Supplemental Pension PlanSupplemental Pension PlanFunding Relief ProvisionsFunding Relief Provisions

Pension SeminarApril 15, 2009

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AgendaProvisions adopted by QuébecProvisions adopted by AlbertaProvisions adopted by OntarioConclusion

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Provisions Adopted by Provisions Adopted by QuébecQuébec

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BackgroundThe market decline has had a significant

impact on pension plans The Québec government has adopted

concrete provisions to help plan sponsors get through the crisisHowever, not everything is yet cast in stoneMuch discussion remains to be doneSome compromises will need to be made...

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Background (cont’d)Bill 1 contains practically no provisions on:

The role of the Régie des rentes du Québec (RRQ) in managing pension income

Anticipated application of the new CIA StandardsAuthority to adopt regulations retroactively

Any further provisions are to be set out in two regulations (governing provisions, and the role of the RRQ):“Extended private” consultationsPre-publication in early April

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ObjectivesIn light of the 2008 financial crisis, to relieve

the burden on companies of contributions required under Québec’s Supplemental Pension Plans Act

To limit the adverse effect of the proposed provisions on the security of pension plan participants’ and retirees’ benefits

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Role of Régie des rentes du Québec (RRQ)Last-minute additions:

Guarantee that retirees will not lose entitlement as a result of the relief provisions

Five-year RRQ management delayImportance of retirees' political powerPolitical processConsiderable influence of guaranteed retiree

rights on subsequent discussions

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Results1. Anticipated adoption of new CIA Standards2. Deficit consolidation3. Extension of consolidated deficit

amortization period from five to 10 years4. Smoothing of assets over a five-year period

in order to determine solvency deficit

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But…

Base levelContributions may not be less than a base

levelThere is no intention of providing relief for

more than the impact of the 2008 financial crisis

Discussions on how to determine the base level are ongoing

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RRQ-recommended method1. Determination of balance contributions with no

relief (with neither consolidation, smoothing, nor extension to 10 years) in accordance with the former CIA Standards

2. Determination of crisis deficit-related balance contribution: actual assets as of December 31, 2008, less accumulated assets as at December 31, 2007 (taking into account 2008 cash flows) at the solvency standard interest rate

3. Pre-crisis balance contribution = (1) – (2)  

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Our recommended methodValue of assets as at December 31, 2007,

increased by an interest rate resulting in neither a solvency deficit nor solvency surplus, taking cash flows into account

Determination of actuarial liabilities using current CIA Standards

Determination of amortization payments Capitalization over a 15-year period and

determination of solvency over a five-year period

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Who requests what?It is employers who request relief provisions:

As at December 31, 2008, orAs at December 31, 2009, orAs at December 31, 2010

Note that there are no consultations of unions, participants or retirees

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Multi-employer pension plansSame provisions as for other plansProblem if one employer does not want to

adopt provisions while others doConsideration by RRQ of possibility of

separate accountingIf withdrawal in case of employer bankruptcy,

option for “retirees” to have their pension managed by RRQ

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Solvency levelNo changeAssets at market value divided by liabilities

on solvency basis (new CIA Standards)NOT using smoothed market valueUsed to pay amounts owingEquity among participants who leave and

those who remain

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AlternativesAlternatives

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If provisions are requestedThe provisions of Bill 30 applyAnnual actuarial valuation

Must value plan again on December 31, 2009

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Whether to request provisionsDone on a case-by-case basisDepends on the following factors among

others:Plan financial situation as at December 31,

2008Level of contributions with and without

provisionsProjected financial situation as at December

31, 2009Estimated contributions payable in 2010

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RRQ authorityAuthority to request actuarial valuation on a

given dateBased on plan financial situationRequired in order to protect participants’

rightsStatement by RRQ that it will not hesitate to

request an actuarial valuation since relief provisions are now available

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So be careful: these points may alter your strategy!!!

Additional RRQ authorityAuthority to adopt special provisions for any

employer that requests them:In order to avoid employer bankruptcyRetroactively to December 31, 2008

Although conditions have not been discussed:Demonstration of insufficiency of general relief

provisionsProposal of acceptable contribution level

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The Next StepsThe Next Steps

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Pre-publication of RegulationPrivate consultation before pre-publication:

Expert committee“Committee of actuaries and lawyers”Goal to minimize to the extent possible

adjustments following pre-publicationPre-publication around April 2009Possibility of additional time to produce

actuarial valuations as at December 31, 2008

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Content of RegulationConditions of application of relief provisionsDefinition of crisis-related deficitDetermination of new contribution minimum

following reliefMechanism for determining contributions in

order to amortize residual deficit following three-year period of application of relief provisions

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Content of Regulation (cont’d)Rules for allocating actuarial gains observed

during period of application of relief provisionsConditions of application of new funding rules

applicable before January 1, 2010 to plans using relief provisions

Regulations governing RRQ management of retirees’ assets

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Relief for public organizations (such as cities, universities, etc.)Not subject to solvency standardsProvisions requested for capitalization

purposes:Asset smoothing method over a five-year

periodDeficit consolidation as at December 31, 2008Triennial instead of annual valuation, even

after 2010Anticipated favourable government reaction

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If 2009...If 2009...

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If 2009 was just as disastrous...The expert committee and the watch

committee will closely monitor the situationNew provisions will be considered, if

appropriateObservations will be made in the fall of 2009

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PProvisions Adopted by rovisions Adopted by AlbertaAlberta

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Practical details “Schedule 0.2, Section 3 of the Regulation”

Legal wordingPolicy Bulletin No. 41

Detailed relief provisionsPolicy Bulletin No. 39

Use of letters of credit “EPPA Update 09-01”

Summary of changes “EPPA Update 09-02”

FAQ on relief provisions

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Main provisionsUse of the new CIA Standards for actuarial

valuations dated on or after September 1, 2008Three-year contribution holiday

Plan may not be improved during contribution holidayExtension of amortization period to 10 years for

“new” deficitsValuation date between September 1, 2008 and

December 31, 2009Plan may be improved

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Conditions of contribution holidayOptions to be chosen by December 31, 2009New actuarial valuation to be producedNo improvement of planExisting deficits amortized over maximum 10-year period (no

deficit consolidation)New deficits amortized over maximum 10-year periodIn case of transfer of entitlement, supplement to be paid for

100% paymentRequirement that participants be notified in statement of

entitlementAny other conditions the superintendent may impose

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Conditions of 10-year amortization

Options to be chosen by December 31, 2009New actuarial valuation to be produced with valuation date between

September 1, 2008 and December 31, 2009Existing deficits amortized as plannedNew deficits amortized over maximum 10-year period (may take into

account capitalization balance contributions over the next 10 years) (unless plan is improved, in which case maximum five-year period)

In case of transfer of entitlement, supplement to be paid for 100% payment

Requirement that participants be notified in statement of entitlementAny other conditions the superintendent may impose

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Main provisionsExtension of moratorium for Defined Multi-Employer

Pension Plans until December 31, 2011Resulting possibility of three-year moratorium for all

employersAt end of moratorium, required actuarial valuation

and amortization of solvency deficit over five-year period

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Additional conditionsRequirement that economic and demographic

assumptions be conservativeBaseline: 6.5% using UP94Other assumptions allowed if justifiedValue of assets limited to 115% of market value (base

capitalization)Application of CIA’s Final Standard on Independently

Reasonable Assumptions, although only came into effect on March 1, 2009

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Additional conditions (cont’d)Actuaries are required to disclose in their reports the

planned increase in solvency liability during the first year following the report

The superintendent will carefully consider actuarial reports:See Policy Bulletin No. 41

The superintendent reserves the right to refuse an actuarial valuation...

…or to require an actuarial valuation

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PProvisions “Adopted”rovisions “Adopted”(1)(1) by Ontarioby Ontario

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(1) Included in March 26, 2009 Ontario budget documents

GeneralThese provisions were tabled as part of Ontario's

March 26, 2009 budgetIf adopted, these legislative amendments would be

retroactive to September 30, 2008This presentation does NOT cover other

amendments tabled as part of the budget but unrelated to relief provisions

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1.- Amortization from five to 10 yearsFor “new” deficits onlyTo determine solvency deficit, one can take into account

capitalization amortization payments over the next 10 yearsDetermined at the time of first actual actuarial valuation

effective on or after than September 30, 2008With “agreement” of participants, their unions, AND retirees“Agreement” if not more than 33.3% are opposed

(comprehensive test)The union counts in proportion to the number of active

participants among their members

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2.- Deficit consolidationConsolidation of balance contributions of “existing”

deficitsPossibility of amortizing over a five-year period the

deficit balances of the first actuarial valuation effective on or after September 30, 2008

In case of consolidation, amortization of future improvements over a maximum five-year period on both capitalization basis and solvency basis (same as provision number 1)

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3.- Contribution holidayHoliday from balance contributionsOne-year periodDetermined at the time of first actuarial valuation

effective on or after September 30, 2008

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4.- Use of gainsThis provision must be used at the time of the first

actuarial valuation effective on or after September 30, 2008

Use of solvency gains must be disclosed in subsequent actuarial valuations

Gains would reduce balance contributions instead of actual solvency deficits

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5.- Increased information More detailed notice to participants on assets,

deferred pensions, and retireesInformation on plan financial situationInformation on implications of using relief provisionsSpecific requirements not yet known

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6.- Accelerated fundingAccelerated funding of benefit improvementsWhat improvements???Important that these improvements be made after

the date the new standards come into effectAmendments already negotiated

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7.- Temporary restrictions on contribution holidaysThis provision applies to fiscal years ending between

2010 to 2012Actuaries must certify annually the existence of a

surplus at the beginning of the fiscal yearCertificates must be registered with the Financial

Services Commission of Ontario (FSCO)The cost certificate may be based on a projection of

the financial situation since the most recent full actuarial valuation

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8.- Adoption of CIA StandardsAnticipated adoption of the new Standards for

determining solvencyFor actuarial solvency valuations dated starting

December 12, 2008Idem: Québec and Alberta

Only the retroactivity date varies from one province to another

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ConclusionConclusion

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The more things change, the more they stay the sameEach province adopts “its” own provisionsEach province is “different”Pay attention to details!!!Carefully assess the consequences of adopting

proposed relief provisionsRemember that in case of employer bankruptcy, the

provisions of Québec's Supplemental Pension Plans Act apply to ALL Québec residents, regardless of where the plan is registered

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Questions?Questions?

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Pierre GirardinPierre Girardinpierre.girardin@pierregirardin.compierre.girardin@pierregirardin.com

Office: 450-443-1543Office: 450-443-1543Cell: 514-949-6027Cell: 514-949-6027