The federal government announced today that it has released "final regulations that will strengthen Canada's federally regulated private pension system".

Specifically, as described in the news release:

• Regulatory amendments to the Pension Benefits Standards Regulations, 1985 will come into force on April 1, 2011.
• These amendments will:
  • permit plan sponsors to secure properly structured letters of credit
    in lieu of making solvency payments to the pension fund, up to a limit
    of 15 per cent of plan assets;
  • require the plan sponsor to fully fund pension benefits on plan termination;
  • void any amendments to a pension plan that would reduce the solvency
    ratio of the pension plan if the plan's solvency ratio would be below a
    ratio of 0.85; and
  • permit sponsors, plan members and retirees of a distressed pension
    plan to negotiate their own funding arrangements to facilitate a plan
    restructuring

The accompanying Regulatory Impact Analysis Statement presented the issue, and background as follows:

Under the Pension Benefits Standards Act, 1985 (the "Act"), the federal government regulates private pension plans covering areas of employment under federal jurisdiction, such as telecommunications, banking and inter-provincial transportation. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of such plans. At March 31, 2009, OSFI supervised some 1,380 pension plans or about seven per cent of all pension plans in Canada, representing about twelve per cent of trusteed pension fund assets in Canada; 449 of the federal plans were defined benefit pension plans.

Under the Act and the Pension Benefits Standards Regulations, 1985 (the "Regulations"), minimum standards are set for a number of areas, including for funding, investment, membership eligibility, vesting, locking-in, portability of benefits, death benefits and members' rights to information. For defined benefit pension plans, the Act requires that promised benefits be funded in accordance with the standards provided for under the Regulations.

Recent Challenges and Government Action

Pension plan funded levels have experienced much volatility in recent years. In the early to mid-2000s, a sharp decline in long-term interest rates along with changes in actuarial standards, such as the longevity assumptions, resulted in increased plan liabilities. Combined with poor investment returns, these factors led to many plans being underfunded on a solvency basis. More recently, the 2008 global credit crisis led to a sharp decline in global equity markets, which further reduced the funded status of federally regulated private pension plans.

To address the pressure that increased funding requirements put on plan sponsors, the Government adopted two temporary Solvency Funding Relief Regulations (the "2006 and 2009 Regulations"). The 2006 and 2009 Regulations provided solvency funding relief by allowing plans to extend their solvency funding payment schedule from five to ten years, subject to the condition of either members' and retirees' consent, or securing the difference between the five- and ten-year payment schedules with a letter of credit. These measures provided for the solvency deficiencies of federally regulated defined benefit pension plans to be addressed in an orderly fashion while providing safeguards for pension benefits. In addition, the Government also brought into force special regulations for two specific sponsors with the Canadian Press Pension Plan Solvency Deficiency Funding Regulations (2009), the Air Canada Pension Plan Funding Regulations, 2009 and the Air Canada Pension Plan Solvency Deficiency Funding Regulations (2004) in order to help these entities deal with their own specific challenges to funding their pension plans.

The existence of the temporary solvency funding relief measures and special regulations points to the need to improve the legislative and regulatory framework respecting federally regulated private pension plans on a permanent basis.

On October 27, 2009, the Government announced a series of proposals to improve the legislative and regulatory framework respecting federally regulated private pension plans. Divided into five main themes, the announcement notably proposed to make it easier for participants to negotiate changes to their pension arrangements and to allow sponsors to better manage their funding obligations, while at the same time protecting member benefit security. To put these measures into effect, legislative and regulatory changes are required.

In respect of legislative amendments, the Jobs and Economic Growth Act, adopted by Parliament in July 2010, included amendments to the Act which implemented a number of the announced pension proposals, such as the enabling legislative provisions to permit letters of credit and void amendments, as well as those related to disclosure on plan termination.

In June 2010, a number of amendments to the Regulations, which did not require the Royal Assent of the Jobs and Economic Growth Act, were finalized. These amendments included: 1) the adoption of a new standard for establishing minimum funding requirements on a solvency basis that will use average - rather than current - solvency ratios to determine minimum funding requirements; 2) the introduction of a solvency margin which precludes plan sponsors from taking contribution holidays, unless the solvency ratio exceeds full funding plus a margin, which is set at a level of five percent of solvency liabilities; and 3) the removal of the quantitative investment limits in respect of resource and real property investments.

With the Royal Assent of the Jobs and Economic Growth Act, the Government is now proceeding with further regulatory changes.