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Quebec pension law requires employers to maintain reserve

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An amendment to Quebec's pension law imposes strict provisions regarding the funding and management of defined benefit plans and may be another justification for Canadian employers to consider terminating their plans even though the amendment includes provisions that are favorable to plan sponsors.

In an effort to improve funding of pension plans to protect benefits of members and beneficiaries, the Quebec provincial government enacted an amendment--Bill 30--that will require a pension fund to maintain an "adverse deviation" provision.

Adverse deviation is a percentage of the solvency liability--the estimated value of pension obligations if a plan were to be terminated--that is to be added to the pension fund by a plan sponsor in case of investment losses. The percentage varies depending on the distribution of the plan's assets and investment policy. For example, if 60% of plan assets were invested in equities, the reserve would equal 7% of a plan's solvency liability.

The government wants employers to make sure that plans are fully funded and have a reserve before surpluses are used to fund benefit increases or employer contribution holidays, pension experts say.

"The idea is to make sure the assets of the plan and the funding of the plan (are) more secure for employees," said Robert Dupont, a Montreal-based partner with Heenan Blaikie L.L.P. who specializes in employment and pension issues.

The provision, though, has negative implications for plan sponsors because it will require that more money be contributed to pension plans, said Michel Methot, chief actuary of Alcan Inc. in Montreal and chair of the Quebec Regional Council of the Toronto-based Assn. of Canadian Pension Management, which represents plan sponsors in Canada.

Bill 30 also mandates accelerated funding of any change to a pension plan when the cost of the change causes the solvency of the plan to drop below a certain threshold. If benefits are increased at a time when the plan is less than 90% funded, the employer immediately has to pay the cost of the additional benefits or fund the plan up to the 90% level. This means few employers will be tempted to increase benefits because of the financial burden this will cause, Mr. Dupont said.

The new funding measures take effect in 2010.

Bill 30 also requires that any use of surplus assets to fund a plan amendment that increases benefits must be equitable for active and nonactive members. If 30% or more of the members of either group oppose the amendment, the equity requirement will not be satisfied and members of the group will be allowed to contest the legality of the funding method in court, according to a statement by Mercer Human Resource Consulting.

"This is an element of the bill that adds further complexity to the management of defined benefit plans and ultimately gives a bad reputation to defined benefit plans to plan sponsors," Mr. Methot said.

The amendment also requires pension committees to establish and observe specific governance and operational standards. By the end of 2007, such committees must adopt bylaws governing, among other things, the duties and obligations of, and ethics rules that apply to, committee members. The provision will increase administrative costs, Mercer said.

One positive aspect of the amendment for employers is that it allows them to use a letter of credit to fulfill part of their funding obligations. Employers who are not parties to a multiemployer plan will be allowed to use a letter of credit to fund deficit payments up to 15% for a fiscal year, Mercer said in the statement.

While using a letter of credit can help certain companies, organizations with significant profitability issues may have trouble securing an affordable letter of credit. "It's not an instrument available to all plan sponsors, but it's good news nevertheless," Mr. Methot said.

The use of letters of credit rather than special payments to fund pension deficits is gaining momentum nationwide after the Canadian federal government adopted a provision allowing it (BI, Nov. 13).

Liability protections

Another positive aspect of the Ontario amendment is that it features rules designed to protect and compensate pension committee members in liability matters. Committee members will be indemnified by the pension fund if they have committed no wrongdoing unless they receive compensation under a liability insurance plan. Committee members who are insured and who have committed a transgression, unless it was deliberate or egregious, may be indemnified by the pension fund up to the amount of the deductible. Mercer anticipates that this change, retroactive to June 14, 2006, will encourage committee members to increase their liability coverage.

This change is positive because pension plan committee members, under previous law, could be sued as fiduciaries, Mr. Methot said. Now, if they act in good faith, they are not liable; if they are sued, the deductible can be paid from the fund, which it could not be before the amendment, he said.

Overall, Bill 30 is problematic for plan sponsors because it does not address the issue of asymmetry of pension surplus/deficit ownership, in which sponsors are responsible for paying off deficits, but may not be entitled to plan surpluses.

"If anything, it has accentuated the asymmetry and, therefore, defined benefit plans are becoming more than ever a less effective vehicle for employers to look after the retirement of their employees, which is sad because defined benefit plans are, in many instances, the best tool to manage the retirement of employees," Mr. Methot said.