Manitoba introduces further amendments to thePension Benefits Act related to solvency and funding for pension plans
Special Notice – January 19, 2022
On December 20, 2021, the Pension Benefits Regulation, amendment (Regulation 142/2021) amending the Manitoba Pension Benefits Act (Act) came into force. The amendments should be the final step in a multi-year consultation process to modernize the province’s pension legislation, which included previously reported amendments in Bill 8, The Pension Benefits Amendment Act.
The latest amendments are mainly targeted to plans that are not exempted from solvency funding. They include changes to the required solvency deficiency threshold for special payments, the implementation of a prescribed provision for adverse deviation (PfAD) for going-concern valuations, and new rules related to solvency reserve accounts. The changes are similar in structure to those introduced in other Canadian jurisdictions in recent years.
This Special Notice provides an overview of the changes and the implications for administrators and members of pension plans registered in Manitoba.
- The solvency funding target is reduced from 100% to 85% and the solvency ratio required to file triennial valuations is reduced from 90% to 85%.
- A going-concern provision for adverse deviation (PfAD) is now required for defined benefit (DB) plans with the exception of solvency-exempt plans, multi-unit plans, and specified multi-employer plans. The size of PfAD correlates to the riskiness of a plan’s investment strategy; a typical asset mix might require a PfAD of about 10%.
- Amortization of going-concern deficits for solvency-exempt plans remains at 15 years. For all other plans the amortization period is reduced from 15 years to 10 years.
- The amortization period for going-concern and solvency shortfalls resets with every valuation. This change applies to all DB plans.
- Solvency reserve accounts may now be established as a separate account within a pension plan.
Changes to solvency funding
The amendments establish new rules for plans that are not exempted from solvency funding by reducing the solvency deficiency threshold for special payments from 100% to 85% of solvency liabilities, which mirrors similar changes implemented in other Canadian jurisdictions. Plan amendments that decrease the solvency ratio to less than 85% will not be allowed unless additional contributions are made to bring the solvency ratio back up to at least 85%. The threshold for requiring annual actuarial valuations has also been lowered from 90% to 85%.
The amendments also introduce the concept of an “available actuarial surplus” (AAS), determined as follows:
- For plans other than solvency-exempt plans, the AAS equals the lesser of
- solvency assets in excess of 105% of solvency liabilities, and
- going-concern assets in excess of going-concern liabilities plus PfAD; and
- For solvency-exempt plans, the AAS equals the lesser of
- solvency assets in excess of 100% of solvency liabilities, and
- going-concern assets in excess of 105% of GC liabilities.
Plan sponsors and administrators can use the AAS to increase benefits or reduce employer and/or employee contributions (unless expressly prohibited by the plan terms). The AAS may also be paid to the employer with the consent of the pension commission.
Provision for adverse deviation (PfAD) – plans that are not exempted from solvency funding only
Plans must establish and fund a PfAD, a new prescribed reserve in the going-concern valuation of the plan. The PfAD is deemed to be nil for specified multi-employer plans, multi-unit pension plans, and solvency-exempt plans. The PfAD does not apply to benefits secured through annuities or defined contribution liabilities.
Required special payments must be determined including the PfAD amount; however, there is no PfAD funding included on current service cost contributions.
A plan’s PFAD amount is determined in accordance with the following formula:
PFAD amount = A × (0.05 + B), where:
A is the total of the plan’s going-concern liabilities relating to its DB provision, excluding liabilities that have been annuitized; and
B is based on a plan’s target asset allocation with “riskier” assets allocated with a higher value.
For a plan with a typical asset allocation of roughly 30%–40% in fixed income, we have calculated a PfAD in the range of 9% – 10%. A 10% PfAD is roughly equivalent, in terms of additional going-concern liabilities, to applying a margin in the discount rate of 1.0% for a plan with a 10-year duration or 0.65% for plans with a 15-year duration. However, as noted above, the prescribed PfAD does not apply to current service cost contributions, whereas including a margin in the discount rate would.
Funding amortization rules
The amendments change the amortization rules for funding shortfalls. Solvency-exempt DB pension plans continue to amortize going-concern unfunded liabilities over 15 years. Amortization rules for other DB plans are:
- Plans with a reduced solvency deficiency amortize this deficiency over not more than 5 years;
- Plans with a going-concern shortfall amortize this shortfall over not more than 10 years (previously 15 years);
In addition, amortization schedules for the new funding rules are now reset at each filed actuarial valuation review date. This change applies to all DB plans including solvency-exempt plans.
Solvency reserve accounts
The amendments allow plans to establish a solvency reserve account (SRA) as a separate account within a pension fund. Plans that establish an SRA will be required to produce actuarial reports showing the SRA amounts separately from other plan assets.
Any available actuarial surplus from an SRA may be refunded to the employer without the consent of plan members or beneficiaries as long as the superintendent of pensions consents to the refund in writing. Any refunds provided from an SRA must be disclosed in the next annual member statement and must include the amount withdrawn from the SRA for the refund and the remaining SRA balance.
Additional disclosure items are required in interim cost certificates, including the PfAD amount (if applicable) as well as the reduced solvency deficiency.
Two additional Regulation amendments were proclaimed at the same time. The Solvency Exemption for Public Sector Pension Plans Regulation and the Solvency Exemption for Specified Non-Profit Sector Pension Plans Regulation were updated for housekeeping changes to ensure section references to the amended general regulations were correctly updated.
Coming into force
The amendments took effect on December 20, 2021, which enables pension plans completing a valuation as of December 31, 2021, to benefit from the new funding rules. Relevant sections of the previously released Bill 8 were also brought into effect on the same date.
There are no transition provisions other than allowing current funding rules to apply until the next filed valuation report.
Impact: The province delivered on its promise to modernize pension funding. The emphasis on solvency funding is eased while benefit security is further promoted through enhanced going-concern funding rules for private-sector DB pension plans. Public sector and not-for-profit pension plans with current solvency exemptions are largely not impacted by the changes. For multi-unit and specified multi-employer plans, the plan administrator can still manage benefit levels by setting the appropriate level of conservatism in the actuarial assumptions, which should be welcome news for plans with benefits that can be impacted by funding levels.
Plan administrators currently using little or no margin in their going-concern valuation will see liabilities rise which may lead to increased contributions. Plans employing a conservative approach to funding should not find the introduction of the PfAD to be overly impactful.
The appropriate level of margin should be carefully considered by plan administrators, as the prescribed PfAD may not necessarily be the right margin given the unique characteristics and circumstances of each pension plan. Plan administrators may choose to set a margin for their plan at a level higher than what may be prescribed.
For more information on how your pension plan might be impacted by these funding changes, please contact your local Eckler consultant.
This issue of Special Notice has been prepared for general information purposes only and does not constitute professional advice. Should you require professional advice based on the contents of this publication, please contact an Eckler consultant.