Backgrounder
In general, the payments that a plan sponsor must remit to a plan in a given year include the amount necessary to cover new benefit accruals (current service costs) associated with the plan, plus special payments required in that year to pay any funding deficiencies on a going concern or a solvency basis, amortized over fifteen and five years, respectively. These required current service cost contributions and special payments must be made at least monthly based on the pension plan's most recent actuarial valuation report filed with the Office of the Superintendent of Financial Institutions (OSFI).
Defined contribution (DC) pension plans are not subject to solvency funding requirements under the PBSA, but must remit employer and employee contributions as set out in the plan text.
Relief for plan sponsors
On April 15, 2020, the Minister of Finance announced immediate, temporary relief for federally regulated defined benefit pension plan sponsors in the form of a moratorium, through the remainder of 2020, on solvency special payment requirements for defined benefit plans.
The Solvency Special Payments Relief Regulations, 2020 came into force on May 27, 2020 and published in the Canada Gazette, Part II on June 10, 2020.
The regulations reduce solvency special payment requirements for any plan year between the coming into force of the regulations and the end of 2020 by the total amount of all instalments of those payments due from April 1, 2020 until December 30, 2020 (i.e., in respect of the months of March 2020 to November 2020). Further,
- From the day the regulations come into force until December 30, 2020, the amounts of any solvency special payments that become due are reduced to zero, and plans are not required to make instalments of solvency special payments.
- The amounts of any solvency special payments made from April 1st until the day the regulations come into force may be deducted from the plan's normal cost contributions or going concern special payment requirements that become due in the period beginning on the day the Regulations come into force and ending on December 30, 2020.
- This effectively provides a 9-month moratorium on solvency special payments for plan sponsors.
The regulations also provide that interest is not payable on solvency special payment instalments that became due between March 31, 2020 and the day the regulations came into force.
For plan sponsors that use letters of credit to meet solvency special payment obligations, the regulations provide the ability to reduce the face value of letters of credit already obtained in respect of solvency special payments covered by the moratorium period.
Starting in January 2021, plan sponsors will again be required to make their monthly solvency special payments, starting with the payment in respect of December 2020. The regulations do not set out a separate amortization schedule for the payments that were foregone during the moratorium period. At the end of the moratorium period, plans will be subject to the normal funding rules in the PBSR.
Plan Members and Retirees
This short-term relief will help ensure that these employers have the resources they need to maintain their operations and their pension plans, which will support the retirement security of workers and retirees. A moratorium on solvency special payments balances the need to provide relief to federal plan sponsors with the need to protect benefits of plan members and retirees.
Plan sponsors will continue to be required to make contributions to cover the cost of benefits being earned by plan members and other costs related to the ongoing operation of the plan. Single-employer DB plan sponsors will also continue to be required to fully fund defined benefit plans on a solvency basis in the event of plan termination.
The regulations restrict the ability of plan administrators to amend their plans in ways that would reduce the plan's funded position. They also contain disclosure requirements to ensure that the annual statement provided to members and former members includes information on the impact of the moratorium on solvency special payments for the plan.
