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The Restructuring of Quebec’s Multi-Employer Pension Plans

On February 18, 2015, the Government of Quebec introduced Bill 34, An Act to amend the Supplemental Pension Plans Act with respect to the funding and restructuring of certain multi-employer pension plans. By doing so, the Government of Quebec continues to show its commitment to tackling pension plan funding, which began when it commissioned the D’Amours report.[1] Bill 34, which deals with the funding of multi-employer pension plans (MEPPs), effectively brings Quebec back into line with the rules applicable in the rest of Canada. Bill 34 has effect from December 31, 2014.

As explained below, the most striking features of Bill 34 are the requirement that an insolvent MEPP be restructured and the consequences of not doing so.

Negotiated Contribution Plans

Bill 34 adds a new part to the Supplemental Pension Plans Act (SPPA), Chapter X.2. The first division of Chapter X.2[2] introduces the topic by specifying that it applies only to defined benefit MEPPs in force on February 18, 2015 that may not be amended unilaterally by a participating employer – in other words, negotiated MEPPs. These plans are referred to as “negotiated contribution plans.”[3] The next two divisions of Chapter X.2 deal with contributions, benefits and funding. The fourth division deals with restructuring of an underfunded negotiated contribution plan. The final division deals with wind-ups. Bill 34 also contains a number of transitional measures.

Contributions, Benefits and Funding

The following are the main features of the new contribution and funding rules applicable to negotiated contribution plans:

  • Employers participating in a negotiated contribution plan will contribute only “the employer contribution stipulated in the plan”[4] and cannot take a contribution holiday or contribute a letter of credit to deal with solvency deficiencies.
  • Solvency deficiencies in negotiated contribution plans will not be required to be funded, and requirements to hold reserves equal to the amount of the provision for adverse deviation will not apply to such plans.
  • The 50% rule and indexing for deferred pensions prior to early retirement age under section 60.1 of the SPPA will not apply to negotiated contribution plans.
  • Actuarial valuations reports will be required to be filed within six months of the date of actuarial valuation instead of nine months.[5] For actuarial valuations with an effective date of December 31, 2014, the six months will run from the last day of the month during which assent is given to Bill 34.
  • Funding deficiencies (i.e., going-concern deficiencies) will be required to be amortized over 12 years instead of 15 years.
  • The value of benefits accrued to members terminating their plan membership will be paid in proportion to the solvency ratio only, unless the relevant participating employer makes an additional contribution to increase the value to what it would be were it not for the solvency deficiency.

Restructuring and Recovery Plans

As indicated above, the most interesting aspects of Bill 34 are the provisions dealing with a negotiated contribution plan that an actuarial valuation reveals to have insufficient contributions. In such a case, the plan must be restructured according to a recovery plan that must be filed with the Régie des rentes.

The following are the permitted parameters of a recovery plan:

  • It can provide for increased employer contributions, increased member contributions and/or an amendment reducing benefits accrued before or after the effective date of the amendment.
  • If benefits are to be reduced, the value of benefits in pay may not be reduced by more than the value of benefits for active members, and benefits already paid cannot be affected.
  • The negotiated contribution plan’s liabilities may not be reduced below its asset value on both a solvency and a funding basis.

How a recovery plan is implemented depends on whether the negotiated contribution plan already allows benefit reductions.

If the plan does not allow benefit reductions when an actuarial valuation reveals insufficient contributions, the board of trustees or other party with the power to amend the plan will have to initiate a consultation process with the plan members and beneficiaries.[6] A notice describing the recovery plan, including the proposed increases in employee or employer contributions and/or the reduction of benefits, and the consequences of failing to implement the recovery plan must be provided to all plan members and beneficiaries. No more than 30% of the plan members and beneficiaries may object to the recovery plan in order for it to be implemented.

If the negotiated contribution plan already allows benefits to be reduced, the recovery plan can be adopted without further formalities. We assume this will apply to a MEPP registered and with members outside Québec. It also appears that a recovery plan may be adopted without consultation if a negotiated contribution plan has previously successfully undergone the consultation process and been amended to allow benefits to be reduced even though no actuarial valuation had yet revealed the insufficiency of contributions and contributions had not yet been reduced. In other words, a negotiated contribution plan may undergo a consultation process in order to pre-emptively provide it with the means with which to reduce benefits should the need arise in the future.[7]

The following are the dates by which each step of the recovery plan must be implemented and the penalties if these dates are not complied with:

  • The recovery plan must be filed within 18 months of “the date of the actuarial valuation”[8] that revealed the insufficiency of the contributions. Failure to file within that time frame will result in the same penalty as for a late filing of an actuarial valuation report (i.e., for each complete month, 20% of the fees payable with respect to the annual information return for the fiscal year ending as at the actuarial valuation date, up to a maximum of 100% of such fees.)
  • The amendment to implement the recovery plan must be filed with 24 months of “the date of the actuarial valuation.”[9] Failure to file within that time frame will result in active members ceasing to accrue benefits as of the default date.[10] The pension plan must be amended to “specify the period during which the benefits are not accumulated.”
  • If no recovery plan or amendment is filed within 60 months “after of the date of the actuarial valuation,” the plan must be terminated.Given this, the amendment above would likely indicate that the cessation of benefit accruals will last until the earlier of the date on which the amendment to implement the recovery plan is filed and the date on which the plan is terminated.

Employer Withdrawal and Wind-Ups

On a participating employer’s withdrawal from a negotiated contribution plan, benefits will now be required to be transferred or annuitized as if the plan had terminated.

In addition, on a withdrawal or on the negotiated contribution plan’s wind-up,

  • the debt of the employer will consist only of contributions that are unpaid as of the date of the withdrawal or wind-up; and
  • any surplus existing as of the withdrawal or wind-up must be paid to members and beneficiaries.

However, benefit reductions will be reversed and any solvency deficiency will need to be satisfied if a participating employer withdraws from a negotiated contribution plan or the plan winds up within five years of the date of assent of Bill 34 unless the withdrawal or wind-up is triggered by the failure to adopt a recovery plan, the sale or closure of the business, the employer’s insolvency or a change in union affiliation.

Orphaned Members

Finally, one of the D’Amours report’s recommendations was that former members whose employer has once withdrawn from a MEPP be required to transfer their commuted value out of the plan in proportion to the solvency ratio. These so-called orphaned members are former members and beneficiaries whose pensions have begun or have yet to begin, and in respect of whom there is no longer any employer to satisfy the liabilities associated with such pensions. Many MEPPs maintain liabilities with respect to orphaned members that will not be satisfied by their former employer. Orphaned members will have the commuted value of their entitlement transferred out of the plan no later than one year after the date of assent of Bill 34.[11] However, they must be given a three-month notice, and they may request that their benefits remain in the plan subject to being reduced later.[12]

Once orphaned members are dealt with, they should not be part of the recovery plan consent group. However, it is unclear what is to occur if a recovery plan consultation is initiated before their entitlements are transferred.

Next Steps

Clearly Bill 34 is good news for many MEPPs either registered in Quebec or with Quebec members. As soon as Bill 34 is given assent, the affected plans should be ready to assume their status as negotiated contribution plans. Since the Act will have come into force retroactively to December 31, 2014, any actuarial valuation that is effective on or after that date and that reveals an insufficiency of contributions will trigger the recovery plan requirement, and the board or other entity having the power to amend the plan will have to determine what recovery measures to adopt and, if necessary, present it to the plan’s members and beneficiaries.

In addition, these plans will have to be ready to reach out to and deal with orphaned members by the end of the year following the date of assent. Not only must such plans make sure that there is sufficient liquidity to do so, but they should be ready to incur additional costs in processing these unplanned transfers.

Please call me with any questions you may have concerning Bill 34. My colleagues and I can also help you with any other benefit-related questions or issues you may have.

[1] This report, titled Innovating for a Sustainable Retirement System, was released in April 2013 by the Expert Committee on the Future of the Québec Retirement System, which had been commissioned by the Government of Quebec to make recommendations regarding supplemental pension plans.

[2] Section 146.10.

[3] Chapter X.1 does not apply to MEPPs governed by a regulation made under the second paragraph of section 2 of the SPPA, other than the Regulation providing new relief measures for the funding of solvency deficiencies of pension plans in the private sector, but does apply to plans subject to Division III.3 of the Regulation respecting the exemption of certain pension plans from the application of provisions of the Supplemental Pension Plans Act.

[4] In most cases, that contribution should be the amount that has been negotiated.

[5] Actuarial valuations for Quebec-registered plans are filed yearly.

[6] It appears to be required only if the recovery plan includes the reduction of benefits.

[7] In fact, section 146.33(2) and section 146.34 of Bill 34 refer to a consultation process with the plan members and beneficiaries to adopt an amendment permitting the reduction of benefits before an actuarial valuation reveals insufficient contributions; whereas section 146.35 refers to a consultation process and an amendment to reduce benefits if contributions are insufficient and the plan does not already allow benefit reductions.

[8] Presumably this means that the recovery plan must be filed within 18 months of the effective date of the actuarial valuation, and therefore within the 12 months of the last date upon which the valuation is required to be filed. For valuations with an effective date of December 31, 2014, the 18 months will run from the last day of the month during which assent is given to Bill 34.

[9] For valuations with an effective date of December 31, 2014, the 24 months will run from the last day of the month during which assent is given to Bill 34.

[10] Thus, a sizable retiree population could hold the active members hostage and force the latter to bear the reduction of benefits.

[11] It appears that new section 319.7 of the SPPA would apply to all MEPPs and not just to those that qualify as negotiated contribution plans since this provision is not restricted to members and beneficiaries of negotiated contribution plans.

[12] This appears to mean that the notice will have to be given no later than nine months after assent. In addition, although not stated, it is assumed that the value of benefits that orphaned members elect to be retained in the plan will be reduced to reflect the plan’s solvency ratio set out in the most recent actuarial valuation prior to the one-year anniversary of the date of assent of Bill 34.