Canada Gazette

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, 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), hereby makes the annexed Solvency Funding Relief 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:

"bank" means a bank or authorized foreign bank within the meaning of 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 has chosen 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)

(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;

(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;

(f) the non-renewal of a letter of credit referred to in Part 3 for its full face amount unless

(i) it has been replaced by another letter of credit for the same face amount at least 30 days before the beginning of the following plan year,

(ii) an amount equal to the face amount of the letter of credit has been remitted to the pension fund at least 30 days before the beginning of the following plan year, or

(iii) the face amount has been reduced in accordance with section 26; or

(g) the failure by an employer to comply with a direction issued by the Superintendent pursuant to section 11 of the Act with respect to the face amount of the letters of credit required by subsection 19(2). (défaut)

"holder" means a trust company that is licensed to carry on business in Canada and that has entered into a trust agreement with the employer or, if the employer is not the administrator, with the employer and the administrator. (détenteur)

"initial solvency deficiency" means the solvency deficiency of a plan that emerged 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 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 section 5, 6, 7 or 19 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.

2. (1) These Regulations apply to the funding of a defined benefit plan and, except as otherwise provided, the Pension Benefits Standards Regulations, 1985 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 "solvency deficiency" in subsection 9(1) of the Pension Benefits Standards Regulations, 1985 except that

(a) 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 before the emergence of the initial solvency deficiency shall be zero; and

(b) for the purposes of Parts 2 and 3, that definition shall be interpreted as including the present value of the special payments calculated with respect to an initial unfunded liability that are due in the next 10 years.

(3) For the purposes 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 before the emergence of the initial solvency deficiency is not required to be made.

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

(a) a plan that is established after December 31, 2005 unless the plan is formed as a result of a merger of plans one or more of which was established before December 31, 2005 or is formed as a result of a splitting of a plan that was established before December 31, 2005; or

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

4. (1) Plans may only be funded under these Regulations if all of the payments that are owed to the pension fund before 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 as of the filing date of the actuarial report that shows the emergence of that initial solvency deficiency.

(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.

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 initial solvency 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 "solvency deficiency" in subsection 9(1) of those Regulations and that definition shall be interpreted as including the present value of the special payments referred to in subsection (1).

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 that Part 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 initial solvency deficiency emerged.

(2) The initial solvency deficiency may be funded in accordance with this Part only if less than one third of the members and less than one third of the beneficiaries excluding members object before the date indicated in the statement referred to in paragraph 8(1)(j).

(3) Any objection expressed by a beneficiary representative on behalf of the persons that they represent shall be counted as a separate objection for each person that they represent.

(4) Despite the fact that the 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 that Part 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 made to the pension fund in accordance with this Part, plus interest, shall be considered to be an amount accrued to the pension fund.

(5) 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.

7. (1) Despite subsection 9(4) of the Pension Benefits Standards Regulations, 1985 and section 6 of these Regulations, and subject to subsection (2), 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 initial solvency deficiency emerged.

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

(3) The initial solvency deficiency may be funded in accordance with this Part only if less than one third of the members and less than one third of the beneficiaries excluding members object before the date indicated in the statement referred to in paragraph 8(1)(j).

(4) Any objection expressed by a beneficiary representative on behalf of the persons that they represent shall be counted as a separate objection for each person that they represent.

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

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

(c) a description of the extent to which the beneficiaries' benefits would be reduced if the plan were fully terminated and wound up with the solvency ratio referred to in paragraph (a);

(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 the 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 the plan assets are less than the plan liabilities;

(e) the special payments that would have been made during the first plan year covered by the actuarial report referred to in paragraph 10(b) if the initial solvency deficiency were to be funded in accordance with Part 1;

(f) the special payments that are to be made during the first plan year covered by the actuarial report referred to in paragraph 10(b) if the initial solvency deficiency is funded in accordance with this Part;

(g) a statement indicating that an actuarial report is to 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 in accordance with this Part only if less than one third of the members object and less than one third of the beneficiaries excluding members object;

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

(j) a statement indicating that the beneficiaries may object to the proposal to fund the plan in accordance with this Part by sending an objection to the administrator at the address and by the date indicated in the statement, and that date shall not be less than 30 days after the day on which the other information required to be provided under this section is provided by the administrator;

(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 plan years of funding in accordance with this Part; and

(l) a statement setting out the right of access to 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.

9. If a beneficiary representative has the authority to act on behalf of a beneficiary with respect to any matter under this Part, the administrator shall deal with the beneficiary representative.

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

(a) written notification that the initial solvency deficiency is to be funded in accordance with this Part;

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

(c) 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 persons who have the authority to direct or authorize the actions of that body, has been given, authorizing the special payment schedule calculated 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 beneficiaries excluding members have objected.

11. 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 that is filed with the Superintendent in accordance with subsection 12(3) of the Act.

12. 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 "solvency deficiency" in subsection 9(1) of those Regulations, and that definition shall be interpreted as including

(a) the present value of the special payments referred to in section 6 or 7; and

(b) the present value of the special payments calculated with respect to an initial unfunded liability that are due in the period that is the greater of

13. If a plan is fully terminated and on the day on which it terminates the liabilities of the plan exceed its assets, the lesser of the amount determined in subsection 6(4) and the amount by which the liabilities of the plan exceed its assets shall immediately be remitted to the pension fund.

14. (1) A plan may cease to be 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 the plan has a surplus as of the first day of the plan year.

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

15. 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.

16. If a plan ceases to be funded in accordance with this Part and the plan has a surplus as of the first day of the plan year, this Part ceases to apply to the plan on the first day of that plan year.

17. (1) If a plan ceases to be funded in accordance with this Part and the plan 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:

(i) the administrator shall have an actuarial report prepared — in which the present value of the special payments referred to in section 6 or 7 shall be zero — valuing the plan as of the first day of the plan year in which funding ceases,

(ii) the amount by which the aggregate amount of special payments that would have been made to the pension fund in accordance with Part 1 from the day on which the initial solvency deficiency emerged to the day on which funding ceases, 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 made to the pension fund in accordance with this Part, plus interest, shall immediately be remitted to the pension fund,

(iii) any remaining initial solvency deficiency disclosed by the actuarial report, which shall be calculated by including the amount remitted in accordance with subparagraph (ii) as an asset of the pension fund, shall be considered to have emerged as of the day on which the initial solvency deficiency emerged,

(iv) the remaining initial solvency deficiency calculated under subparagraph (iii) shall be funded by special payments sufficient to liquidate that initial solvency deficiency by equal annual payments over a period not exceeding five years minus the number of years that the plan was funded in accordance with this Part, and

(v) the special payments set out in section 6 or 7 shall continue to be made until the first special payment required to fund the remaining initial solvency deficiency referred to in subparagraph (iii) is made to the pension fund; and

(i) the administrator shall have an actuarial report prepared as of the first day of the plan year in which funding ceases, and

(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.

18. (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 subsection 6(2) and sections 8 and 10 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 special 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 and the Minister responsible for the Crown Corporation of the decision that the initial solvency deficiency is to be funded in accordance with this Part; and

(d) a copy of letters from the Minister and the Minister responsible for the Crown Corporation acknowledging that they have been informed of the fact 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 indicate the amount of the initial solvency deficiency and that the deficiency is to be funded in accordance with this Part by equal annual payments over a period not exceeding 10 years.

(3) Section 11 shall not apply in respect of a plan if the documents and information set out in subsection (1) are filed with the Superintendent.

19. (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 initial solvency deficiency emerged.

(2) The initial solvency deficiency may be funded in accordance with this Part if the employer

(a) obtains letters of credit for 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 for each plan year after that year, 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 interest rate that was assumed in valuing the liabilities of the plan for the purpose of calculating the initial solvency deficiency.

20. (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), as amended from time to time;

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

(i) the letter of credit is made out to the holder's benefit,

(ii) the issuer will pay the face amount of the letter of credit on demand from the holder without inquiring whether the holder has a right to make the demand,

(iii) the bankruptcy of the employer shall have no effect on the rights and obligations of the issuer and the holder set out in the letter of credit,

(iv) the letter of credit will expire on the day on which the plan's year ends,

(v) the letter of credit will automatically be renewed for the full face amount for further one-year periods on the expiry date referred to in subparagraph (iv) unless the issuer notifies the holder, in writing, of the non-renewal not less than 90 days before the expiry date, and

(vi) the letter of credit may not be amended during the term of the letter of credit and may not be assigned except to another holder.

(2) A letter of credit shall be obtained not later than the day on which the actuarial report is filed with the Superintendent, under subsection 12(3) of the Act, 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.

21. 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 fifth year following the plan year for which it was obtained.

22. If the face amount of letters of credit obtained or maintained in accordance with this Part for a plan year is less than the amount required by subsection 19(2) for that plan year, the employer shall make up the difference either by increasing the amount of letters of credit or by making additional payments to the pension fund no later than on the day on which the next quarterly payment is made to the pension fund in accordance with subsection 9(14) of the Pension Benefits Standards Regulations, 1985.

23. (1) The employer and, if the employer is not the administrator of the plan, the administrator shall enter into a trust agreement or shall amend any existing trust agreement it may have with the holder regarding the letters of credit referred to in this Part.

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

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

(d) if not otherwise notified under paragraph (c), the administrator shall notify, in writing, the holder and the Superintendent of a default immediately after becoming aware of it;

(e) on receipt of the notice referred to in paragraph (c) or (d), the holder shall immediately make a demand for payment of the face amount of all of the letters of credit held in respect of the plan;

(f) on receipt of a written notice of default from any person other than the employer or the administrator, the holder shall

(i) immediately notify, in writing, the employer, the administrator and the Superintendent of the notice; and

(ii) make a demand for payment of the face amount of all of the letters of credit held in respect of the plan unless the administrator provides a written notice to the holder within 30 days after receipt of the notice that the default has not occurred;

(g) when a holder makes a demand for payment of a letter of credit held for the plan, it shall notify, in writing, the employer, the administrator and the Superintendent that it has made the demand;

(h) the holder shall immediately notify, in writing, the employer, the administrator and the Superintendent if the issuer does not pay the face amount of a letter of credit after a demand for payment has been made,

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

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

(k) the administrator shall provide the holder with a copy of the statements referred to in paragraph 24(1)(e) and subsection 24(2) and with a copy of the written notice referred to in paragraph 30(a).

24. (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) written notification that the initial solvency deficiency is to be funded in accordance with this Part;

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

(c) 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 persons who have the authority to direct or authorize the actions of that body, has been given, authorizing the special payment schedule calculated in accordance with this Part;

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

(f) a copy of the trust agreement set out in section 23 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.

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

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

26. (1) The face amount of a letter of credit may be reduced, effective the beginning of a plan year, by

(a) the amount by which the aggregate amount of payments that the employer has made to the pension fund in the previous plan year exceeds the total of the required special payments and the normal cost of the plan for that year as shown in an actuarial report that was filed with the Superintendent for that year in accordance with subsection 12(3) of the Act; or

(b) the amount by which the aggregate face amount of all of the letters of credit that are held by the holder in respect of the plan exceeds the amount set out in paragraph 19(2)(a) or (b), as the case may be.

(2) The face amount of the letter of credit shall not be reduced following a default.

27. 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 "solvency deficiency" in subsection 9(1) of those Regulations and that definition shall be interpreted as including

(a) the present value of the special payments referred to in subsection 19(1); and

(b) the present value of the special payments calculated with respect to an initial unfunded liability that are due in the period that is the greater of

28. On receipt of the notice from a holder that an issuer has not paid the face amount of a letter of credit after a demand for payment has been made, the employer shall remit to the pension fund no later than 30 days after the day on which the demand for payment was made, an amount equal to the face amount of that letter of credit.

29. (1) If a default occurs, 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 made to the pension fund in accordance with this Part, plus interest, shall immediately be remitted 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 19(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 disclosed by the actuarial report prepared in accordance with subsection (2) shall be calculated by including as an asset any amount remitted to the pension fund in accordance with subsection (1) and the remaining initial solvency deficiency shall be considered to have emerged as of the day on which the initial solvency deficiency emerged.

(4) The remaining initial solvency deficiency calculated under subsection (3) shall be funded by special payments sufficient to liquidate that initial solvency deficiency by equal annual payments over a period not exceeding five years minus the number of years that the plan was funded in accordance with this Part.

30. A plan may cease to be funded in accordance with 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) 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 made to the pension fund in accordance with this Part, plus interest, is remitted to the pension fund at least 30 days before the plan's year end; and

(c) an actuarial report is prepared in accordance with subsection 29(2) and any remaining initial solvency deficiency is calculated and funded in accordance with subsections 29(3) and (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.

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

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 some 1,300 pension plans or about 10 per cent of all pension plans in Canada, representing about 15 per cent of trusteed pension fund assets in Canada; 433 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 15 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 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 per cent of federally regulated DB pension plans had a solvency deficit. OSFI's estimates reveal that federally regulated DB pension plans were 90 per cent funded, on average, as at December 31, 2005, compared to 100 per cent 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 10 years from five years.

The Solvency Funding Relief Regulations (the "Regulations") provide solvency funding relief through four temporary measures that respond to these difficult circumstances. These measures 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. Under the Regulations, a plan sponsor will be able to seek funding relief by choosing one of the four 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 measures are only available for plan sponsors that are up to date in their funding payments. Depending on their particular circumstances, sponsors may choose from the funding relief options described below. Sponsors may also choose to continue to fund under the rules set out in the PBSR.

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 relief provided by the Regulations strikes a balance between the status quo, whereby the current 5-year funding rules would be maintained, and simply extending the funding period to 10 years without conditions, as advocated by some sponsors.

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 on-going 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.

An assessment under the strategic environmental assessment policy has been conducted and concluded that there are no important environmental effects.

The implementation of the Regulations will 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 provide some regulatory relief for plan sponsors by offering them a choice of options which 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.

Only modest additional costs are anticipated for OSFI to administer the 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 could 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 seeking 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 Regulations include terms and conditions intended to mitigate potential risks to plan members. Accordingly, the 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.

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 stakeholder's 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 provided.

The details of the funding relief options, announced in Budget 2006, were set out in proposed Regulations that were pre-published for a 30-day comment period in the Canada Gazette, Part I on June 10, 2006. The Department of Finance received about 25 written submissions regarding the Regulations during the consultation period. Reaction to the Regulations has been generally positive with many noting that the proposed funding relief is a good first step, but that more fundamental changes to the legislative framework would be desirable, such as many of the issues consulted on in the Department's 2005 consultation paper. However, changes of this type are outside the scope of the Regulations.

Sponsors and pension experts are pleased that the government sees private pension funding as an important issue with many describing the government's announcement as a useful first step to ensuring the sustainability of defined benefit pensions. Other sponsors and pension experts hope that provincial regulators will follow the federal government's lead in offering temporary funding relief.

Labour had mixed reactions to the proposed funding relief. Some labour unions stress concern that the changes could have a negative impact on benefit security. Some understand the need for some flexibility around solvency funding for plan sponsors in crisis, but are concerned about the prospect of lower plan funding in the near term as a result of the funding relief. Some labour submissions oppose providing relief to financially healthy companies.

Labour and some sponsors requested clarification regarding the role of unions in representing their beneficiaries for the buy-in procedure. This has been clarified in the Regulations. A concern was also raised that the 21-day period for members and retirees to express objections to the extension of the amortization period was too short and that it was not clear when the time period started. In response, the Regulations have been amended to provide for a 30-day period to express objections and when the time period starts has been clarified.

Many of the comments were technical in nature and have been addressed through changes to the Regulations. Some submissions requested clarification on certain aspects of the Regulations. For example, clarification was requested on how experience gains could be applied. Clarification on this issue will be provided through OSFI's guidance. Other comments were related to policy matters such as whether to have separate classes for the buy-in measure.

There were a number of comments related to the requirement in the Regulations that active and inactive plan members be treated separately for the buy-in option. Some were supportive of the requirement, while others raised concern that it would be difficult to obtain buy-in from the separate classes and that a small number of retirees could potentially prevent buy-in even where active members support the change. This policy of providing for separate classes is consistent with the surplus sharing mechanism in the Act. As such, this requirement has been maintained in the Regulations.

Trustees expressed concern about a requirement that a holder call a letter of credit upon "becoming aware" of an event of default. The concern was that this wording could place an additional independent obligation on holders to assess "awareness" of a default, and that it may not be within the ability of a holder to assess what constitutes a default. In response, the Regulations have been clarified to ensure that holders under the letter of credit measure act on written notice where an event of default has occurred.

A number of comments were received suggesting that the income tax rules may need clarification in order to accommodate the letter of credit proposal. There was concern that the payment from a financial institution as a result of the call of a letter of credit to the pension plan was not provided for in the income tax rules and could jeopardize the registered status of a pension plan. In response, it is intended that an amendment to the Income Tax Act ensure that a payment into a pension plan on default of a letter of credit in lieu of an otherwise eligible plan sponsor contribution will be treated as an employer contribution for income tax purposes.

Submissions conveyed an interest on the part of all parties to address broader challenges facing defined benefit pension plans. The Government will continue to assess means to strengthen the viability of defined benefit pension plans, drawing on the full range of views received on this important issue of public policy. Any further policy initiative will allow opportunity for consultation with interested parties.

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

No compliance problems are anticipated with respect to the Regulations. OSFI's current supervisory process will enable OSFI to monitor compliance with the Regulations. The Superintendent has the authority to issue a direction of compliance to the administrator of a pension plan, an employer, or any person to ensure that the funding requirements are being met. Pension plans that do not meet the requirements of these Regulations must fund according to the normal 5-year funding rules.

Diane Lafleur
Director
Financial Sector Division
Finance Canada
Ottawa, Ontario
K1A 0G5
Telephone: (613) 992-5885
FAX: (613) 943-8436
E-mail: lafleur.diane@fin.gc.ca