Vol. 140, No. 23 — June 10, 2006

Solvency Funding Relief Regulations

Statutory authority

Pension Benefits Standards Act, 1985

Sponsoring department

Department of Finance

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

Under the Pension Benefits Standards Act, 1985 (the "Act"), the federal government regulates private pension plans covering areas of employment under federal jurisdiction. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of such plans. OSFI supervises close to 1 300 pension plans, or about 10% of all pension plans in Canada, representing about 15% of trusteed pension fund assets in Canada; 428 of the federal plans are defined benefit pension plans.

The Act requires that federally registered pension plans fund promised benefits in accordance with standards set out in the Pension Benefits Standards Regulations, 1985 (PBSR). Defined benefit pension plans must file actuarial valuations every three years, or more frequently, as required by the Superintendent of Financial Institutions ("the Superintendent"). Where these valuations show a pension plan's assets to be less than its liabilities, payments must be made into the plan to eliminate the deficiency over a prescribed period of time, as described below. While private pension plans are voluntary, they must generally be registered, either federally or provincially. One of the main purposes of regulation is to set out standards for funding and investment of pension plans to ensure that the rights and interests of pension plan members, retirees and their beneficiaries are protected. In particular, regulation is intended to ensure that pension plan assets are sufficient to meet pension plan obligations.

Actuarial valuations of defined benefit plans are conducted using two different sets of actuarial assumptions: "solvency valuations" use assumptions consistent with a plan being terminated, while "going-concern valuations" are based on the plan continuing in operation. If a solvency valuation reveals a shortfall of plan assets to plan liabilities, the PBSR require the plan sponsor to make special payments into the plan sufficient to eliminate the deficiency over five years. Where a deficiency exists on the basis of a going-concern valuation, the PBSR require special payments to eliminate the going-concern deficiency over fifteen years. In general, the payments that a plan sponsor must remit to a plan in a given year include the amount necessary to cover the ongoing current service costs associated with the plan, plus any "special payments" required in that year to pay down a funding deficiency over the relevant time period.

In recent years, the sharp decline in long-term interest rates to historically low levels has increased plan liabilities and has led to significant solvency deficiencies for many pension plans. Recent changes in actuarial standards that reflect longer life expectancy and make the calculation of solvency liabilities more sensitive to prevailing market interest rates have also contributed to these deficiencies. OSFI estimates that, as of December 31, 2005, 78% of federally regulated DB pension plans had a solvency deficit. OSFI's estimates reveal that federally regulated DB pension plans were 90% funded, on average, as at December 31, 2005, compared to 100% funded as at December 31, 2004.

Many plan sponsors, while committed to funding their pension plans, are concerned that the funding requirements stemming from recent solvency deficiencies are driving excessive cash flow away from expenditures that could enhance productivity and competitiveness and benefit the economy. Some plan sponsors say that the high solvency payments could undermine their ability to provide ongoing support to their pension plans. In response to similar challenges, some other Canadian jurisdictions have provided temporary solvency funding relief, for example, by allowing, under certain conditions, the amortization period for solvency deficiencies to be extended to ten years from five years.

The proposed Solvency Funding Relief Regulations (the "Regulations") would provide solvency funding relief through four temporary measures that respond to these difficult circumstances. These measures would provide for the solvency deficiencies of federally regulated defined benefit pension plans to be addressed in an orderly fashion while providing safeguards for pension benefits. A plan sponsor would be able to seek funding relief by choosing one of the four proposed temporary measures outlined below, depending on its particular circumstances, for the first actuarial valuation showing a solvency deficiency before 2008. Any additional solvency deficiencies would be funded in accordance with the current rules. The proposed measures would only be available for plan sponsors that are up to date in their funding payments. Depending on their particular circumstances, sponsors would be able to choose from the following options for relief:

• Consolidation of solvency payment schedules: Plan sponsors would be permitted to consolidate solvency payment schedules and amortize the entire solvency deficit existing over a new five-year period. This would have the effect of extending previously established solvency special payment schedules over the next five years.
  
• Extension of the solvency funding payment period to ten years with buy-in: Plan sponsors would be permitted to extend the period for making solvency funding payments to ten years from five years, provided that no more than one-third of active plan members or non-active members and beneficiaries, including retirees, object. The buy-in condition, which is based on plain language disclosure, ensures that the parties are fully informed about the situation and its implications. The difference between the five-year and ten-year level of payments would be subject to a deemed trust. Under provisions of the Act and the proposed Regulations, this amount would be deemed to be held in trust for active members, non-active members and beneficiaries, including retirees.
  
  There would be a restriction on plan improvements in the first five years unless the improvements were pre-funded in order not to worsen the solvency deficit of the plan. Alternatively, a plan sponsor could make plan improvements by opting out of the ten-year funding schedule and returning to the normal five-year funding schedule.

• Extension of the solvency funding payment period to ten years with letters of credit: Plan sponsors would be permitted to extend the period for making solvency funding payments to ten years on the condition that the difference each year between the five-year and ten-year level of payments is secured by a letter of credit (LOC) obtained by the plan sponsor and held by a trustee. This would reduce the level of annual solvency payments for plan sponsors while protecting pension benefits.
  
  By issuing a letter of credit to a plan sponsor, the financial institution would essentially be guaranteeing the difference between the five-year and ten-year level of payments. Should the plan sponsor, for example, terminate the plan, go bankrupt or file for protection under the Companies' Creditors Arrangement Act during this period, the trustee would make a demand for payment from the financial institution issuing the LOC. The LOC would also be payable on the demand of the trustee if the LOC were not renewed or replaced on its expiry date. Upon receiving the demand for payment, the issuing financial institution would be required to pay the full amount of the letter of credit immediately to the pension fund. If the financial position of the pension plan improves due to changes in market performance and/or increase in long-term interest rates, plan sponsors would be able to reduce or eliminate the letters of credit to the extent that they are no longer required as set out in the Regulations.
  
  The plan sponsor would normally have to pay an annual fee to the financial institution for obtaining a letter of credit. The fee would typically vary depending on the plan sponsor's credit worthiness.
  
• Extension of the solvency funding payment period to ten years for agent federal Crown corporations: Federal agent Crown corporations with defined benefit pension plans governed by the PBSA represent a special case. Agent Crown corporations will have the funding relief options described above available to them, with the exception of the letter of credit proposal. Obtaining a letter of credit would represent a risk-free loan by that financial institution which would ultimately be at the expense of the Crown. Accordingly, it is proposed that agent federal Crown corporations be permitted to extend the period for making solvency funding payments to ten years subject to meeting the terms and conditions of the Regulations. This would include an acknowledgement in writing by the Minister of Finance that an agent federal Crown corporation intended to pursue this measure. In order to encourage a level playing field, it is anticipated that, in order to supply this letter, the Minister would require a fee to be paid to the Government comparable to the fee that would be paid to obtain a letter of credit.

Alternatives

The current difficult circumstances are placing significant stress on many plan sponsors, which could affect the viability of defined benefit pension plans and benefit security. The best security for pension benefits is a financially healthy plan sponsor that provides ongoing support to its pension plan. The proposals provide a balance between the status quo, whereby the current five-year funding rules would be maintained, and simply extending the funding period to ten years without conditions, as advocated by some sponsors.

Analysis

Maintaining the current funding requirements over the short term in these difficult circumstances would result in continued financial stress for many plan sponsors, which could affect their business operations and ongoing viability. This could ultimately lead to a reduction in pension benefits. Indeed, there have been a number of plan sponsors that have already reduced pension benefits as a result of the current circumstances or have approached the Superintendent for authorization of such reductions. While the reduction of benefits could be a positive approach towards making a plan more affordable, the difficult circumstances currently affecting many pension plans could require reductions in benefits that may not be in the best interest of plan members. In addition, some plan sponsors have started to close their defined benefit plans to new employees or to shift to defined contribution plans where benefits paid are subject to return on investment and the employee bears most of the risk.

The five-year funding period is seen in most circumstances as an appropriate timeframe to eliminate any solvency deficiency, as it represents a balance between the funding of plans and the protection of pension benefits. Extending the solvency funding payment period to more than five years without any additional protections could negatively affect benefit security. As such, the Regulations provide protections to mitigate risks to plan members and retirees.

Benefits and costs

Benefits

The implementation of the proposed Regulations would help protect the interests of plan members and other beneficiaries by providing solvency funding flexibility in recognition of the difficult circumstances facing federally regulated defined benefit pension plans. The Regulations would provide some regulatory relief for plan sponsors by offering them a choice of options which would allow for reduced annual payments in the short term while providing appropriate safeguards to protect pension benefits, recognizing that the security of pension benefits is best secured through solid funding practices and a financially viable plan sponsor.

Costs

Only modest additional costs are anticipated for OSFI to administer the proposed Regulations, as the increased funding options will make the supervision of pension plans more complex and may require that additional guidance be issued to plan administrators. Existing supervisory procedures and information systems will not require significant changes.

Potential costs to a pension plan sponsor would depend on whether it chose to avail itself of the Regulations and which option it chose. For example, there would be a cost of obtaining a letter of credit for a plan sponsor that sought relief through this measure. In the case of agent crown corporations, there would be a cost associated with the fee to the Government that would be comparable to the fee that would be paid to obtain a letter of credit. With respect to a sponsor who elected to pursue the buy-in measure, it would incur costs associated with disclosing the required information to active members, non-active members and beneficiaries, including retirees, and it would seek their buy-in.

There will be no direct cost to beneficiaries of affected pension plans. However, because of potential risks associated with extending the period for funding solvency deficiencies, the proposed Regulations include terms and conditions intended to mitigate potential risks to plan members. Accordingly, the proposed Regulations require that beneficiaries be informed of the implications of the longer amortization period for the solvency deficiency, and, for the extension with buy-in option, there is also a requirement that no more than one third of active members or retirees object to the company's election to come under the provisions of the Regulations.

Consultation

On May 26, 2005, the Department of Finance released a consultation paper on Strengthening the Legislative and Regulatory Framework for Defined Benefit Pension Plans Registered under the Pension Benefits Standards Act, 1985. The consultation paper included a discussion of the possibility of extending the solvency funding period, and sought stakeholders' views on whether such an extension should be offered as a temporary measure. The Department received a broad range of views from stakeholders, including plan sponsors, labour representatives, retirees, industry associations, actuaries and individual Canadians, with many stakeholders stressing that the funding status of private defined benefit pension plans is an important immediate issue affecting many workers, retirees, and pension plan sponsors. Many stakeholders have commented publicly and made representations to the Department on the need for immediate funding relief along the lines of what is being proposed.

Compliance and enforcement

The proposed Regulations will not require any significant change in OSFI procedures or significant additional personnel resources.

No compliance problems are anticipated with respect to the proposed Regulations. OSFI's current supervisory process will enable OSFI to monitor compliance with the proposed Regulations. In the event of non-compliance, plans would be required to return to the normal five-year funding period. The Superintendent has the authority to issue a direction of compliance to the administrator of a pension plan to ensure that the funding requirements are being met.

Contact

Diane Lafleur, Director, Financial Sector Division, Finance Canada, Ottawa, Ontario K1A 0G5, (613) 992-5885 (telephone), (613) 943-8436 (fax), lafleur.diane@fin.gc.ca (email).

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to the definition "surplus" (see footnote a) in subsection 2(1), to subsection 9(1), to paragraph 10.1(2)(b) (see footnote b), to subsection 12(3), to paragraph 28(1)(b) (see footnote c) and to section 39 (see footnote d) of the Pension Benefits Standards Act, 1985 (see footnote e), proposes to make the annexed Solvency Funding Relief Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Diane Lafleur, Director, Financial Sector Division, Department of Finance, L'Esplanade Laurier, 20th Floor, East Tower, 140 O'Connor Street, Ottawa, Ontario K1A 0G5 (tel.: (613) 992-5885; fax: (613) 943-8436; e-mail: lafleur.diane@fin. gc.ca).

Ottawa, June 1, 2006

DIANE LABELLE
Acting Assistant Clerk of the Privy Council

SOLVENCY FUNDING RELIEF REGULATIONS

INTERPRETATION

1. (1) The following definitions apply in these Regulations.

"acceptable rating" means the rating given by a credit rating agency to an issuer at the time of the issuance or renewal of a letter of credit that is at least equal to one of the following ratings from the applicable credit rating agency:

(a) A, from Dominion Bond Rating Service Limited;

(b) A, from Fitch Ratings;

(c) A2, from Moody's Investors Service; or

(d) A, from Standard & Poor's Ratings Services. (note acceptable)

"Act" means the Pension Benefits Standards Act, 1985. (Loi)

"bank" means a bank or authorized foreign bank within the meaning given to those terms in section 2 of the Bank Act. (banque)

"beneficiary" means a member or a former member of a plan or any person who is entitled to pension benefits under the plan except

(a) a former member who has transferred or elected to transfer their pension benefit credit under section 26 of the Act; and

(b) a former member for whom the administrator has purchased an immediate or deferred life annuity. (bénéficiaire)

"beneficiary representative" means a union representative or court-appointed representative of a beneficiary. (représentant des bénéficiaires)

"cooperative credit society" means a cooperative credit society to which the Cooperative Credit Associations Act applies or a cooperative credit society incorporated and regulated by or under an Act of the legislature of a province. (société coopérative de crédit)

"Crown Corporation" means a Crown corporation that is an agent of Her Majesty in right of Canada in respect of which employment has not been excepted from included employment by a regulation made under subsection 4(6) of the Act. (société d'État)

"default" means the occurrence of one of the following events:

(a) the written notification to the Superintendent that the administrator intends to terminate or wind up the whole plan under subsection 29(5) of the Act;

(b) the amendment of the plan, resolution by the employer or coming into force of any other measure that effects the termination of the whole plan;

(c) the Superintendent's declaration under subsection 29(2) of the Act that terminates the whole plan;

(d) the filing of any application or petition by the employer, or against the employer, under the Companies' Creditors Arrangement Act, the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act;

(e) the non-renewal of the letter of credit set out in Part 3 unless

(f) the aggregate face amount of all of the letters of credit obtained in accordance with Part 3 is less than the amount set out in subsection 18(2) unless

(g) the termination of the whole plan. (défaut)

"holder" means a trust company that is licensed to carry on business in Canada, that is at arm's length, within the meaning of the Income Tax Act, from the issuer and that has entered into a trust agreement with the employer or, if the employer is not the administrator, with the employer and administrator. (détenteur)

"initial solvency deficiency" means the solvency deficiency of a plan that emerges on the date on which the valuation that identified the deficiency was performed, as reported in the first actuarial report filed after the coming into force of these Regulations, and that values the plan as of a date that is later than December 30, 2005 and before January 2, 2008. (déficit initial de solvabilité).

"issuer" means a bank or cooperative credit society that has an acceptable rating at the date of the issuance or renewal of a letter of credit and that is not the employer or affiliated with the employer within the meaning of subsection 2(2) of the Canada Business Corporations Act. (émetteur)

"special payment" means a payment or one of a series of payments that is determined in accordance with section 9 of the Pension Benefits Standards Regulations, 1985 or sections 5, 6, 7 or 18 of these Regulations. (paiement spécial)

(2) Except as otherwise provided, expressions used in these Regulations have the same meaning as in the Pension Benefits Standards Regulations, 1985.

APPLICATION

2. (1) These Regulations apply to the funding of a defined benefit plan and, except as otherwise provided in these Regulations, the Pension Benefits Standards Regulations, 1985 shall also apply to the funding of a plan under these Regulations.

(2) For the purposes of these Regulations, an initial solvency deficiency shall be calculated in accordance with the definition of "solvency deficiency" in subsection 9(1) of the Pension Benefits Standards Regulations, 1985, except that the present value of any special payment referred to in paragraph (d) of that definition calculated in respect of the funding of a solvency deficiency that emerged prior to the emergence of the initial solvency deficiency shall be zero.

(3) For the purpose of these Regulations, any special payment that would have been required to be made under subsection 9(4) of the Pension Benefits Standards Regulations, 1985 with respect to the funding of a solvency deficiency that emerged prior to the emergence of the initial solvency deficiency is not required to be made.

(4) In case of an inconsistency between these Regulations and the Pension Benefits Standards Regulations, 1985, these Regulations shall prevail.

3. These Regulations do not apply to

(a) a plan that was established after December 31, 2005; or

(b) a plan to which the Air Canada Pension Plan Solvency Deficiency Funding Regulations apply.

4. (1) Only plans to which all payments owed to the pension fund prior to the day on which the initial solvency deficiency emerges, as required by subsection 9(14) of the Pension Benefits Standards Regulations, 1985, have been made to the pension fund as of the filing date of the actuarial report that shows the emergence of the initial solvency deficiency may be funded in accordance with these Regulations.

(2) Despite section 8 of the Pension Benefits Standards Regulations, 1985, the funding of a plan shall be considered to meet the standards for solvency if the funding is in accordance with Part 1, 2 or 3 of these Regulations.

PART 1

NEW FIVE-YEAR FUNDING

General Funding Rules

5. (1) Despite subsection 9(4) of the Pension Benefits Standards Regulations, 1985, an initial solvency deficiency of a plan may be funded by special payments sufficient to liquidate the initial solvency deficiency by equal annual payments over a period not exceeding five years from the day on which the deficiency emerged.

(2) If the initial solvency deficiency is funded in accordance with this Part, the administrator of the plan shall notify the Superintendent in writing at the time of filing of the first actuarial report after the coming into force of these Regulations.

(3) When a solvency deficiency emerges after the day on which the initial solvency deficiency emerged, the new solvency deficiency shall be calculated, for the purposes of subsection 9(4) of the Pension Benefits Standards Regulations, 1985, in accordance with the definition of "solvency deficiency" in subsection 9(1) of those Regulations which shall be interpreted as including the present value of the special payments referred to in subsection (1) as an asset.

PART 2

NEW 10-YEAR FUNDING

General Funding Rules

6. (1) Despite subsection 9(4) of the Pension Benefits Standards Regulations, 1985, an initial solvency deficiency of a plan may be funded in accordance with Part 1, but the remittance to the pension fund of a portion of the special payments determined under Part 1 may be deferred as if the initial solvency deficiency were funded by special payments sufficient to liquidate the initial solvency deficiency by equal annual payments over a period not exceeding 10 years from the day on which the deficiency emerged.

(2) The initial solvency deficiency may be funded under this Part if

(a) less than one third of the members object; and

(b) less than one third of the former members and other persons included in the definition of "beneficiary" in subsection 1(1) object.

(3) Despite the fact that special payments set out in subsection (1) may be made over a period that exceeds the period applicable under Part 1, for the purposes of subsection 8(1) of the Act, the amount by which the aggregate amount of special payments that would have been remitted to the pension fund in accordance with Part 1 from the day on which the initial solvency deficiency emerged, as adjusted to take into account the actuarial gains that were applied under paragraph 9(9)(a) of the Pension Benefits Standards Regulations, 1985, plus interest, exceeds the aggregate amount of special payments paid or remitted to the pension fund in accordance with this Part, plus interest, shall be considered to be an amount accrued to the pension fund from the employer.

(4) Interest shall be calculated by using the interest rate that was assumed in valuing the liabilities of the plan for the purpose of calculating the initial solvency deficiency.

Multi-employer Pension Plan

7. (1) Despite subsection 9(4) of the Pension Benefits Standards Regulations, 1985 and section 6 of these Regulations, an initial solvency deficiency of a multi-employer pension plan may be funded by special payments sufficient to liquidate the initial solvency deficiency by equal annual payments over a period not exceeding 10 years from the day on which the deficiency emerged.

(2) If the funding is for an initial solvency deficiency of a multi-employer pension plan and if the annual amount required to be remitted to the pension fund under subsection (1) is less than the aggregate amount of payments that are required to be made or remitted to the pension fund, excluding normal cost and special payments required to liquidate an initial unfunded liability, under all applicable collective agreements, the amount required to be remitted to the pension fund in accordance with this Part shall be the aggregate amounts required to be paid or remitted to the pension fund pursuant to all collective agreements.

(3) The initial solvency deficiency may be funded under this Part if

(a) less than one third of the members object; and

(b) less than one third of the former members and other persons included in the definition of "beneficiary" in subsection 1(1) object.

Information To Be Provided to Beneficiaries

8. (1) Subject to subsection (2), the administrator shall provide to the beneficiaries the following information:

(a) the solvency ratio of the plan as of the day on which the initial solvency deficiency emerged;

(b) the amount of the initial solvency deficiency;

(c) a description of how the pension benefits would be allocated and distributed if the plan were to fully terminate on the day on which the initial solvency deficiency emerged;

(d) a statement indicating that extending the period for funding the initial solvency deficiency as permitted by this Part may result in a lower value of plan assets during the funding period than would be the case if the deficiency were funded over a period not exceeding five years and that the longer funding period may also extend the period during which plan assets are less than plan liabilities;

(e) the special payments and normal cost of the plan that would have been made during the first plan year covered by the actuarial report referred to in paragraph 9(a) if the initial solvency deficiency were to be funded under Part 1;

(f) the special payments and normal cost of the plan that will be made during the first plan year covered by the actuarial report referred to in paragraph 9(a) if the initial solvency deficiency is funded in accordance with this Part;

(g) a statement indicating that an actuarial report will be filed at least annually with the Superintendent while the plan is being funded in accordance with this Part;

(h) a statement indicating that the plan may be funded under this Part only if less than one third of the members object and less than one third of the former members and other persons included in the definition of "beneficiary" in subsection 1(1) object;

(i) a statement indicating that the Superintendent's approval is not required to fund the deficiency in accordance with this Part;

(j) a statement indicating that in order to register their disagreement with the proposal to fund in accordance with this Part, an objection must be sent to the administrator at the address and by the date indicated on the notice, that date being one that is not less than 21 days after the provision of the information under this section;

(k) a statement indicating that if the plan is funded in accordance with this Part, amendments to the plan that increase the pension benefits will be restricted for the first five years; and

(l) a statement setting out the right to access the documents described in paragraph 28(1)(c) of the Act.

(2) If a beneficiary is represented by a beneficiary representative, the administrator shall provide the information set out in subsection (1) to the beneficiary representative.

Documents and Information To Be Filed with Superintendent

9. The administrator shall file the following documents and information with the Superintendent:

(a) the actuarial report valuing the plan as of the day on which the initial solvency deficiency emerged;

(b) other than in the case of a multi-employer pension plan, a written statement confirming that a resolution of the board of directors of the employer has been passed, if the employer is a corporation, or, if the employer is not a corporation, an approval of the directors or members of that other body who have the authority to direct or authorize the actions of that body, has been given, authorizing the funding payment schedule calculated in accordance with this Part;

(c) in the case of a multi-employer pension plan, written notification that the initial solvency deficiency is to be funded in accordance with this Part; and

(d) a written statement confirming that the information set out in section 8 has been provided to the beneficiaries or to the beneficiary representatives and that less than one third of the members have objected and less than one third of the former members and other persons included in the definition of "beneficiary" in subsection 1(1) have objected.

Prescribed Solvency Ratio

10. For the purposes of paragraph 10.1(2)(b) of the Act, the prescribed solvency ratio level for the first five plan years of funding in accordance with this Part is the solvency ratio calculated on the basis of the most recent actuarial report filed with the Superintendent in accordance with subsection 12(3) of the Act.

New Solvency Deficiency

11. When a solvency deficiency emerges after the day on which the initial solvency deficiency emerged, the new solvency deficiency shall be calculated, for the purposes of subsection 9(4) of the Pension Benefits Standards Regulations, 1985, in accordance with the definition of "solvency deficiency" in subsection 9(1) of those Regulations which shall be interpreted as including the present value of the special payments referred to in section 6 or 7 as an asset.

Termination of Plan

12. If a plan is fully terminated and on the day of its termination the liabilities of the plan exceed its assets, the lesser of the amount determined in subsection 6(3) and the amount by which the liabilities of the plan exceed its assets shall immediately be remitted to the pension fund.

Ceasing 10-Year Funding

13. (1) A plan may cease being funded under this Part, beginning on the first day of a plan year, by giving written notice to the Superintendent not later than six months after the beginning of that plan year.

(2) The notice shall indicate whether or not the plan has a surplus as of the first day of the plan year in which the funding ceases.

(3) If funding ceases, section 9 of the Pension Benefits Standards Regulations, 1985 applies in respect of the plan except as otherwise provided in this Part.

Calculating Surplus

14. A surplus in respect of a plan shall be determined in the manner prescribed by subsection 16(1) of the Pension Benefits Standards Regulations, 1985 as if the plan had been fully terminated.

Plan with Surplus

15. If funding ceases in respect of a plan that has a surplus as of the first day of the plan year, this Part ceases to apply on the first day of that plan year.

Plan Without Surplus

16. (1) If funding ceases in respect of a plan that does not have a surplus as of the first day of the plan year, section 9 of the Pension Benefits Standards Regulations, 1985 applies except as follows:

(a) in the case where funding ceases before the sixth plan year,

(b) in the case where funding ceases after the fifth plan year,

(2) Interest shall be calculated by using the interest rate that was assumed in valuing the liabilities of the plan for the purpose of calculating the initial solvency deficiency.

Crown Corporations

17. (1) The administrator of a plan of a Crown Corporation with an initial solvency deficiency that is funded in accordance with this Part shall not have to comply with sections 8 and 9 if the administrator files the following documents and information with the Superintendent:

(a) the actuarial report valuing the plan as of the day on which the initial solvency deficiency emerged;

(b) a written statement confirming that a resolution of the board of directors of the Crown Corporation has been passed authorizing the funding payment schedule calculated in accordance with this Part;

(c) a written statement confirming that the board of directors of the Crown Corporation has notified the Minister of the decision to fund the initial solvency deficiency in accordance with this Part; and

(d) a copy of a letter from the Minister acknowledging that the Crown Corporation intends to fund the initial solvency deficiency in accordance with this Part.

(2) When the administrator provides the written statement under paragraph 28(1)(b) of the Act, the administrator shall also provide the amount of the initial solvency deficiency and the fact that the deficiency is being funded in compliance with this Part by equal annual payments over a period not exceeding 10 years.

(3) Section 10 shall not apply in respect of a plan if the documents and information set out in subsection (1) is filed.

PART 3

10-YEAR FUNDING WITH LETTERS OF CREDIT

General Funding Rules

18. (1) Despite subsection 9(4) of the Pension Benefits Standards Regulations, 1985, an initial solvency deficiency of a plan may be funded by special payments sufficient to liquidate the initial solvency deficiency by equal annual payments over a period not exceeding 10 years from the day on which the deficiency emerged.

(2) The initial solvency deficiency may be funded under this Part if the employer

(a) obtains letters of credit in each of the first five plan years of funding under this Part, for the amount representing the difference between the present value, at the end of each plan year, of the remaining special payments under this Part and the present value of the remaining special payments that would have been required to be made to liquidate the initial solvency deficiency as if it had been funded under Part 1; and

(b) maintains letters of credit for the sixth plan year of funding and each of the following plan years, for the amount representing the present value at the beginning of each plan year of the remaining special payments under this Part.

(3) The present value of the remaining special payments shall be determined by using the same interest rate that is used to determine the initial solvency deficiency.

(4) The administrator shall notify the Superintendent in writing that it intends to fund the initial solvency deficiency in accordance with this Part.

Letter of Credit

19. (1) A letter of credit required by this Part shall be an irrevocable, unconditional standby letter of credit that

(a) is in accordance with the rules of International Standby Practices, 1998 (publication No. 590 of the International Chamber of Commerce);

(b) is issued or confirmed by an issuer who is a member of the Canadian Payments Association that has been assigned an acceptable rating; and

(c) provides that

(2) A letter of credit shall be obtained by not later than the day on which the actuarial report is filed with the Superintendent, for the first plan year of funding, and at least 30 days before the beginning of each subsequent plan year that is covered by it.

(3) The letter of credit shall immediately be provided to the holder.

20. (1) If separate letters of credit have been obtained for each plan year, a letter of credit is not required to be automatically renewed after the sixth year following the plan year for which it was obtained.

(2) A letter of credit is not required to be automatically renewed if an actuarial report that has been filed with the Superintendent in accordance with subsection 12(3) of the Act shows that the initial solvency deficiency has been completely liquidated.

Trust Agreement

21. (1) The employer and, if the employer is not the administrator of the plan, the administrator shall enter into a trust agreement with the holder regarding the letters of credit set out in this Part.

(2) The trust agreement shall provide that

(a) the holder shall hold the letter of credit in Canada in trust for the plan;

(b) the definition of "default" as set out in these Regulations applies to the agreement;

(c) the employer shall immediately notify the holder and the Superintendent and, if the employer is not the administrator of the plan, the administrator, in writing of a default;

(d) the administrator shall notify the holder and the Superintendent in writing of a default immediately after becoming aware of the default;

(e) on becoming aware of a default, the holder shall immediately make a demand for payment of the face amount of all letters of credit from the issuer and shall notify the employer and Superintendent that it has made the demand;

(f) the holder shall not make a demand for payment if the letter of credit is expiring without being renewed, or the face amount is being reduced, in accordance with this Part; and

(g) the administrator shall notify the holder of any circumstance when the letter of credit may expire, or when the face amount of the letter of credit may be reduced, in accordance with this Part.

Documents and Information To Be Filed with Superintendent

22. (1) The administrator shall file the following documents and information with the Superintendent for the first plan year of funding of the initial solvency deficiency:

(a) the actuarial report valuing the plan as of the day on which the initial solvency deficiency emerged;

(b) a written statement confirming that a resolution of the board of directors of the employer has been passed, if the employer is a corporation, or, if the employer is not a corporation, an approval of the directors or members of that other body who have the authority to direct or authorize the actions of that body, has been given, authorizing the funding payment schedule calculated in accordance with this Part;

(c) a copy of all letters of credit in effect for the plan year; and

(d) a written statement from the administrator that the letters of credit comply with this Part;

(e) a copy of the trust agreement set out in section 21 together with the name and address of the holder of the letters of credit.

(2) For each subsequent plan year of funding, the administrator shall file with the Superintendent copies of all subsequent letters of credit that have been obtained by the employer and a written statement, for each letter of credit filed, that it complies with this Part.

Statement to Members

23. When the administrator provides the written statement under paragraph 28(1)(b) of the Act, the administrator shall also provide the following information:

(a) the amount of the initial solvency deficiency;

(b) the fact that the deficiency is being funded in compliance with this Part by equal annual payments over a period not exceeding 10 years; and

(c) the aggregate face amount of all letters of credit being held by the holder.

Reduction of Face Amount of Letter of Credit

24. (1) The face amount of a letter of credit may be reduced by

(a) the amount by which the amount that the employer has remitted or paid to the pension fund in a particular plan year exceeds the total of the required special payments and the normal cost of the plan for that year; or

(b) the amount by which the aggregate face amount exceeds the amount set out in subsection 18(2).

(2) Subject to subsection (3), the reduction of the face amount of the letter of credit may only be made within 60 days before the beginning of the following plan year.

(3) If an event described in paragraph (a), (b), (c) or (g) of the definition of "default" in subsection 1(1) occurs, the face amount of a letter of credit shall not be reduced until the Superintendent has approved the report required under subsection 29(9) of the Act.

New Solvency Deficiency

25. When a solvency deficiency emerges after the day on which the initial solvency deficiency emerged, the new solvency deficiency shall be calculated, for the purposes of subsection 9(4) of the Pension Benefits Standards Regulations, 1985, in accordance with the definition of "solvency deficiency" in subsection 9(1) of the Pension Benefits Standards Regulations, 1985, which shall be interpreted as including the present value of the special payments referred to in section 18 as an asset.

Failure to Pay Letter of Credit

26. If the issuer does not pay the face amount of a letter of credit after a demand for payment has been made, the employer shall remit to the pension fund within 30 days after the demand for payment an amount equal to the face amount of that letter of credit.

Occurrence of Default

27. (1) If a default occurs, an amount equal to the total face amount of all of the letters of credit shall, for the purposes of subsection 8(1) of the Act, be considered as an amount accrued to the pension fund.

(2) Except if a plan is fully terminated, the administrator shall have an actuarial report prepared — in which the present value of the special payments referred to in subsection 18(1) shall be zero — valuing the plan as of the last day of the plan year in which the default occurs and shall file a copy of the report with the Superintendent in accordance with subsection 12(3) of the Act.

(3) Any remaining initial solvency deficiency identified in the actuarial report prepared in accordance with subsection (2), which shall be calculated by including the face amount of the letters of credit remitted to the pension fund as an asset, shall be considered to have emerged as of the day the initial solvency deficiency emerged.

(4) Any remaining initial solvency deficiency identified in the actuarial report prepared in accordance with subsection (2) shall be funded by special payments sufficient to liquidate the initial solvency deficiency by equal annual payments over a period not exceeding five years minus the number of years the plan was funded in accordance with this Part.

Ceasing 10-Year Funding

28. A plan may cease being funded under this Part, beginning on the first day of a plan year, if

(a) the administrator gives written notice to the Superintendent not later than six months after the beginning of that plan year;

(b) an amount equal to the face amount of all letters of credit held at that time is remitted to the pension fund; and

(c) any remaining initial solvency deficiency is calculated and funded in accordance with subsections 27(2) to (4) as if a default occurred, except that the actuarial report shall be prepared valuing the plan as of the first day of the plan year in which funding ceases.

CEASE TO BE IN FORCE

29. These Regulations cease to be in force on February 1, 2019.

COMING INTO FORCE

30. These Regulations come into force on the day on which they are registered.

[23-1-o]

Footnote a

S.C. 1998, c. 12, s. 1(4)

Footnote b

S.C. 1998, c. 12, s. 10

Footnote c

S.C. 2000, c. 12, par. 263(d)

Footnote d

S.C. 2001, c. 34, s. 76

Footnote e

R.S., c. 32 (2nd Supp.)

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