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Legislation and Standards

The regulatory structure supporting private-sector target benefits plans is evolving. The current status and key themes of legislative initiatives for each Canadian jurisdiction as well as applicable standards are outlined below.

Accounting Standards

Accounting for Target Benefit Plans

In Canada, there is continued uncertainty with respect to accounting for target benefit plans in the financial statements of plan sponsors.

From Aon Hewitt’s perspective, the target benefit plan should be treated like a defined contribution (DC) pension plan, especially if the commitment from the employer is clearly a fixed contribution, without any possible variation. The impact of such accounting methodology would be as follows:

  • the cost of the plan for any specified financial period is the actual contribution made by the employer; and
  • there is no impact on the employer's balance sheet.

The position of the audit community is ambiguous while it continues to reflect on its position. One point of contention is the assumption to make concerning the reaction of an employer following poor investment performance in a target benefit plan. Will the employer add more contributions rather than reduce benefits? In other words, some auditors may assume that the "target benefit" is a constructive obligation of the employer and, therefore, it should be considered a defined benefit (DB) plan. Before establishing, or participating in, a target benefit plan that permits a certain level of variation in employer contributions, even with a ceiling on such contributions, the employer should closely analyze the impact of the accounting treatment of such variation.

For example, some New Brunswick plan sponsors that have converted their DB pension plans to the shared-risk model have found some middle-ground in the accounting treatment of their specific arrangements.

Also of note, accounting standard-setting organizations have been attempting for years to clarify the treatment of “hybrid plans”. The International Accounting Standards Board (IASB) had introduced the concept of contribution based plans in the initial version of IAS19-R ED, but this was later shelved as it was seen as too complex. It would not be a surprise to see a similar attempt to address hybrid plans, in the near future, as the target benefit concept continues to increase in popularity around the globe.

Given this uncertainty, auditors must analyze each target benefit plan on a case by case basis. Accordingly, any employer who plans to establish, or participate in, a target benefit plan should discuss the appropriate treatment of the arrangement with its auditor.

Analysis Under Different Accounting Standards

Below is Aon Hewitt’s analysis of the treatment of target benefit plans under the various accounting standards used in Canada.

International Financial Reporting Standard

International Accounting Standard 19 — Employee Benefits

Par. 28
Under defined contribution plans the entity’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a post-employment benefit plan or to an insurance company, together with investment returns arising from the contributions. In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall, in substance, on the employee.

Par. 29
Examples of cases where an entity’s obligation is not limited to the amount that it agrees to contribute to the fund are when the entity has a legal or constructive obligation through:

  1. a plan benefit formula that is not linked solely to the amount of contributions and requires the entity to provide further contributions if assets are insufficient to meet the benefits in the plan benefit formula;
  2. a guarantee, either indirectly through a plan or directly, of a specified return on contributions; or
  3. those informal practices that give rise to a constructive obligation.

Par. 30
Under defined benefit plans:

  1. the entity's obligation is to provide the agreed benefits to current and former employees; and
  2. actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the entity. If actuarial or investment experience are worse than expected, the entity's obligation may be increased

For example, a constructive obligation may arise where an entity has a history of increasing benefits for former employees to keep pace with inflation even where there is no legal obligation to do so.

Aon Hewitt Analysis

Unless the employer increases its contribution each time a reduction in benefits is deemed necessary, a target benefit plan should be treated like a DC pension plan for accounting purposes and not like a DB pension plan.

It is worth noting that the IASB has, on many occassions, discussed projects related to setting standards for a "contribution-based promise". If such standards are released, this could change the above analysis, and/or could result in more disclosure with respect to target benefit plans than with respect to DC pension plans. So far, no amendments to the standards have been adopted in this regard, however, discussions have started in 2014 that could potentially address these matters.

Accounting Standards for Private Enterprises
Section 3462 — Employee Future Benefits

Par .010
When an entity provides benefits under a defined contribution plan, it does not assume the actuarial and investment risks inherent in a defined benefit plan. A defined contribution plan specifies how contributions are determined rather than the amount of benefits an employee is to receive or the method for determining those benefits. The entity contributes a certain amount to the fund in each period in exchange for services rendered by the employee and has no responsibility to make any further contributions. The employees are at risk because the amount of the benefit that will be payable to an individual employee is entirely dependent upon the amount of funds accumulated in the employee's account and the investment earnings on the accumulated funds.

Par .011
A particular benefit plan is classified as either a defined benefit plan or a defined contribution plan depending on the economic substance of the plan established by its terms and conditions. A benefit plan may contain characteristics of both defined benefit and defined contribution plans but is, in substance, one or the other. For example, a benefit plan may stipulate the basis of contributions on which future benefits are determined and, because of this, appear to be a defined contribution plan. However, the plan may make the entity responsible for specific employee future benefits or a specified level of future benefits. In such a case, the plan is, in substance, a defined benefit plan. Another example is a pension plan in which the benefits provided are the greater of the benefits under a defined benefit plan and the benefits under a defined contribution plan. Such a plan is accounted for as a defined benefit plan.

Aon Hewitt Analysis

Since the employer does not assume actuarial and investment risk, Aon Hewitt’s analysis of Section 3462 is that a target benefit plan should be treated like a DC pension plan for accounting purposes and not like a DB pension plan.

However, some auditors could interpret that a target benefit plan falls under the example of Par .011, meaning that such a plan is, “in substance” a DB plan.

US GAAP
FASB Accounting Standard Codification (ASC) 715 — Compensation — Retirement Benefits

Definition of a DC Plan in the glossary:
A plan that provides benefits in return for services rendered, provides an individual account for each plan participant, and specifies how contributions …are to be determined rather than specifies the amount of benefits the individual is to receive… the benefits a plan participant will receive depend solely on the amount of contributed to the plan participant's account, the returns earned of those contributions and the forfeitures of other plan participants' benefits that may be allocated to that plan participants' account.

Section 715-70-15-2
A pension plan having characteristics of both a defined benefit plan and a defined contribution plan requires careful analysis. If the substance of the plan is to provide a defined benefit, as may be the case with some target benefit plans, the accounting requirements shall be determined in accordance with the provision of subtopic 715-30 applicable to DB plans and the disclosure requirements…

Aon Hewitt Analysis

The language in Section 715-70-15-2 leaves a certain level of uncertainty as to whether a given target benefit plan arrangement should be recognized as a DC pension plan or a DB pension plan. It is important to note that the label "target benefit" in this FASB standard does not have the same meaning as the target benefit design described on this website, but it is instead a DC type of arrangement in the US. Again, discussions with auditors are needed in each specific case and the appropriate treatment will depend on the terms of the employer’s commitment.

Public Sector Accounting (PSA)
Section PS 3250 — Retirement Benefits

Par 012
When a government provides benefits under a defined contribution plan, it does not assume the actuarial and investment risks inherent in a defined benefit plan. A defined contribution plan (or money purchase plan) is one in which a government's contributions in respect of services rendered by employees are specified. The government is required by the plan to make a specific fixed contribution each period. If that contribution is made, no additional government contributions are required now or in the future for the related service. The employees are at risk. This is generally because the amount of the benefit that will be payable to an employee is dependent upon the funds accumulated for each employee's account and the investment earnings on the accumulated funds.

Par 013
Because benefit plans are often complex, careful analysis and professional judgment are needed to determine whether the substance of a particular plan makes it a defined benefit or a defined contribution plan.

Aon Hewitt Analysis

Similar to IAS19, unless the employer increases its contribution each time a reduction in benefits is deemed necessary, it is clear that a target benefit plan should be treated like a DC pension plan for accounting purposes and not like a DB pension plan.

Income Tax Act

In the April 2015 federal budget, the federal government indicated that it is committed to reviewing possible changes to the income tax rules to accommodate target benefit pension plans within the system of rules and limits for registered pension plans. Further insight will be gathered as provincial legislation is reformed across Canada to accommodate these types of hybrid designs into the large spectrum of plan design alternatives.

There are currently no actual proposals for amending the Income Tax Act (ITA) to specifically provide for target benefit pension plans. There are target benefit plans operating under the current environment; however, to be most supportive of target benefit pension arrangements, the following questions should be clarified:

  • What Pension Adjustment (PA) rules apply to target benefits? We suggest that the most appropriate approach would be for the PA to equal the annual contributions made to the plan on behalf of the member, as for a defined contribution plan. This avoids the need to determine retroactive PA adjustments (PSPAs and PARs) when benefits are altered.
  • There is currently a provision in the ITA that specifies pension benefits cannot be variable. This provision could be problematic for target benefit plans that wish make retroactive benefit reductions.
  • How would "excess surplus" be defined?
  • Would a funding Provision for Adverse Deviations (PfAD, or margin) be recognized as a plan liability and be included as an "eligible contribution"?

We understand that Finance is reviewing several of these questions. We also note that Specified Multi-Employer Pension Plans (SMEPPs) have different treatment which addresses most of the above questions and allows them to operate as true target benefit pension plans.

In March 2015, the C.D. Howe Institute published a paper, The Taxation of Single-Employer Target Benefit Plans – Where We Are and Where We Ought To Be, co-authored by Karen Hall and Barry Gros of Aon Hewitt, with lawyers Ian McSweeney and Jana Steele. This report proposes a tax treatment for single employer target benefit plans that is both flexible and practical for the full spectrum of potential target benefits plan designs.

Federal (Includes Northwest Territories, Yukon and Nunavut)
Legislation

In the April 2015 federal budget, the federal government indicated that it was continuing to assess the importance of target benefit pension plans as an option for Crown corporations and federally regulated private sector pension plans, as a mechanism to enhance pension coverage to Canadians. In April, 2014, the Department of Finance Canada launched consultations on a potential framework for Target Benefit Plans (TBPs). The Consultation Paper, Pension Innovation for Canadians: The Target Benefit Plan, contains proposals and requests input from industry stakeholders on all aspects of plan design and management: administration, governance, funding policy, contribution and benefit structures, communications, portability, conversion from other plan designs, and plan termination.

View Aon Hewitt's response to this consultation paper.

Prior to this, OSFI had indicated they would allow target benefit pension plans to work within the existing rules for negotiated contribution plans, meaning that, presently, target benefits are possible only for multi-employer plans.

On October 19, 2016, Bill C-27, An Act to amend the Pension Benefits Standards Act, 1985 received first reading. This bill purports to amend the Pension Benefits Standards Act, 1985 to provide a framework for the establishment, administration and supervision of target benefit plans. Specifically, the new legislation would apply to both single employer (irrespective of whether there is a collective bargaining agreement in place) and multi-employer pension plans.

Please see Aon Hewitt Information Bulletin Target Benefit Plans Proposed for Federally-Regulated Employers for further details.

Source: Bill C-27, An Act to amend the Pension Benefits Standards Act, 1985.

Alberta
Legislation

The Employment Pension Plans Act, S.A. 2012, c. E-8.1 (Act), was proclaimed in force effective September 1, 2014 along with the accompanying new Employment Pension Plans Regulation (Regulation). The Act and Regulation make provision for target benefit pension plans.

Key changes to the Act and Regulation are summarized in the Aon Hewitt Information Bulletin Alberta Pension Reform is Here, dated July 29, 2014. The information below provides a more detailed analysis of the provisions specific to target benefit pension plans.

The Act and Regulation do not provide for conversion of past service defined benefits to target benefits. While a bill was introduced in April 2014 to permit past service conversions, it was not passed before an election was called. The Alberta government has not indicated any intent to reintroduce the bill.

Definition of a Target Benefit Plan

The Act allows any plan to have a “target benefit provision”.

A “target benefit provision” means a provision of the plan text document of a pension plan that:

  1. establishes a formula by which the amount of the pension that is intended to be payable to a member is to be determined; and
  2. provides that the actual benefit under the plan may be reduced below the intended benefit under section 20(2)(b) [of the Act].

Source: Employment Pension Plans Act, S.A. 2012, c. E-8.1, s. 1(1)(nnn)

Governance

The Act requires every pension plan to have a written governance policy, containing certain minimum required information. The governance policy for a pension plan that contains a target benefit provision is subject to the same requirements.

The Act also requires every pension plan with a defined benefit or target benefit provision to have a written funding policy. In addition to the information required for a defined benefit plan, the funding policy for a plan with a target benefit provision must include information on expectations for benefit reductions.

Funding a Target Benefit Provision

The Alberta Act and Regulations specify minimum requirements for funding a target benefit provision of a pension plan. The key new requirement is the determination of a provision for adverse deviation, or PfAD. The PfAD is a percentage which is the sum of two components:

  1. a component that depends on the allocation of plan assets to equities (the Regulations provide a table that specifies the required percentage as a function of the equity allocation); plus
  2. a component that depends on the difference between the discount rate assumed in the valuation of the plan liabilities and a benchmark discount rate (“BDR”).

The BDR is determined by applying the plan’s asset allocation to bond and equity return assumptions specified in the Regulations. The percentage for this component of the PfAD is equal to 15 multiplied by the amount that the assumed discount rate exceeds the BDR.

The contributions to a target benefit provision must be at least equal to:

  1. the normal actuarial cost, plus
  2. the PfAD percentage multiplied by (a), plus
  3. a provision for amortization of any unfunded liability.

An “unfunded liability” is equal to the value of pension assets minus the value of accrued liabilities on a going-concern basis. There is no requirement to apply the PfAD to the valuation of accrued liabilities.

Valuations and Solvency

Going-concern actuarial valuations continue to be required triennially. Target benefit provisions are exempt from funding on a solvency basis. However, stress testing is required. The actuary must identify elements that could pose a material risk to the plan’s ability to meet its funding requirements and in the valuation report quantify and explain the potential impact of these risks.

Plans with target benefit provisions cannot withdraw “actuarial excess” funds from the target benefit component of the plan while it is continuing. Nor can “excess” funds be used to offset required contributions.

Lump Sum Transfer Values

Under a target benefit provision, commuted values are calculated using the going-concern assumptions from the most recent actuarial valuation report. The 50% rule on employee contributions continues to apply; however, the total amount paid is proportionately reduced if the target benefit funded ratio is less than 100%.

Plan Member Communications

New requirements have been added to existing disclosure statements, and some new statements have been added. The new items specific to target benefit plans are as follows:

  • in the plan summary, an explanation as to how and when benefits might be reduced;
  • in the annual statements for active members and pensioners as well as the statements provided on termination of employment, marriage breakdown, retirement and death, the target benefit funded ratio and, if this funded ratio is less than 100%, statements regarding the impact on members’ benefits and the steps being taken to address the funding shortfall.
British Columbia
Legislation

British Columbia’s new Pension Benefits Standards Act, S.B.C. 2012, c. 30 (Act), came into force effective September 30, 2015 along with the accompanying new Pension Benefits Standards Regulation (Regulation). The Act and Regulation make provision for target benefit pension plans.

Key changes to the Act and Regulation are summarized in the Aon Hewitt Information Bulletin New BC Pension Legislation. The information below provides a more detailed analysis of the provisions specific to target benefit pension plans.

The Act and Regulation provide for target benefit pensions. Although the Joint Expert Panel on Pension Standards (JEPPS) report had largely described and envisioned a target benefit provision in the context of a collectively bargained multi-employer pension plan, the Act does not specifically limit target benefits to only these types of plans. However, with respect to the conversion of past service defined benefits to target benefits, this is currently only permitted in the context of negotiated cost multi-employer pension plans., There are currently no provisions for single-employer target benefit plans as the Act and Regulation do not outline funding rules for single employer target benefit plans.

Definition of a Target Benefit Plan

The Act allows an eligible plan to have a “target benefit provision”, defined as:

A "target benefit provision" means a provision of the plan text document of a pension plan that:

  1. establishes a formula by which the amount of the pension that is intended to be payable to a member is to be determined; and
  2. provides that the actual benefit under the plan may be reduced under section 20 (2) (b) below the intended benefit.

Source: Pension Benefits Standards Act, S.B.C. 2012, c. 30, s. 1.

Governance

The Act requires every pension plan to have a written governance policy, containing certain minimum required information. The governance policy for a pension plan that contains a target benefit provision is subject to the same requirements.

The Act also requires every pension plan with a defined benefit or target benefit provision to have a written funding policy. In addition to the information required for a defined benefit plan, the funding policy for a plan with a target benefit provision must include information on expectations for benefit reductions.

For an existing pension plan, the written governance and funding policies must be established no later than the first day of the fiscal year immediately following the fiscal year of the plan during which the applicable section of the Act comes into force. For plans with a calendar year fiscal year, this deadline is January 1, 2016. The written policies must be available if requested by the pension regulator, although they do not need to be formally filed. They are available on request by a member or other interested party.

Funding a Target Benefit Provision

The Act and Regulation specify minimum requirements for funding a target benefit provision of a pension plan. The key new requirement is the determination of a prescribed provision for adverse deviation, or PfAD. The PfAD is a percentage of a target benefit component’s going concern liabilities, which is adjustable depending on certain risk factors. The PfAD has two components.

  1. The first factor is called the “asset allocation amount”. The amount of the PfAD associated with this factor depends on the amount of the plan’s equity allocation.
  2. The second factor in determining the PfAD compares the going concern discount rate used in the plan’s actuarial valuation report to a benchmark discount rate. Instructions on how to calculate the benchmark discount rate are in section 2. The amount of the PfAD associated with this component is a 15% increase in going concern liability for every 1% that the assumed discount rate exceeds the benchmark discount rate.

The contributions to a target benefit provision must be at least equal to:

  1. the normal actuarial cost, plus
  2. the PfAD percentage multiplied by (a), plus
  3. minimum amortization payments of any unfunded liability.

Note that the additional funding starts three years after the conversion of the plan to a target benefit. If the above contribution requirement cannot be met, benefit reductions will be required.

An “unfunded liability” is equal to the value of pension assets minus the value of accrued liabilities on a going-concern basis. There is no requirement to apply the PfAD to the valuation of accrued liabilities, however, the PfAD must be applied to the normal actuarial cost. Going-concern actuarial valuations continue to be required triennially. Target benefit provisions are exempt from funding on a solvency basis. However, stress testing is required. The actuary must identify elements that could pose a material risk to the plan’s ability to meet its funding requirements and in the valuation report quantify and explain the potential impact of these risks. There is no obligation to fund the plan in consideration of the results of the stress testing.

Plans with target benefit provisions are not permitted to:

  • have solvency reserve accounts,
  • withdraw “actuarial excess” funds from the target benefit component of the plan while it is continuing, or
  • use “excess” funds to offset employer required contributions.

If the Plan with target benefit provisions has accessible going concern excess, as defined in the Regulations, this excess can be used to increase benefits.

Lump Sum Transfers

Under a target benefit provision, commuted values are calculated using the going-concern assumptions from the most recent actuarial valuation report. The 50% rule on employee contributions continues to apply; however, the total amount paid is proportionately reduced if the target benefit funded ratio is less than 100%.

Plan Member Communications

New requirements have been added to existing disclosure statements, and some new statements have been added. The new items specific to target benefit plans are as follows:

  • in the plan summary, an explanation as to how and when benefits might be reduced;
  • in the annual statements for active members and pensioners as well as the statements provided on termination of employment, marriage breakdown, retirement and death, the target benefit funded ratio and, if this funded ratio is less than 100%, statements regarding the impact on members’ benefits and the steps being taken to address the funding shortfall.
Manitoba

There is no current or proposed legislative framework for private-sector target benefit pension plans.

Newfoundland and Labrador

There is no current or proposed legislative framework for private-sector target benefit pension plans.

New Brunswick
Legislation

New Brunswick’s An Act to Amend the Pension Benefits Act, S.N.B. 2012 c. 38 (formerly Bill 63), introduced a new form of pension plan called a Shared Risk Pension Plan (“SRPP”). An SRPP is essentially a target benefit pension plan. A basic benefit is derived, but that benefit may increase or decrease according to the way the plan performs over time. Bill 63 came into effect on July 1, 2012, and the Shared Risk Plans Regulation — Pension Benefits Act, N.B. Reg. 2012/75 was filed August 14, 2012 to provide details on the structure and administration of SRPPs. The Regulation provides considerable detail on affordability testing for such plans.

New Brunswick’s Bill 20, An Act to Amend the Pension Benefits Act, received royal assent in December 2012. This Bill further facilitates the conversion of a pension plan to an SRPP, by clarifying the treatment of past service benefits. Bill 20 has retroactive effect to July 1, 2012.

Definition of a Shared Risk Plan

The Act provides the following definition:

A shared risk plan shall meet the following criteria:

  1. the employer and the members make contributions to the pension plan in the amount set in accordance with the plan and the funding policy;
  2. subject to the prior consent of the Superintendent, a funding policy for the pension plan is established at inception and reviewed at least annually by the administrator in accordance with the regulations;
  3. subject to the prior consent of the Superintendent, an investment policy for the pension plan is established at inception and reviewed at least annually by the administrator in accordance with the regulations;
  4. subject to the prior consent of the Superintendent, risk management goals and procedures for the pension plan are established at inception and reviewed at least annually by the administrator in accordance with the regulations;
  5. escalated adjustments may only be granted in respect of past periods and if the funding policy so permits;
  6. contributions shall not be reduced or suspended except in accordance with the Income Tax Act (Canada) and the funding policy;
  7. disclosure of the purpose and characteristics of the pension plan is made to its members in accordance with the regulations;
  8. a dispute resolution process is established at inception in the plan text to resolve a deadlock among the trustees on a board of trustees with respect to any resolution or motion before them; and
  9. the base benefits and ancillary benefits satisfy any other criteria prescribed by regulation.
Source: An Act to Amend the Pension Benefits Act, S.N.B. 2012 c. 38 (formerly Bill 63), ss. 100.4(1) – 100.4(2)

Governance

Shared risk pension plans (SRPP) in New Brunswick are subject to stringent regulatory oversight. They require the establishment of a funding policy, an investment policy, risk management goals and procedures, including asset/liability modeling and annual actuarial valuations, and a dispute resolution process. The policies must be approved by the Superintendent and the Superintendent may withhold approval of a new SRPP if s/he is not satisfied that the plan’s contributions are sufficient to provide the benefits within the required risk management parameters. Annually, the administrator must review the funding policy and investment policy and ensure that the risk management procedures are applied to the plan; confirmation and updates must be provided to the Superintendent.

The New Brunswick legislation further requires that the plan administrator be a trustee, board of trustees or a non-profit corporation (each director on the board of directors of the non-profit corporation will be a trustee of the plan). An employer or traditional pension committee cannot be the administrator of an SRPP. The sole obligation of the employer and the employees is to make their required contributions. The independent plan administrator is responsible for carrying out the purposes of the plan and for making decisions, in accordance with the plan’s policies, to increase, decrease or suspend both contributions and benefits. The Act does not specify how the administrator is to be appointed or established.

The Superintendent has the power to remove a trustee if he believes the trustee has acted improperly, has acted to the detriment of the purposes of the plan, has not acted in accordance with the applicable legislation, or has failed to act when required by applicable legislation. The Superintendent can also intervene to resolve disputes and deadlocks among trustees.

Design and Affordability Testing

There are very specific requirements for SRPPs when it comes to affordability testing. First of all, "base benefits" are distinguished from "ancillary benefits". Base benefits include formula benefits at normal retirement, past pension increases, as well as ancillary benefits that have vested. Ancillary benefits may be early and postponed retirement benefits, bridge benefits, escalated adjustments, etc.

Secondly, there are two risk management goals that must be met when the plan is established, converted and whenever an adjustment is made:

  1. The primary goal is a 97.5% probability that over the next 20 years, the base benefits will not be reduced.
  2. The secondary risk management goal is that, over the next 20 years, at least 75% of the ancillary benefits will be delivered.

In the initial plan design, contributions must cover the funding policy normal cost, administration expenses (including investment expenses exceeding 0.50% of the plan fund), plus any additional amounts required to meet the two risk management goals above.

Stochastic affordability testing must be conducted annually, and must determine the plan’s funded ratio based on an open group projection over a 15-year period. If the open group funded ratio fails to meet minimum requirements (100% in 2 successive years), a funding deficit recovery plan is required. Only when the open group funded ratio is over 105% may benefit improvements be considered under a funding excess utilization plan.

Valuations and Solvency

Actuarial valuations are conducted annually and must examine and disclose the results of the affordability testing. There are no requirements for funding on a solvency basis, although the “termination value funded ratio” (essentially the past service funded ratio) must be determined and disclosed.

Lump Sum Transfer Values

A member’s termination value under a SRPP is the greater of:

  • the member’s contributions with interest; and
  • the actuarial value of the member’s benefit on the funding basis, multiplied by the termination value funded ratio.
Plan Member Communications

SRPP must disclose to new members and to terminating/retiring members (or the spouse of a deceased member), the nature of the plan and the benefits provided under the plan, including a “clear, plain language statement that the contributions are limited to those allowed under the funding policy” and that base benefits and ancillary benefits may be reduced, both past and future. The plan must also disclose the plan’s funding policy and funded status and must explain how benefits adjustments are determined.

All stakeholders, including members and former members, must be informed annually, within 12 months of the review date, of the key results of the most recent actuarial valuation, with a summary of the plan’s funding policy and a description of how member benefits would be calculated if the plan were terminated.

Additional disclosures are specified upon plan conversion.

Nova Scotia
Legislation

For the most part, Nova Scotia’s new Pension Benefits Act, S.N.S. 2011, c. 41 (Former Bill 96) was proclaimed in force effective June 1, 2015. However, the provisions of Former Bill 96 that provided for target benefit plans have not yet been proclaimed in force. It is not clear when, or if, these provisions will be proclaimed in force. The operational details for target benefit plans would need to be set out in regulations before these provisions would come into force.

Definition of a Target Benefit Plan

The target benefit provisions of Former Bill 96 that have not yet been proclaimed in force provide the following definition:

The pension benefits provided by a pension plan are target benefits if all of the following criteria are satisfied:

  1. the pension benefits are not defined contribution benefits;
  2. the obligation of the employer to contribute to the pension fund is limited to a fixed amount set out in one or more collective agreements;
  3. the administrator is authorized, by the documents that create and support the pension plan and pension fund, to reduce benefits, deferred pensions or pensions accrued under the plan, both while the plan is ongoing and upon wind-up;
  4. the reduction referred to in clause (c) is not prohibited by the terms of any applicable collective agreement or by the pension legislation of a designated jurisdiction;
  5. the pension benefits satisfy such other criteria as may be prescribed; and
  6. the pension plan satisfies such other criteria as may be prescribed.

Source: Pension Benefits Act, S.N.S. 2011, c. 41 (Formerly Bill 96), s. 57 [not yet proclaimed]

Ontario
Legislation

Ontario’s Securing Pension Benefits Now and for the Future Act, 2010, S.O. 2010 c. 24 (formerly Bill 120) introduced provisions governing target benefit plans to the Pension Benefits Act, R.S.O. 1990, c. P.8. These provisions have not yet been proclaimed in force and much of the operational detail will not be known until accompanying regulations are released.

The 2013 Ontario Budget indicated that the government will proceed with the necessary regulatory changes with respect to eligible multi-employer target benefit plans. Assuming certain federal tax issues are resolved, the 2013 Ontario Budget also indicated that the government plans to consult with interested parties to establish a framework for single-employer target benefit plans, which would include funding rules, plan governance, the timing of necessary benefit reductions, permitted benefit improvements, and notice to members and retired members.

The 2013 Budget did not indicate whether the Ontario government would reconsider its current position, that target benefit plans should be limited to collective bargaining situations.

Definition of a Target Benefit Plan

Pending provisions of the Act provide the following:

The pension benefits provided by a pension plan are target benefits if all of the following criteria are satisfied:

  1. The pension benefits are not defined contribution benefits; and
  2. The obligation of the employer to contribute to the pension fund is limited to a fixed amount set out in one or more collective agreements.
  3. The administrator is authorized, by the documentsthat create and support the pension plan and pen-sion fund, to reduce benefits, deferred pensions orpensions accrued under the plan, both while theplan is ongoing and upon wind up.
  4. The reduction referred to in paragraph 3 is not pro-hibited by the terms of any applicable collectiveagreement or by the pension legislation of a desig-nated jurisdiction.
  5. The pension benefits satisfy such other criteria asmay be prescribed.
Source: Securing Pension Benefits Now and for the Future Act, 2010, S.O. 2010 c. 24 (formerly Bill 120), s.39.2.

Prince Edward Island
There is no current or proposed legislative framework for private-sector target benefit plans.
Quebec
Legislation

The Act to provide for the establishment of target-benefit pension plans in certain pulp and paper sector enterprises (2012, chapter 32) came into force on December 7, 2012. Although this act applies only to some companies in the pulp and paper sector, it is considered as a first step toward a legal framework that would allow the establishment of target benefit plans (TB) in Quebec.

The Regulation respecting target-benefit pension plans in certain pulp and paper sector enterprises under the Supplemental Pension Plans Act (SPP Act) was published in the Gazette officielle du Québec on November 6, 2013. These provisions are retroactive to December 31, 2010 as some TB plans came into effect on January 1st, 2011. These rules are temporary until permanent legislation is promulgated for all TB plans in Quebec.

Definition of a Target Benefit Plan

A TB plan under this Regulation shall include the following characteristics:

  1. the employer and member contributions as well as the method used for calculating those contributions are determined in advance;
  2. the plan text determines the benefits target, including any ancillary benefit, on the basis of which the current service contribution is established;
  3. the normal pension may vary according to the financial situation of the pension plan, as can any ancillary benefit provided for under the plan; the same variation being described in the actuarial valuation report for the plan;
  4. notwithstanding section 39 of the Act, the employer contribution to the plan is limited to the one set out in the plan text;
  5. the cost of the plan’s obligations, after deducting the employer contribution set out in the plan text, is charged solely to the members and beneficiaries of the plan, under the conditions provided for in section 27;
  6. only the members and beneficiaries are entitled to surplus assets during the existence of the plan, as in the case of its termination;
  7. the plan has no defined contribution provision nor provisions that, under a defined benefit plan, are identical to those of a defined contribution plan.

Source: Regulation respecting target-benefit pension plans in certain pulp and paper sector enterprises under the Supplemental Pension Plans Act

Governance

TB plans in Quebec are, for now, subject to the same governance rules as the majority of defined benefit (DB) plans. Thus, a Pension Committee should manage TB plans. There are no special rules for TB plans regarding the composition of the Pension Committee (e.g., joint committee or not, greater number of representatives designated by the members).

The Pension Committee must set an investment policy and risk management procedures. Every year, an actuarial valuation report of the plan must be prepared, at the Pension Committee’s request. The Committee should also regularly review the investment policy and ensure that the risk management procedures are applied to the plan.

Just like the majority of the other Quebec pension plans, the Pension Committee is responsible for managing the TB plan text. Corrective measures for making up contribution shortfalls, as well as the priority for each measure, should be expressly stated in this text. Similarly, the terms pertaining to the restoration of any benefits that might have been cut back must be defined.

Design and affordability test

Under temporary rules applied to TB plans in Quebec, corrective measures should be taken if an actuarial valuation shows the following:

x

Here are the possible corrective measures:

  1. a reduction in the benefits arising from service completed prior to the date of the actuarial valuation;
  2. an increase in member contributions;
  3. a reduction in the benefits target (future service).

It should be noted that a reduction of benefits for past service if required to rebalance the plan funding does not constitute a plan amendment according to the Supplemental Pension Plans Act. In such circumstances, the concept of amendment reducing benefits, which would require the approval of all affected members, does not apply to TB plans.

Where an actuarial valuation shows a surplus:

  1. The surplus exceeding 10% of liabilities on a solvency basis must first be allocated to the restoration of benefits which were reduced (note: the plan must provide the terms of restoration, including the order in which benefits will be restored).
  2. The surplus exceeding 20% of liabilities on a solvency basis, after the implementation of the preceding paragraph, may be allocated according to the plan provisions or as decided by the entity authorized to amend the plan.

The restoration of benefits that had been reduced is not considered a plan amendment. As such, the principle of equity does not apply to an amendment aiming to increase the benefit target.

Valuations and solvency

Actuarial valuations are carried out annually and must review and communicate the results of the affordability test. The solvency basis will “continue” to be calculated and presented, as it part of the affordability test under the temporary rules. Furthermore, the solvency ratio is used to determine the transfer value for a TB member.

Lump-sum transfer values

A non-retired member may, at any age, exercise his right to transfer his benefits following the termination of membership in the plan. The value of the member’s entitlements in the TB plan must include any additional benefit related to early retirement under the plan. The methodology and assumptions used are otherwise identical to those required for DB plans. However, TB plans are subject to neither the minimum adjusted benefit provided for in article 60.1 of the SPP Act, nor the rules governing excess employee contributions. Nevertheless, the transfer value must not be less than the sum of the contributions made by the employee, plus interest.

The value of a TB member’s benefits must be paid in proportion to the degree of plan solvency (whether this degree is lesser or greater than 100%). If a payment is made, the benefits covered by the payment constitute a full discharge (i.e. the concept of residual benefits as defined in sections 143 to 146 of the SPP Act does not apply to TB plans).

Finally, the Pension Committee cannot unilaterally purchase annuities for members whose pension is being paid, unless certain conditions are met. A member whose annuity was purchased at his request, if the plan allows it, or as a result of a decision taken by the Pension Committee ceases to be a TB member.

Communications

In addition to the information usually shared with DB members, the Pension Committee must communicate additional information to TB members, including:

  1. a description of what a TB pension plan is, including the fact that benefits may vary according to the financial situation of the pension plan;
  2. a description of the risks for the members as well as the methods used by the Pension Committee to manage those risks.
  3. benefit adjustments and changes to employee contributions or benefits targets during the fiscal year, that would be applied at a later date.
Saskatchewan

The Saskatchewan Pension Division of the Financial and Consumer Affairs Authority has confirmed that no amendments are required to the Pension Benefits Act to allow for target benefit plans. Section 40 of the Pension Benefits Act allows a sponsor to limit the contribution levels to the amount negotiated under a collective bargaining agreement. If funds are not sufficient to support benefits, then benefits will be reduced. However, it is not likely that that plans will be permitted to convert defined benefit plans to target benefit plans for past service.

Aon Hewitt assisted in the development of a new target benefit plan in Saskatchewan that provides retirement coverage for the 500-plus officers and civilian staff of the Regina Police Service. Please see Aon Hewitt’s News Release for further details.