On December 11, 2020, Bill 68, An Act mainly to allow the establishment of target benefit pension plans (“Bill 68”), received assent and came into force. Bill 68 amends, among other statutes, the Supplemental Pension Plans Act (Québec) (“SPPA”) to permit employers to adopt a “target benefit pension plan” (“TBP”). Prior to the passage of Bill 68, TBPs were available in Québec only to certain employers in the pulp and paper sector by virtue of special regulations. (These existing TBPs must be amended to conform to the new TBP rules by December 31, 2023.)
The passage of Bill 68 should provide both employers and employees with greater flexibility in designing and negotiating appropriate and sustainable pension solutions beyond the traditional defined benefit (“DB”) plan, in particular by limiting employer funding obligations to a fixed amount while providing members a more predictable periodic retirement pension payable for life.
Target Benefits in a Nutshell
Similar to other Canadian jurisdictions in which TBP provisions are in force, employer contributions to a Québec TBP are fixed at a rate set forth in the plan. From the employer’s perspective, the employer’s fixed contributions can be said to resemble a defined contribution (“DC”) rather than a DB obligation. Members are responsible for the contribution obligation stipulated under the TBP, less the fixed employer contribution. Thus, unlike under a traditional DB plan, members and not employers bear the funding risk.
Each TBP is required to establish a “benefit target”, being the periodic pension benefits (normal pension) and any other benefits that are expected to be funded by total contributions to the TBP and projected investment returns thereon.
Since fixed contributions and investment returns may not be enough ultimately to meet the “benefit target”, a TBP is required to specify the “recovery measures applicable in the event of insufficient contributions, their objective and the conditions and procedure for applying them”. Recovery measures can include increased member contributions, reductions to pension benefits for future service (for active members) or even reductions to accrued benefits (including, for retirees, pensions in pay). The TBP must stipulate how recovery measures are applied and in what order. Such measures cannot be at the discretion of the TBP’s pension committee.
Finally, TBPs must also set out the conditions and procedure for restoring benefits that were previously reduced as a result of insufficient funding as well as the use of surplus after all previously reduced benefits have been restored.
Existing DB and DC Pension Plans
A TBP will not be permitted also to contain a DB provision (although it could contain a DC provision). In addition, employers will not be able to convert accrued benefits under an existing DB plan to target benefits under a new TBP. However, subject to any applicable collective and other employment agreements, an employer is permitted to establish a new TBP plan for future service (akin to a “freeze” of the DB plan).
In contrast, a DC plan and certain negotiated-cost multi-employer pension plans may be converted to a TBP. In turn, a TBP may be converted into another type of plan, subject to conditions that will be prescribed in future regulations.
Limitations on TBP Benefits
A TBP must provide a benefit based on a career average formula. Bill 68 expressly prohibits TBP benefit formulas based on “final average” or “best average” earnings (as are often seen under traditional DB pension plans).
Additionally, TBPs will not be permitted to provide for post-retirement indexation.
Finally, TBPs cannot provide early retirement benefits that depend on a member’s years of employment or service.
Members Employed in Other Jurisdictions
TBPs under the SPPA are available only to members who report to work in provincially regulated employment in Québec. Bill 68 contemplates future regulations governing participation in a Québec TBP by members employed in another jurisdiction.
Other Notable Features
Bill 68 also provides for detailed rules governing surplus. In general, a TBP will only be permitted to use surplus to improve benefits if a plan is fully funded (including by the stabilization provision target level), and the maximum surplus that may be used in a fiscal year is limited to 20% of such surplus. Surplus cannot be used to improve benefits in a way that prefers non-active members over active members. Employers cannot share in any surplus.
A TBP may not be amended or terminated unilaterally by the employer (or all employers, in the case of a multi-employer pension plan).
Finally, a TBP is permitted to determine its solvency ratio more frequently than annually. This feature is important given that the value of an accrued TBP entitlement that a terminating member can transfer from a TBP is reduced by any solvency ratio less than one.
Consideration for Pension Committees
The new TBP rules may give rise to additional fiduciary considerations for members of the pension committee that acts as the administrator of a TBP given the complexity of these arrangements and the potential for benefit reductions. In this regard, during the bill stage, some had recommended that the SPPA also be amended to contemplate for more of a place for independent members and experts on the pension committee. These recommendations were not ultimately accepted, and, as it stands, the SPPA will continue to require a pension committee of a TBP to be comprised of an active member representative, an inactive member representative, and an independent member (as is the case for other plans). In implementing a TBP, consideration should be given to the level of employer indemnity or fiduciary insurance coverage in place for the individual members of the pension committee to encourage motivated and expert volunteers.
Variable Benefits for DC Plans and VRSPs
While not related to TBPs per se, Bill 68 separately amends the SPPA to enable both DC plans and voluntary retirement savings plans (“VRSPs”) to offer variable payment life pensions, similar to a registered retirement income fund. A plan providing for such a feature will permit a member, on the cessation of active membership, to transfer his or her DC entitlement to a “variable payment life pension fund” that meets requirements that will be prescribed in future regulations. These amendments provide DC plan and VRSP sponsors with an additional decumulation option for members based on the new “variable payment life annuity” announced by the federal government in 2019.
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