The road forward: Nova Scotia government announces and seeks input on further regulatory changes regarding funding of defined benefit pension plans

Level Chan and Dante Manna

The Province of Nova Scotia is soliciting stakeholder input on significant regulatory changes to the Pension Benefits Act (“PBA”) and Pension Benefits Regulations (“PBR”).  The solicitation is accompanied by a paper entitled “Improved Funding Framework for Nova Scotia Pension Plans: The Road Forward”, published May 13, 2019.  The paper contains an overview of the legislative and regulatory changes that may be made, as well as seeking input on “technical issues”, to determine the “best road forward for regulatory provisions”.

Review of Bill 109 changes

The paper reviews recent changes to defined benefit (“DB”) plan funding introduced through Bill 109 in March 2019.  That Bill added PBA provisions allowing for the establishment of “reserve accounts”, removing the limits on the use of letters of credit, and allowing the discharge of liability for annuity buyouts for a DB plan that is not wound up.  These changes follow a review begun in Fall 2017 with a solicitation for input on potential changes to DB funding rules.

The changes made under Bill 109 are set to come into effect upon proclamation.  The paper indicates that is anticipated to happen in Fall 2019, along with the regulatory changes described below.

Planned regulatory changes

The paper outlines the planned changes to the PBR:

• Permanent Solvency Funding Relief – DB plan sponsors will be permitted, on a go-forward basis, to elect to permanently fund their plans to an 85% solvency standard (rather than the current standard of 100%), subject to 5-year amortization and information requirements. The election will not be permitted to move forward if at least one third of eligible participants objects. Existing solvency funding exemptions will continue under the new regime.
• Enhanced Going Concern Funding (PfAD) – Going concern deficiencies must be funded over 10 years (rather than 15) and special payments will be allowed to consolidate with prior deficiencies. A provision for adverse deviation (“PfAD”) must be established (applied to liabilities, but not current service cost), and funded in the same manner as the other going concern obligations. Much of the input sought by the Province is with respect to PfAD; see below.
• Contribution Holiday Limitations – Contribution holidays will be restricted to plans with a going concern funding level of at least 110% and solvency funding level of at least 110% after the holiday is taken.
• PfAD Calculations – The Province is considering two options for the required methodology for calculating a plan’s PfAD. Both proposed options depend on the proportion of assets held in variable income securities.
  • Option 1 – Under this option the PfAD ranges between 0% and 22%, determined by (a) the ratio of asset duration to liability duration and (b) the percentage of assets invested in variable income securities. The PfAD amount generally increases with a decrease in (a) or an increase in (b). This option is analogous to the PfAD calculation currently employed in Quebec.
  • Option 2 – The PfAD ranges between 5% and 22%, increasing in proportion to the percentage of assets in variable income securities. In contrast to Option 1, the method does not take asset-to-liability ratio into account, and there is a fixed base PfAD of 5% that applies to all plans.  This option is comparable to the Ontario PfAD calculation methodology.
• Additional PfAD for Plans with Aggressive Discount Rates – It is proposed that the PfAD as calculated above would be supplemented by an additional amount if the pension plan were to use a discount rate exceeding a certain level. The level currently considered is the Ontario Benchmark Discount Rate.
• Transition – A three-year transition period is proposed for plans where the contribution requirements will increase as a result of the new funding regime.
• PfADs for Solvency Exempt Pension Plans – It is proposed that PfADs apply to all plans, including those exempt from solvency funding.
• Frequency of Valuations for Solvency Exempt Pension Plans – Exempt plans with solvency concerns will no longer be required to submit annual valuations; instead, in an effort to “reduce cost and red tape”, the requirement will be triennial valuations and annual cost certificates, subject to the Superintendent’s discretion to require valuations more frequently.
• IPP Exemptions – It is proposed that individual pension plans for owners and significant shareholders will be exempt from solvency funding and certain filing requirements. The paper does not mention any special notice or other requirements like those adopted in Newfoundland and Labrador, but they could be addressed in the PBR.
• FIR Incorporation by Reference – Federal permitted investment rules will be incorporated by reference into the PBR so that any changes made to the former will automatically apply in Nova Scotia.
• Benefit Improvements for Solvency Exempt Pension Plans – Solvency exempt plans will be able to improve benefits funded over five years if, at the time of the improvement, they are fully funded on a going concern basis and 85% funded on a solvency basis.

Summary of feedback requested

In summary, the Province is seeking feedback on the following:

1. Types of employer contributions that should be permitted to be paid into a reserve account – as we noted in an earlier update, “reserve accounts” are not limited to solvency deficiency payments. The Province is considering allowing payments in respect of a going concern PfAD to be paid into a reserve account.
2. Most appropriate form of going concern PfAD/margin
   1. Preference between Option 1 and Option 2 (and rationale)
   2. Other options that should be considered (and rationale)
   3. Whether there should be a different PfAD for solvency exempt or public sector plans
   4. Use of an additional PfAD to apply for pension plans using aggressive discount rates
   5. Definition of variable income securities
3. Proposed three-year transition period for pension plans that must pay increased contributions under the new rules
4. Proposed contribution holiday threshold (110% funded on both going concern and solvency bases)

We anticipate most stakeholders will see the value in providing input on the issues outlined above, as they will affect plan costs and options.

Feedback must be received by June 21, 2019 in order to be considered.

This update is intended for general information only. If you have questions about the above, please contact a member of our Pensions & Benefits group.

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