approximately 4% of plan members, retirees and other beneficiaries of these plans.

Objective

The objective of the Regulations Amending the Pension Benefits Standards Regulations, 1985 (Negotiated Contribution Plans) [the amendments] is to enhance the retirement security of NC plan members and retirees by allowing active plans to offer more sustainable benefit levels for a given level of contributions.

Description

The amendments exempt NC plans from making extra payments if there is a solvency deficiency. Instead, the amendments require NC plans to include a funding buffer for both normal costs^{footnote 2} and for going concern liabilities as part of enhanced going concern requirements. The minimum buffer for normal costs is set at 5% of normal costs and the buffer for going concern liabilities will be determined based on actuarial considerations by the plan administrator. NC plans will continue to be required to disclose their solvency ratio and describe the implications to plan members and retirees. However, they will no longer be required to describe the measures to bring the solvency ratio back to an acceptable level. Additionally, the amendments set a going concern funding threshold for plan amendments, which will prohibit any amendments to improve benefits that would result in a going concern ratio of less than 1.05 (i.e. fully funded with a going concern surplus of 5%).

The amendments also prescribe the elements required in the governance and funding policies of NC plans. The governance policy will require elements such as a description of plan governance structures and processes, who has the authority to make decisions, performance measures and monitoring, a process of dispute resolution, risks, as well as a code of conduct and education and skills necessary for the administrator. The funding policy will require elements such as describing the plan’s funding objectives, stability of contributions, risks, frequency of actuarial reports, as well as expectations for the going concern ratio, amortization of unfunded liabilities and reductions of benefits, if necessary.

Regulatory development

Consultation

From December 16, 2019, to January 31, 2020, the Department of Finance conducted a consultation with a targeted group of stakeholders, including current NC plans, labour groups, retiree groups and pension industry experts on the overall revised framework for NC plans. Department officials met with the organized labour and retiree representatives, pension professionals and law firms, and received written submissions from 20 stakeholders. Officials also met with the representatives of the Canadian Energy and Related Industries Pension Plan, who are interested in transitioning from a multi-employer defined contribution plan to an NC plan. The framework received broad stakeholder support. In particular, existing NC plans, labour unions and pension industry experts expressed support for the revised framework. Retiree groups were not opposed.

On June 24, 2023, the amendments were prepublished in the Canada Gazette, Part I, followed by a public consultation period of 30 days. The Department received comments from 11 stakeholders from industry associations, pension sponsors, pension plans, and labour groups. The amendments were prepublished alongside proposed amendments related to unclaimed pension balances. The amendments related to unclaimed balances will continue to be pursued through a separate regulatory process, as additional time will be needed to finalize the framework.

Stakeholders were supportive of the overall framework, but a limited number (representing unions, a pension plan, and industry and pension professionals, including Eckler, the Canadian Labour Congress, and the Multi-Employer Benefit Plan Council of Canada) said that including the funding buffer of 5% as part of the definition of normal cost would exacerbate funding pressures during economic downturns, as plans would need to fund both the buffer and any amortization costs. However, the buffer of 5% serves as part of the enhanced going concern requirement to balance out the removal of solvency funding requirements. Allowing plans to pay either the buffer or liabilities would remove the integrity of the buffer and increase the likelihood of future going concern deficits.

Modern treaty obligations and Indigenous engagement and consultation

The amendments are not expected to have any differential impacts on Indigenous people or implications for modern treaties, as per the Government of Canada’s obligations in relation to rights protected by section 35 of the Constitution Act, 1982, modern treaties and international human rights obligations.

Instrument choice

Budget 2021 introduced legislative amendments to establish a revised NC plan framework. The amendments are required to operationalize the legislative amendments. Therefore, no other instruments were considered.

Regulatory analysis

Benefits and costs

Benefits

The amendments remove solvency funding requirements for NC plans to help establish more sustainable benefits for plan members, retirees and their beneficiaries. Stakeholders have indicated that NC plans would benefit from the removal of solvency funding requirements as it would help to reduce the instances where ongoing NC plans were required to reduce the pension benefits of plan members and retirees in response to solvency deficits. Enhanced going concern requirements will help to protect the ongoing pension benefits of plan members and retirees in the absence of a solvency funding requirement. The required information for the governance and funding policies would improve plan transparency.

Costs

The amendments do not impose any significant costs on pension plan sponsors, administrators, members or retirees. OSFI’s supervision of pension plans operates on a cost-recovery basis and there are no incremental costs for OSFI associated with the amendments.

Stakeholders have indicated that NC plans generally have documented governance and funding policies. The amendments do not require new processes, but rather document existing ones. Most plans either already comply or will be required to make updates to their existing policies in order to comply. A few plans may be required to draft governance or funding policies. The cost to draft these documents will vary by plan but should be low given that these documents are high-level and an industry best practice. Additionally, while the minimum normal cost and going concern liability margins may introduce new costs, the exemption from solvency funding requirements will simplify the overall approach and help protect against a reduction of benefits, enhancing plan security for plan members and retirees. Removing the solvency funding requirement will allow plans to offer the maximum level of benefits that will be sustainable based on a going concern valuation, rather than basing them off of a solvency valuation. This will also help address intergenerational equity concerns with paying benefits to current retirees below levels that are sustainable for an operational plan. The margins would affect payment volatility, while employer costs would remain fixed contributions. The amendments could help provide higher benefits while the plan is ongoing, as well as reduce the supervisory burden for OSFI to the extent that there are fewer applications for NC plan benefit reductions.

Small business lens

Analysis under the small business lens concluded that the amendments will not impact Canadian small businesses. The amendments change rules applicable to multi-employer NC pension plans. None of the applicable plans are offered by small businesses.

One-for-one rule

The one-for-one rule does not apply, as there is no incremental change in the administrative burden on business and no regulatory titles are repealed or introduced.

The amendments remove the solvency funding requirement and introduce others related to plan administration, governance and disclosures. The governance and funding policies required under the amendments do not need to be filed with OSFI on registration or when they are amended. Therefore, the impact of the amendments will not result in an increased administrative burden on NC plan sponsors.

Regulatory cooperation and alignment

The amendments are not part of a formal regulatory cooperation initiative; however, the amendments align with certain provincial regulations.

A number of provinces, including British Columbia, Alberta, Saskatchewan, Quebec and Ontario, have fully exempted some or all multi-employer NC-type plans from solvency funding requirements. These provinces represent approximately 90% of the Canadian population.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that the amendments are unlikely to result in important environmental effects.

Gender-based analysis plus

The amendments will benefit all active workers of federally regulated NC plans, as well as retirees and other beneficiaries, such as surviving spouses, regardless of identity characteristics. Approximately 45% of active workers participating in federally regulated private pension plans are women. The gender breakdown for NC plans is not available. As such, women constitute a slight minority of members in federal plans, though the impact of the amendments does not vary based on the gender of plan members.

Implementation, compliance and enforcement, and service standards

Implementation

The amendments come into force on the day on which sections 188, 189 and 190 of the Budget Implementation Act, 2021, No. 1, Chapter 23 of the Statutes of Canada 2021, come into force, but if they are registered after that day, they will come into force on the day on which they are registered.

The OSFI supervises federally regulated private pension plans and ensures they are in compliance with the PBSA, PBSR, and other regulations made under the PBSA, including the Regulations. The OSFI’s Superintendent is required to report to Parliament on the operations of the PBSA annually.

Contact

Kathleen Wrye
Director
Pensions Policy
Financial Crimes and Security Division
Department of Finance Canada
90 Elgin Street, 13th Floor
Ottawa, Ontario
K1A 0G5
Email: re-pension@fin.gc.ca