BC Financial Services Authority (“BCFSA”) recently amended the Pension Benefits Standards Regulation through Order in Council No. 505 to revise the definition of Provision for Adverse Deviations (PfAD) for plans with target benefit provisions (target benefit plans) in BC.
The revised PfAD for target benefit plans is comprised of two components:
- A minimum 7.5% amount, and
- An additional plan-specific PfAD (the “supplementary percentage”)
BCFSA has now released guidelines (https://www.bcfsa.ca/media/3111/download) that provide guidance on the development and documentation of the new PfAD definition for target benefit plans.
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New BCFSA Guidelines for Target Benefit PfAD
PfADs for target benefit plans are intended to be an additional buffer on a plan’s going concern liabilities and normal actuarial cost. Under BC funding requirement guidelines, plans must be funded based on a “Going Concern Plus” basis. Specifically, with respect to PfADs:
- Contributions to a plan must be sufficient to fund normal actuarial cost plus PfAD, and any unfunded liability payments, and
- Benefit improvements for past service can only be granted if the plan is fully funded on a going concern liability plus PfAD basis.
The previous PfAD regime was strictly formula based and created PfADs that were large and highly volatile for certain target benefit plans. This one size fits all approach created funding challenges for plans, and in some cases resulted in a reduction in the security of benefits.
The new PfAD regime moves from a rules-based to a principles-based framework. The addition of a supplementary percentage concept allows PfADs to better reflect the risk profile of pension plans based on a wholistic view of the plan’s specific characteristics.
The introduction of the supplementary percentage provides more flexibility for plan administrators when setting PfADs. For example, being able to account for a plan’s prudent investment and/or risk management strategies can now be reflected in PfAD levels through the supplementary percentage. This in turn introduces a degree of subjectivity. Accordingly, the new guidelines require plan administrators to describe the approach for determining the supplementary percentage in the plan’s funding policy.
Ultimately, BCFSA’s expectation is that the PfAD is set at a level that “provides a minimum buffer intended to promote benefit stability”.
Risk Management Framework
The guidelines establishes a five-step risk management framework designed to help plan administrators identify, assess and manage relevant risks while supporting the development of an appropriate level of PfAD.
- Establish Context of plan’s objective, PfAD and means for effective communication to members and stakeholders.
- Identify Risks that are unique to meeting the plan’s objectives.
- Evaluate and Classify how risks impact the plan’s objectives and how they can be managed.
- Determine how best to Manage Risks, including the use of PfADs. PfADs may be
i. fixed or variable depending on certain factors,
ii. or may be different depending on application to normal actuarial cost or going concern liabilities.
- Monitor and Review the effectiveness of the risk management strategies and regularly review framework to see whether re-classification of risks or introduction of new emerging risks is required.
In light of these changes, the plan’s funding policy is required to disclose the rationale and method for determining the appropriate level of PfAD.
- Rationale: The PfAD must reasonably follow the plan’s objective, risks and other plan-specific considerations. There should be a sound explanation on how these factors lead to the determination of the PfAD.
- Method: The administrator must explain the methodology in determining the PfAD. Examples of methodology include: i) a fixed PfAD, ii) a quantitative approach where the PfAD may vary, or iii) a qualitative approach that explains the decision making process for determining the PfAD.
The guidelines also provide some suggested best practices for Plan’s including:
- Consider the Special Considerations for Target Pension Arrangements in CAPSA Guideline No. 7: Pension Plan Funding Policy, as part of the plan’s funding policy.
- Develop and implement a member communication policy.
- Incorporate stress test results as part of an appropriate risk management strategy for the plan.
The new guideline introduces several changes that plan administrators and trustees need to consider and action on.
BC’s Superintendent of Pensions expects the new definition of PfAD to be reflected in a plan’s funding policy and actuarial valuation with a review date on or after December 31, 2022. A copy of the plan’s funding policy is required when filing a valuation report.
Contact your PBI consultants on how to navigate these changes and adhere to the guidelines of BCFSA, including:
- Reviewing/establishing your plan’s risk management framework in conjunction with a methodology for PfAD determination,
- Determining a level of supplementary percentage PfAD appropriate for your plan, and
- Documenting these changes/methodologies within your funding policy.