Alberta announces overhaul of Provision for Adverse Deviation for target benefit plans

Special Notice – June 28, 2024

Alberta has announced a major overhaul of the Provision for Adverse Deviation (PfAD) applicable to target benefit plans. In general, the changes will mean a lower, more predictable minimum funding requirement that better reflects each plan’s specific circumstances.

The changes come into effect immediately, however, the Deputy Superintendent of Pensions has communicated that plans may continue to calculate the PfAD under the previous regulations for actuarial valuations filed in 2024. Plans that would like to file an actuarial valuation in 2024 using the new PfAD, but will require additional time to do so, may seek a filing extension.

Under the Alberta Employment Pension Plans Act and Regulations, contributions to a target benefit plan must be sufficient to fund the plan on a going-concern basis plus a PfAD on the normal actuarial cost. Before any benefit increase may be granted, the PfAD must also be funded on the valuation balance sheet.

The new definition of PfAD for target benefit plans consists of two components:

• A fixed minimum PfAD of 7.5%; and

• An additional PfAD, or “supplementary percentage,” to be determined by the plan administrator (e.g., the board of trustees).

The plan’s funding policy must set out how the supplementary percentage is expected to achieve the funding objectives and manage risks. The supplementary percentage may be as low as zero if the plan administrator determines this is appropriate. However, supplementary percentage must be sufficient and reasonable, in the opinion of the Superintendent, to manage the material risks and ensure the stability of the plan. The Superintendent may ask for additional documentation to support the supplemental percentage.

This is a significant departure from the previous PfAD definition – which is both complex and volatile. In British Columbia, where the legislation had been the same as Alberta’s, the 2022 Report on Pension Plans Registered in British Columbia showed that the average PfAD for target benefit plans was 17% in 2015, and 28% in 2020. In 2022, the pension regulator in British Columbia also made very similar changes to the PfAD legislation that Alberta has now made.

The PfAD reform will provide welcome relief to plan administrators, although careful consideration will be needed to determine the appropriate supplementary percentage based on each plan’s circumstances. We expect plan administrators will consider many factors, which could include:

• Investment risk (reflecting the plan’s investment strategy in a more sophisticated way than the simple split between equities and other investments under the current PfAD definition);
• Asset/liability mismatch risk;
• Plan maturity;
• The discount rate used; and
• Contribution risk.

Alberta has also released a draft interpretive guideline which explains the regulatory expectations and legislative requirements with respect to developing and documenting the new PfAD.

Alberta target benefit plan administrators should begin to have discussions with their consultant about developing a PfAD that suits the risk profile of their plan.

Should you have questions about this or other pension topics, please reach out to your Eckler consultant or connect with us at Eckler.ca.