Level Chan and Dante Manna

On February 26, 2020, the Nova Scotia Government released its regulations establishing a new defined benefit pension funding framework for the province. The amendments to the Pension Benefits Regulations (“PBR”) complete consultations held over the last year and have been highly anticipated since the government first solicited input in 2017. The amendments come into effect April 1, 2020.

Highlights from the new funding framework include:

• Reduced solvency funding obligations – The amended regulations will only require special payments into a defined benefit plan to increase the plan’s funded ratio to 85%, as measured on a solvency basis. This is a reduction from the previous required solvency ratio of 100%. The formula for calculating a solvency deficiency (the liability amount) has been modified accordingly.
• Enhanced going concern funding obligations – In parallel with the lower solvency funding threshold, the PBR amendments have enhanced funding requirements on a going concern basis. Defined benefit plans will be required to add an extra percentage margin, called a provision for adverse deviations (“PfAD”), to its going concern funding requirements. The PfAD is not a fixed number; for non-solvency exempt plans it can vary between 5% and 22%, depending on the proportion of the plan’s fixed income assets in specified investment categories, as reported in the plan’s financial statements. The maximum amortization period for going concern unfunded liabilities has also been reduced from 15 to 10 years. This was Option 2 in the consultations and is comparable to the approach in Ontario.
• Reserve accounts – Contributions in relation to a solvency deficiency or a going-concern PfAD may be deposited into a separate reserve account within the plan. An employer may withdraw any surplus from the reserve account upon plan windup, subject to the Superintendent’s consent and other prescribed conditions.
• Contribution holidays – The PBR will further restrict contribution holidays, prohibiting those that reduce the funded ratio below 105% on either a going concern or solvency basis.
• Actuarial valuation reports – Certain solvency-exempt plans under s. 19(6) of the PBR will no longer be required to file annual valuation reports when there is a solvency deficiency. Another change is that any reserve accounts established for a defined benefit plan must be accounted for in the valuation report, separate from the remainder of the pension fund.

Also included are regulations regarding other changes to the Pension Benefits Act (“PBA”) introduced in 2019’s Bill 109.  These changes are also effective April 1, 2020:

• Letters of credit – The limit on the use of letters of credit (formerly 15%) for solvency deficiency funding was removed and no new explicit restrictions on their use have been added. The new regulations deem existing letters of credit to continue in respect of a solvency deficiency calculated under the new formula.
• Annuity purchase – Administrators will be allowed to discharge liability for annuity buyouts of a defined benefit plan that is not wound up. The new regulations detail the requirements to take advantage of the discharge.

Further changes, also effective April 1, 2020, include:

• Individual Pension Plan (“IPP”) exemption – Individual pension plans for members who are “connected”, as that term is defined in the Income Tax Act, will be exempt from specified PBA and PBR provisions, including certain provisions regarding membership, vesting and standard of care.
• Federal investment rules – The PBR will harmonize its investment restrictions with those of other jurisdictions by incorporating the rules under the federal Pension Benefits Standards Regulations, 1985 (“PBSR”), including any future amendments to the PBSR.

The amendments provide new options and obligations for employers and plan sponsors as they look to maintain the long-term sustainability of their defined benefit plans. Our Pensions and Employee Benefits Group would be pleased to discuss this new framework with you and assist with enhanced obligations or any plan document modifications required to take advantage of the changes.

This article is provided for general information only. If you have any questions about the above, please contact a member of our Pensions and Benefits group.

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