On December 12, 2019, the government of British Columbia amended the Pension Benefits Standards Regulation (PBSR) effective December 31, 2019. These amendments are the result of the government’s review of the Solvency Funding Framework under the Pension Benefits Standards Act (PBSA).
The review began with a consultation paper released in October 2018, which outlined two approaches to solvency funding reform for Defined Benefit pension plans. After reviewing comments on the consultation paper received from various stakeholders, the government drafted its proposed revised funding requirements. The proposals were released in a report in August 2019 and stakeholders were again invited to submit comments.
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Defined Benefit Funding Requirements
The amendments to the PBSR affecting Defined Benefit plans are consistent with the changes proposed in the August report. The required level of solvency funding has been reduced from 100% to 85% while going concern funding has been “enhanced” by the introduction of a provision for adverse deviation (PfAD).
The PfAD for DB plans in the amended PBSR is a percentage that depends on long-term interest rates and the target asset allocation in the plan’s Statement of Investment Policies and Procedures. For plans with an allocation to non-fixed income assets of at least 30%, the PfAD is calculated as the greater of 5% and five times the Bank of Canada’s long-term bond rate (CANSIM series V122544). If the plan’s target allocation to non-fixed income assets is less than 30%, the factor of five is multiplied by the ratio of the non-fixed income target allocation to 30%. Except for this adjustment, the PfAD formula does not recognize any measures taken to protect the plan from interest rate risk.
A plan’s funded status will now be measured by a “going concern plus” valuation, which means that the prescribed PfAD is added to the liabilities determined on a best estimate going concern basis. Minimum funding rules require plans to fund the normal cost plus PfAD unless the plan has an actuarial excess. An actuarial excess, the amount of which can be used to reduce or eliminate contributions, is the excess of assets over 105% of the sum of the going concern liabilities plus the PfAD.
A plan is considered to have an unfunded going concern liability if the plan assets are less than the best estimate going concern liabilities increased by the PfAD. The period over which a going concern deficiency must be funded has changed. In the past, going concern funding deficiencies were amortized over a 15-year period from the date they were established at each actuarial valuation. Under the new regulations, the monthly going concern payments are now consolidated, and a new amortization schedule is recalculated at each valuation date by dividing the unfunded amount by 120.
DB plans are now required to fund on a solvency basis only to the 85% level. Specifically, at each valuation, monthly solvency payments will be established equal to the excess of 85% of the solvency liabilities over the assets, divided by 60.
The solvency funding level below which the Superintendent may refuse to register a plan amendment has been reduced from 90% to 85%. However, the use of actuarial excess to reduce or eliminate contributions is still restricted if the plan’s solvency ratio falls below 100%.
With the introduction of these less stringent solvency funding requirements, temporary funding relief in the form of an extension of the solvency funding deficiency period under Schedule 8 of the PBSR is eliminated as of December 31, 2019. For plans that made an election under Schedule 8 before these amendments, the temporary funding relief will end on the first review date on or after December 31, 2019.
It should be noted that with the change to best estimate going concern assumptions, the impact due to the enhanced going concern funding requirements is somewhat mitigated as liabilities will now be determined at higher interest rates. Previously, plans were required to hold a margin for adverse experience within the going concern assumptions; typically, the margin was held in the discount rate.
The new minimum funding requirements simplify the calculation of special payments and, since they are recalculated with each valuation, past deficits are consolidated. Such consolidation was not allowed before the amendments.
Target Benefit Provisions
An unanticipated change brought in by these amendments is the extension of the Target Benefit framework to single employers. Effective December 31, 2019, single-employer pension plans may include a Target Benefit provision. Previously, only multi-employer pension plans could provide Target Benefits.
Besides, the definition of “equity allocation” has also been amended to mean the target asset allocation in the plan’s Statement of Investment Policies and Procedures. This change affects the calculation of the “benchmark discount rate” and reflects the guidance previously provided by BCFSA.