DEPARTMENT OF LABOUR AND IMMIGRATION
PENSION COMMISSION UPDATE NO. 24
FUNDING DEFINED BENEFIT PENSION PLANS
SOLVENCY REGULATIONS
This update has
no legal authority. The Pension Benefits Act of Manitoba
and The Pension Benefits Regulation, 188/87R amended should be
used to determine specific requirements.
Revised March
2005
On April 30, 1999
revisions were made to the Regulation under The Pension Benefits
Act. The purpose of this update is to provide an overview
of various revisions made to the Regulation.
Reference: The Pension Benefits Act
Sections 18(4), 26(1), 26.1, 26.3, 28(3), 28(6) 38; and
Regulation 188/87R amended
The process by which The Pension Benefits Act of Manitoba,
Chapter P32 ensures the orderly funding of defined benefit plans
is described in various sections of the legislation, but can be
summarized as follows:
- the plan’s actuary must review the plan’s financial
position and prepare an actuarial valuation describing the
funding needs of the plan;
- the employer is then responsible for remitting
contributions on the basis of the valuation and in a manner
required by legislation; and
- the filing of an annual information return describing the
funding that has occurred allows the Pension Commission to
ensure that contributions are being made in accordance with
the valuation.
This bulletin will attempt to explain the new requirements
effective April 30, 1999 of The Pension Benefits Act of Manitoba
(referred to as "the Act") and The Pension Benefits
Regulation, ("the Regulation") with respect to each
step in this process. However, the bulletin has no legal
authority. The Pension Benefits Act of Manitoba and The Pension
Benefits Regulation, 188/87 R amended should be used to
determine specific requirements.
A "defined benefit provision" means a provision of
a plan pursuant to which benefits are determined in any way
other than solely by reference to what is provided by
contributions made by or for the credit of a member together
with interest. A "defined benefit plan" means a plan
that contains a defined benefit provision. For simplicity, this
bulletin will use the term "plan" rather than
"defined benefit plan" or "defined benefit
provision".
In the case of a new plan, section 3(1) of the Regulation requires
an employer to have a plan reviewed as of the effective date of the
plan. Thereafter, an actuarial review must occur at the end of a
fiscal year and at intervals not exceeding three fiscal years after
the preceding review date. A review must also occur in the case of an
existing plan, where an actuarial valuation report or cost certificate
indicates that the solvency ratio is less than 0.9, at the end of the
fiscal year following the review date. As well, the Superintendent of
Pensions has the authority to request a review be made of the plan at
any time.
By review, we mean a review conducted by a Fellow of the Canadian
Institute of Actuaries with respect to the financial position of the
plan and the contributions required to be made to the plan to meet the
tests of solvency required by legislation.
The employer must file with the commission an actuarial report
based on the review. In the case of a new plan, section 3(7) of the
Regulation requires an actuarial valuation report to be filed not
later than 60 days after the establishment of the plan. The plan is
established on the date the persons authorized to establish the plan
resolve to do so. The plan may have an effective date, which precedes
the date it is established.
In the case of a review occurring after the effective date of the
plan, a valuation must be filed not later than 270 days after the
review date. The filing deadline applies to all valuations, which are
filed with the commission, whether or not the valuation is due. A
review is to be made every third year. However, if a review is made
one or two years after the preceding review date and the employer
wishes to make contributions on the basis of the new review, then the
actuarial valuation report resulting from the new review must be filed
within 270 days after the review date.
Section 5 of the Regulation requires an actuarial valuation to be
prepared in a manner that is consistent with the Standard of Practice
for the preparation of actuarial valuation reports issued by the
Canadian Institute of Actuaries. The Institute’s "Standard of
Practice for Valuation of Pension Plans" came into effect for
valuations having an effective date on or after May 1, 1994.
Section 3(12) describes the contents of an actuarial valuation
report. A report must include the following so far as is applicable:
(a) the estimated total dollar cost of benefits for all members,
showing separately the employer contributions and the employee
contributions relating to the normal actuarial cost
- for the fiscal year following the review date, where that date
falls on the last day of a fiscal year, or
- for the fiscal year in which the review date falls, where the
date falls on any other day;
(b) the rule used to compute the normal actuarial cost (i.e., % of
payroll, cents per hour, dollar
amount, etc.) and to allocate the cost between the employer and the
employees in respect of service in the period covered by the report or
certificate;
(c) in respect of any unfunded liability, the date it was
established, the unamortized balance
the special payments to be made to amortize it and the date at which
it will be amortized;
(d) where the person making the review determines that the plan
does not have a solvency
deficiency, a statement that, in the opinion of the person, the plan
does not have a deficiency;
(e) where the person making the review determines that the plan has
a solvency deficiency, the date it was established, the unamortized
balance as of the review date, the special payments to be made to
amortize it, the value of the assets and liabilities used to determine
the amount of it, the assumptions and valuation methods used to
calculate it and, based on the special payments, the date at which it
will be amortized;
(f) where the person making the review determines the solvency
ratio is not less than 1, a statement that, in the opinion of the
person, the ratio is not less than 1;
(g) where the person making the review determines that the solvency
ratio is less than 1, the solvency ratio, the value of the assets and
liabilities used to determine it, and the assumptions and valuation
methods used to calculate the liabilities;
(h) the surplus of the plan and, if known to the person who made
the review, a description of how the surplus will be utilized;
(i) the market value of the assets and a description of the
valuation methods used to determine the going concern assets;
(j) the value of the going concern liabilities with respect to each
of the following, including a description of the assumptions and
valuation methods used to determine that value;
- active members
- former members who have not commenced receiving pensions under
the plan, and any other persons who have a future entitlement to
receive pensions under the plan, and
- former members who are receiving their pension under the plan,
and any other persons who are receiving payments under the plan;
(k) in the case of a review occurring after the effective date of
the plan, a reconciliation of the results of the review, and
identification of the sources of actuarial gains and losses since the
immediately previous review date;
(l) in the case of a multi-unit plan in which the contributions of
the employer are based on a fixed rate or amount,
- the rate or amount that is to be contributed by the employer and
a member,
- breakdown of the rate or amount referred to in subclause (i),
stating the rate or amount that is attributable to the plan’s
normal actuarial cost, to the amortization of any unfunded or
solvency deficiency, and to any contingency reserve, and
- the average number of hours of service per member per fiscal
year that is assumed for the purpose of the review.
(m) such other information as the superintendent may require to
determine whether the plan meets the tests for solvency set out in
section 4.
An actuary is required to provide opinions on the financial
condition of the plan and on the contributions required to be made to
the plan on the assumption: (1) that the plan will be a going concern
and will not terminate and (2) that the plan has terminated at the
review date. In support of his or her opinions, the actuary prepares a
going concern valuation based on the first assumption and a solvency
valuation based on the second.
A going concern valuation will be familiar to the users of
actuarial valuations. The purpose of a going concern valuation is to
recommend the orderly funding of a plan to accumulate assets to
provide for the plan’s benefits in advance of their actual payment.
As previously mentioned, the actuary must make a recommendation with
respect to the normal actuarial cost of the plan for the fiscal year
following the review date. Legislation defines the normal actuarial
cost of a plan as "the amount estimated to be the cost to
persons required to contribute to the plan of the benefits of the plan
for a fiscal year".
In addition to determining the plan’s normal actuarial cost, the
actuary must compare the plan’s going concern liabilities, as
accrued to the date of the review. If the liabilities exceed the
assets, then the plan is said to have an unfunded liability. An
unfunded liability might exist because the plan’s benefits were
improved retrospectively without the plan having sufficient assets to
provide for the benefit improvements. An unfunded liability also might
be created if the assumptions on which the last valuation of the plan
were based are not met.
Regardless of why an unfunded liability is established, the
Regulation provides that an employer is obliged to make special
payments to the plan sufficient to amortize the unfunded liability
over a period not exceeding 15 years from the review date relating to
the establishment of the unfunded liability.
The requirement to prepare calculations on the basis of the
plan’s hypothetical termination is new to Manitoba’s legislation.
In examining the solvency of a plan, the actuary must compare the
plan’s liabilities determined on a plan termination basis to the
value of solvency assets. If a deficiency exists, then an employer is
obligated to make special payments to the plan sufficient to amortize
the solvency deficiency over a period not exceeding 5 years from the
review date relating to the establishment of the solvency deficiency.
These payments are in addition to contributions required with respect
to the normal actuarial cost and to special payments with respect to
unfunded liabilities.
In preparing a solvency valuation, all benefits which would be
payable upon the termination of the plan must be included in the
liabilities of the plan. The assumptions used to calculate liabilities
are set as at the review date and not as at some later date, such as
the report date. For instance, legislation provides those members not
yet eligible to commence a pension be given the right to transfer the
commuted value of benefits from the plan on plan termination. As such
the actuary would use the transfer value assumptions in accordance
with the Standard of Practice for Determining Pension Commuted Values to value the benefits for these members. The
interest rate prescribed by those standards as at the date of the
hypothetical termination would be used.
The actuary must also take into account the estimated expenses of
administering the termination of the plan, which would be required to
be paid out of the pension fund.
For purposes of preparing a solvency valuation, the value of the
assets of a plan
-
is
determined as of the latest review date and on the basis of the
market value of the assets or a value related to their
market value by means of an averaging method over a period of not
more than five years; and
-
includes
any cash balances and accrued and receivable income; and
-
is the
actuarial present value, determined in accordance with generally
accepted actuarial principles using the same assumptions as are
used in the solvency valuation of the plan’s liabilities, of:
(i) previous special payments,
(ii) special payments payable in respect of benefits for
employment before the effective date of the plan, if no benefits for that employment were provided under the plan
before the establishment of those special payments; and
(iii) special payments that are payable over the five years
following the plan's latest review date and not
included in subclauses (i) and (ii)
Previous special payment means a payment that was within the
definition of "special payment" before April 30, 1999.
Two final notes on the tests for solvency.
First, in a final or best average earnings type of plan, where the
pension is based on a rate of salary at retirement date or on average
of salaries over a specified and limited period, a projection of the
salary of each member must be used to estimate the salary on which the
pension payable at retirement date will be based when conducting a
going concern valuation. A solvency valuation normally would not take
into account a projection of salary.
Second, if the actuarial basis used in the actuarial valuation is
such that an unfunded liability or solvency deficiency may not be
revealed, as is the case with the Aggregate Method, then the actuary
must perform supplementary calculations to show that the solvency
tests are being met, and must certify to conducting those calculations
and to the solvency tests being met.
Section 26(1) of the Act requires that a plan be funded in
accordance with the tests for solvency prescribed by the Regulation.
An employer is required to make contributions that are sufficient to
provide for all benefits in accordance with the prescribed tests for
the solvency of the plan, which were previously described. Employees
contribute to a plan only if so required by the plan.
Section 4 of the Regulation requires employer contributions to be
made quarterly, both with respect to the normal actuarial cost and
special payments. Section 2.3(1) of the Regulation requires the
payment of those contributions to the plan's fund holder within 30
days after the end of the month for which those contributions are
payable. In the case of employer contributions to a multi-unit pension
plan, this section requires payment within 30 days after the end
of the month for which the contributions are payable.
Section 2.3(1) also requires the remittance to the fund holder of
any contributions made by the member within 30 days after the end of
the month in which the contributions were received by the employer
from a member or were deducted from the member's remuneration.
In the event that a review is being made, the employer
contributions in respect of normal actuarial cost and special payments
that are payable in respect of the first quarter after a review date
may be made with employer contributions in respect of the second
quarter, but the contributions must include interest from the date
they would otherwise be required to be paid to the date of payment, at
the same rate of interest used to determine the employer contributions
under section 2.3(1)(c) of the Regulation.
Section 28(6) of the Act states that an employer who is required
under a pension plan to remit a sum fails to do so within 60 days
after the date required under the plan, the person to whom the sum was
to be remitted must immediately notify the superintendent in writing.
A "person" means the administrator or a trustee or member
of the board of trustees of the pension plan, the person charged with
the investment of the funds of the plan, or the fund holder. Fund
holders include, an insurance company, a trust corporation, a society
established under the Pension Fund Societies Act (Canada) or a
corporation that is permitted to act as a fund holder under the Income
Tax Act (Canada).
To protect money which is payable, but not yet remitted to the fund
holder, sections 28(1) and (3) of the Act provide that the money which
has been received by an employer from an employee, or has been
withheld by an employer from money payable to an employee, or is due
to be paid by the employer cannot appropriate or convert any part of
the money to the employer’s own use or to any use not authorized by
the terms of the plan.
Section 18(4) of the Act requires the employer of a plan to file an
annual information return with the commission. The return is in a form
prescribed by the commission and must be filed within 180 days after
the end of each fiscal year of a plan.
On the return, the employer must report the amount of contributions
actually paid to the plan with respect to the plan fiscal year under
review.
SPECIAL ISSUES
Section 3(8) of the Regulation provides that, where an amendment to
a plan affects the cost of benefits provided by the plan or the
solvency or funding of the plan, or creates an unfunded liability, a
re-evaluation of the plan’s financial position is in order. The
employer must have the plan reviewed, in which case a comprehensive
actuarial valuation report and cost certificate must be prepared and
filed. Alternatively, the employer must have the latest review
revised. If the latter approach is to be used, the plan’s actuary
must be confident that the data, assumptions and actuarial methods
used in the previous review remain appropriate.
The employer must file a new or revised actuarial valuation report
within 120 days after the date the amendment is made. The date the
amendment is made is the date on which the amendment is executed by
whomever is authorized to amend the plan. The date the amendment is
made is not necessarily the date the amendment is effective – for
instance, a plan’s benefits could be improved retroactively. As
well, the date the amendment is made is unlikely to be the date the
amendment is filed with the commission. Confirmation that the plan
continues to qualify for registration typically occurs sometime after
the amendment is made.
If a new review is made, the review date is deemed to be the last
day of the fiscal year preceding the fiscal year in which the
amendment was made, for purposes of the Regulation. This is
particularly important with respect to the timing of the plan’s next
review.
Assume, for example, that a plan is amended by Resolution of the
Board of Directors of the company on October 4, 1999, the employer is
having a new actuarial valuation prepared and the fiscal year end of
the plan is December 31. The employer would be required to file the
actuarial valuation with the commission within 120 days of October 4,
1999. For purposes of determining when the next review is due, the new
review would be deemed to have occurred on December 31, 1998. The
employer would have the plan’s next review no later than December
31, 2001, three years after the most recent review.
If the last review is revised, another actuarial valuation report
must be conducted within three years of the date of the last review.
Suppose in the previous example that the employer had chosen to revise
the most recently filed valuation, which was prepared as at December
31, 1997. The employer still would be required to file the revised
cost certificate within 120 days of October 4, 1999, and the next
review would have to be conducted no later than December 31, 2000.
Section 26(3) of the Act requires that upon the termination or
winding up of a pension plan, the employer is liable to pay all
amounts that would otherwise have been required to be paid to meet the
tests for solvency prescribed by the Regulation, up to the date of
such termination or winding up, to the pension fund. This includes all
payments in respect of current service, as well as special payments in
respect of any unfunded liabilities, solvency deficiencies, and
experience deficiencies which were due and payable by the employer at
the termination date, as stated in as stated in the most recent
actuarial valuation report or cost certificate filed with the
commission under section 3 of the Regulation.
An employer is not obligated under legislation to make special
payments with respect to an unfunded liability or solvency deficiency
for the amortization period beyond the date of the termination.
Where an actuarial valuation report or cost certificate filed under
section 3 reveals that a plan does not have an unfunded liability or
solvency deficiency, an actuarial gain
- may be used to increase benefits;
- may be applied to reduce the employer contributions, if the plan
does not specifically provide that an employer may not reduce the
employer contributions by the use of surplus; or
- may be left in the plan.
In determining whether or not a plan permits the use
of surplus assets to make employer contributions, the employer should
be guided by the decision of the Supreme Court of Canada decision on
Schmidt v. Air Products Canada Ltd. The Court’s decision with
respect to an employer’s right to take a contribution holiday
appeared to turn on this conclusion: "When permission is not
explicitly given in the plan, it may be implied from the wording of
the employer’s contribution obligation. Any provision which places
the responsibility for the calculation of the amount needed to fund
promised benefits in the hands of an actuary should be taken to
incorporate accepted actuarial practice as to how that calculation
will be made. That practice currently includes the application of
calculated surplus funds to the determination of overall current
service cost."
Clause 4(3)(a) of the Regulation requires an employer
to pay into a plan the normal actuarial cost allocated to the employer
"as stated in the most recent actuarial valuation report or cost
certificate filed". Therefore, an employer’s obligation with
respect to the payment of the normal actuarial cost cannot change
until another actuarial valuation report or cost certificate is filed.
As a result, a contribution holiday only can occur prospectively from
the filing of an actuarial valuation, which supports the use of
surplus in this way and cannot occur retroactively to the date of
review. If the plan has sufficient surplus assets, a contribution
holiday could continue until the next actuarial valuation is filed.
The need to make special payments to fund unfunded
liabilities and solvency deficiencies was discussed earlier. Section 4
of the Regulation provides guidance in their payment:
-
Special payments must be made on at least a
quarterly basis in an amount that is sufficient to amortize the
unfunded liability or solvency deficiency over a period not
exceeding 15 years and 5 years, respectively, from the review date
relating to the establishment of the unfunded liability or
solvency deficiency (not the date the actuarial valuation is
filed).
Alternatively, the employer may make at least quarterly payments
expressed in a manner that each payment is a constant percentage
of future payroll of the members, projected as of the date of the
original establishment of the unfunded liability or solvency
deficiency, provided that the actuarial present value of all such
payments is equal to the unfunded liability or solvency
deficiency. If salaries are projected to rise, this would result
in a schedule of special payments, which increase over time,
rather than as a schedule of equal payments.
-
Each unfunded liability or solvency deficiency
must be funded and reported separately. As noted earlier, the
present value of some future special payments with respect to
unfunded liabilities may be taken into account as a plan asset for
purposes of determining whether the plan has a solvency
deficiency. Those special payments must continue to be made even
if special payments with respect to a solvency deficiency also are
required.
-
Where a solvency deficiency has been amortized,
the plan’s actuary may recalculate any special payments for any
unfunded liability that has not been amortized.
-
Where an actuarial valuation report or cost
certificate reveals that the plan has actuarial gain, the gain
must be used to amortize or, where it is not sufficient to
amortize, reduce the outstanding balance of any unfunded
liabilities with the oldest established liabilities being
amortized or reduced before later ones. Further, where a gain has
been used to reduce an unfunded liability, the special payments to
be made may be reduced on a prorated basis over the remainder of
the term.
-
At any time, an employer may increase the rate of
amortization of an unfunded liability or solvency deficiency by
increasing the amount of the special payments, making special
payments in advance or making additional payments of any kind.
Where the rate of amortization is increased or an actuarial gain
is allocated to amortize or reduce an unfunded liability, the
amount of special payments for a later fiscal year may be reduced.
-
Where special payments arise as a result of a plan
amendment, the 15 and 5 year periods are treated as commencing
from the date the amendment is made, not the review date.
-
An actuarial valuation report or cost certificate
must include, in respect of any unamortized experience deficiency
established before April 30, 1999,
-
the date of establishment and the unamortized
balance of the deficiency;
-
the special payments to be made to amortize the
deficiency; and
-
the date at which the deficiency will be
amortized.
A plan, which is purely defined contribution, is not
required to file an actuarial valuation and fund on the basis of the
valuation as described in this bulletin. However, we are aware that
some defined contribution plans underwrite annuities for its members.
In lieu of transferring money to an insurance company to purchase a
life annuity, a member may purchase a life annuity from the plan
itself.
For the purposes of the Act and Regulation, the
annuity underwriting operation of such a plan is considered to be a
defined benefit provision. This means that the requirements of
legislation described in this bulletin must be followed
Section 26.1 of the Act deals with a special
arrangement known as multi-unit pension plan. A participating
employer’s liability with respect to the funding of a plan may be
limited to the amount that is provided for in the plan where the
liability of the employer is limited pursuant to a collective
bargaining agreement.
The plan’s actuary must demonstrate that the rate
and amount of contributions are sufficient to meet the tests for
solvency set out in the Regulation. If sufficiency cannot be
demonstrated, the actuary must propose remedial action and the
trustees must act to make changes to the plan. Failing such action,
the superintendent may direct the action of the trustees.
Members’ annual statements must state that if assets
are not sufficient on wind-up of the plan, pension benefits could be
reduced.
The solvency deficiency was described earlier under
the heading "The Prescribed Tests for Solvency". A solvency
deficiency exists if the liabilities of a plan, determined on a plan
termination basis, exceed the market value of its assets, together
with the present value of certain future special payments. If a
solvency deficiency exists, special payments are required to be made
to the plan.
A plan’s solvency ratio is the number obtained by
dividing the market value of the assets currently held in the plan
(plus any cash balances and accrued and receivable income or
contributions) by the liabilities of the plan on a plan termination
basis. In other words, the present value of certain future special
payments is excluded from the determination of the value of assets. An
employer shall not make a transfer that would impair the solvency of
the plan unless the superintendent in writing consents to the transfer
or directs the employer to make the transfer. Sections 2.4 (1)-(3) of
the Regulation address transfer issues.
As well, if a plan’s solvency ratio is less than 1,
section 23(6) of the Regulation requires the employer to include on
the annual member disclosure a statement that the plan’s assets are
not sufficient to cover the liabilities accrued with respect to
benefits promised as at the latest review date, and that special
payments are being made to make the plan solvent in accordance with
pension legislation.
Subsection 3(3) of the Regulation provides that a plan
that contains a defined benefit provision must file an actuarial
valuation report and a cost certificate. Subsection 3(5) states that
an actuarial valuation report need not be filed if the cost
certificate is sufficient to enable the Superintendent to determine
whether the plan will meet the solvency tests.
This bulletin has discussed at length the content of
an actuarial valuation report. Generally speaking, a cost certificate
is a summary of the actuarial valuation report. It indicates the
financial position of the plan, the funding recommendations and a
summary of key assumptions. It also contains a certification section,
which the actuary must complete.
Section 38 of the Act states that every person who
contravenes any of the provisions of the Act or the Regulation or who
obstructs an officer or agent of the commission in the performance of
duties is guilty of an offence and on summary conviction is liable to
a fine of not less than $2,000 and not more than $100,000.
In addition to the fine, a justice who convicts a
person of such an offence where monies in a pension plan or payable to
a pension were lost will order the person to make restitution by
paying to the plan the amount of the loss.
Where a corporation is guilty of an offence under this
Act, the director or agent of the corporation who directed,
authorized, assented to, acquiesced in, or participated in, the
committing of the offence is a party to and guilty of the offence and
is liable on conviction to the punishment provided for the offence
whether or not the corporation has been prosecuted or convicted.
|