British Columbia announces pension funding reform

British Columbia announces pension funding reform

Special Notice Preview – December 19, 2019

British Columbia has announced major changes to the funding requirements for defined benefit pension plans. Like legislators in Quebec, Ontario and elsewhere, the changes strengthen going concern funding requirements while reducing solvency funding, although there are some notable differences from recent reform in those provinces. In doing so, B.C.’s Ministry of Finance seeks to help plan sponsors better address the pressures of low interest rates and volatile investment returns, while supporting the long-term sustainability and benefit security of pension plans in the province.

Also of note is a new option for single employers who wish to offer a target benefit pension plan to their employees. Previously this option was only available to multi-employer plans.

Changes to the funding rules for defined benefit plans take effect for actuarial valuations on or after December 31, 2019, and include the following:

• Solvency funding requirements are reduced to target a funding level of 85% rather than 100%. This will provide relief to sponsors who are currently funding solvency deficiencies.
• Going concern funding requirements are increased to include a prescribed margin intended to reduce long-term interest rate risk.  The impact on any particular plan will depend on whether this buffer is more or less than any existing margins.
• The prescribed margin is based on long-term bond rates. When interest rates are lower, liabilities are generally higher, but a lower margin will be applied than at times when interest rates are higher (lower liabilities, but a higher margin). The total liabilities plus margin is therefore expected to be more stable in the face of changes in interest rates.
• Unlike Quebec and Ontario, the margin required in B.C. does not depend on the plan’s investment strategy or maturity, unless 70% or more of the investments are in fixed income.
• Going concern deficits (calculated with the margin added to the liabilities) will need to be funded over 10 years rather than 15 years. The monthly payments due will be calculated by simply dividing the going concern deficit by 120. Under current funding rules, monthly payments are calculated to amortize both principal and interest on the declining deficit balance.
• The calculation of going concern deficit funding requirements is further simplified by permitting a “fresh start” approach. Instead of carrying forward existing amortization contribution schedules and adding contributions towards any new deficit, the total deficit can be consolidated at the valuation date and a single new amortization schedule can be considered on a “fresh start” basis at each valuation. Use of the fresh start approach will generally lengthen the period over which deficiencies are funded.
• The fresh start approach also applies to the portion of any solvency deficiencies that must be funded (i.e., the portion below the 85% threshold). Monthly payments will be calculated simply by dividing that portion of the solvency deficiency by 60.
• Restrictions on benefit improvements, contribution holidays and refunds of surplus to the plan sponsor are updated to reflect the new funding requirements.

Eckler’s Special Notice in early 2020 will provide more detail on these important changes for plan sponsors, trustees and members.