Nova Scotia introduces regulations amending funding under
Pension Benefits Act

Special Notice – March 27, 2020

The government of Nova Scotia has introduced regulations amending the funding framework for defined benefit (DB) pension plans to improve the flexibility and stability of DB pension plan funding.

The regulations amend the funding requirements for DB pension plans to reduce the required solvency funding to 85% of solvency liabilities from 100%. They also strengthen going-concern funding by introducing a funding cushion above the 100% funding threshold. Additionally, going-concern deficiencies must now be funded over 10 years instead of the previous 15-year requirement.

Other changes include incorporating federally permitted investment rules, reducing reporting requirements for solvency-exempt plans, restricting contribution holidays for overfunded plans by prohibiting plans from taking contribution holidays if their funded ratio is below 105% on either a going concern or solvency basis, and exempting individual plans from specific sections of the Pension Benefits Act (PBA). The regulations are scheduled to come into effect on April 1, 2020, but will impact plans with a valuation date on or after December 31, 2019. Further details regarding the changes are highlighted below.

Background and recent related legislative reforms

The regulations are the culmination of a multi-year consultation process between the government and stakeholders, and a comprehensive review of the province’s funding framework for pension plans. Related legislative reforms in Bill 109, Pension Benefits Act (amended) (Bill 109), which received Royal Assent April 12, 2019, introduced several changes to funding in the Pension Benefits Act (PBA), including:

• Establishing “reserve accounts” to hold solvency deficiency payments and other prescribed contributions in a separate reserve account. Withdrawals from the reserve account are subject to Superintendent approval and are only allowed on plan wind-up.
• Removing the current limits on the use of letters of credit. Currently, the PBA limits the use of letters of credit to fund solvency deficiencies to a maximum of 15% of solvency liabilities.
• Allowing the discharge of liability for annuity buyouts for a DB plan that is not wound up.
• Clarifying the definition of deemed trusts under the PBA, including a provision that deems such amounts to be held separately from an employer’s other assets in the event of liquidation, assignment or bankruptcy.
• Clarifying that information filed, collected by or submitted to, the Superintendent in relation to a pension or a pension plan be kept confidential and not be disclosed except to members, beneficiaries, or others who are entitled to that information.

Key amendments         

Solvency exempt pension plans: DB pension plans that are currently exempt from solvency funding requirements (municipalities, universities, education entities, specified multi-employer pension plans (SMEPPs)) will continue to be exempt but will be required to abide by the enhanced going-concern funding rules discussed below.

Reporting and benefit improvements for solvency exempt pension plans: Solvency exempt plans will be permitted to file an actuarial valuation report every three years (previously required annually if the solvency funded status was less than 85%) unless required to report earlier by the Superintendent. Solvency exempt non-SMEPPs will also be entitled to improve benefits without immediate full funding, provided the improvements don’t result in the plan falling below the 85% solvency funding threshold.

The new regulations continue to allow for additional special rules for SMEPPs. These plans will continue to be able to improve benefits if any increase in the going-concern funding liability resulting from an improvement can be paid over five years.

Solvency funding: Under the new solvency funding regime, for plans that are not solvency exempt, DB pension plans with valuation dates on or after December 31, 2019, will be required to fund up to an 85% solvency standard rather than 100%, with a fresh start allowed on the first valuation filed on or after December 31, 2019. The regulations do not include the proposal from the consultation process that would require the consent of at least two thirds of plan members to fund to the 85% level. Plan sponsors will also be required to amortize solvency deficiencies on a five-year basis with no consolidation of prior years’ deficiencies.

Enhanced going-concern funding rules: The regulations allow for the funding of going-concern deficiencies over a 10-year period (with a fresh start following each valuation) rather than 15 years, and the introduction of a provision for adverse deviation (PfAD). The method for determining the PfAD will be determined in accordance with regulations, and will depend on a number of factors, including the asset mix of the pension fund and type of pension plan. The PfAD for solvency-exempt plans will be 5% less than the PfAD for non-solvency exempt plans under the regulations.

Other regulatory issues: Federal permitted investment rules will now be incorporated so that any changes to those rules are automatically applied in Nova Scotia.

Contributions relating to a going concern PfAD may be considered to be part of a reserve account, held separately within the DB plan to hold solvency deficiency payments or other prescribed contributions.

A five-year phase-in period will be available if adhering to the new regulations results in an increase in funding requirements for pension plans.

What’s next: The amendments should not come as a surprise to plan sponsors, as the proposed reforms are the result of consultations dating back to 2017. Plan sponsors should ensure they have taken steps to be in compliance before the regulations come into effect on April 1, 2020.