Predictability & Sustainability: New NS Pension Funding Regulations

On February 24, 2020, the Nova Scotia government announced that amendments to the Nova Scotia Pension Benefits Regulations implementing changes to the N.S. defined benefit (DB) funding framework take effect April 1, 2020. Declining interest rates have led most Canadian jurisdictions to examine, and in some cases change, the funding rules for defined benefit (DB) plans. The approaches vary, but a Canadian consensus is emerging supporting elimination of the usual 100% solvency funding model in favour of other more flexible and less costly safeguards. Ontario, Quebec and British Columbia have already implemented such rule reforms, and Manitoba has indicated a similar direction.  Other jurisdictions are considering changes.

The Pension Benefits Regulations amendments promote pension plan sustainability by providing more predictability in required funding levels. With them, Nova Scotia joins the emerging consensus on pension plan funding, and takes another step in a pension reform process the government started in September 2017:

September 2017. The government distributed “Pension Funding Framework Review and other issues affecting pension plans”, a discussion paper seeking stakeholder input on N.S.’s defined benefits pension plan funding framework and other regulatory issues affecting pension plans, and outlining three options for a new funding framework.

April 2019. The government passed amendments to the N.S. Pension Benefits Act to implement some of the proposed reforms and ease the pressure on plan sponsors. The government published Improved Funding Framework for Nova Scotia Pension Plans: The Road Forward seeking stakeholder input for the regulations that would ultimately support the amendments, including solvency funding changes.

February 24, 2020. The government announced the Pension Benefits Regulations amendments will take effect April 1, 2020, stating they balance the needs of private sector employers offering defined benefit (DB) pension plans and their members. Five of the key amendments to the Regulations effective April 1 include:

• Solvency Funding Reduced to 85%. Existing and new pension plans with valuation dates on or after December 31, 2019 will be required to fund to 85% of liabilities determined on a solvency basis. If a plan’s solvency ratio is 85% or higher, no solvency payments will be required; if a plan’s solvency ratio is less than 85%, the shortfall (up to 85%) must be funded over five years. Maintaining regulatory consistency, the changes don’t include the suggestion in the 2019 consultation paper that Plan members’ consent must be obtained to access the 85% solvency funding threshold.

• Enhance Going Concern Funding. Going concern deficiencies must be funded over 10 years, down from the 15 years currently required, and a margin or provision for adverse deviation (PfAD) will be introduced. The method for determining the size of the margin for each plan will be determined in accordance with the Regulations. For solvency exempt plans under the Regulations, the PfAD will be 5% less.

• Payments into Reserve Accounts. Legislation permits the employer to withdraw any surplus in a reserve account at wind up. A reserve account is a separate account within a defined benefit pension plan established to hold payments in respect of a solvency deficiency or other prescribed contributions, i.e. contributions relating to the going-concern PfAD, if all the prescribed conditions are met. The administrator will be required to apply to, and obtain consent of, the Superintendent for the withdrawal.

• Less Frequent Valuation Report for Solvency Exempt Plans. Solvency exempt plans will be permitted to report only every three years unless required earlier by the Superintendent, and to improve benefits without immediate funding provided the improvements don’t bring the Plan below 85% solvency funding.

Discharge of Liability for Annuity Buy-Outs. Proposed regulatory amendments to support the annuity buy-out amendments made to the Pension Benefits Act in April 2019.

Please contact your McInnes Cooper lawyer or any member of our Pension & Benefits Law Team @ McInnes Cooper to discuss this topic or any other legal issue.