Municipal and university sector
Regulatory reform of defined benefit pension plan funding

On April 5, the Government of Quebec published a draft Regulation respecting the funding of defined-benefit pension plans of the municipal and university sectors (draft Regulation), which replaces the current regulation for pension plans in this sector. Market stakeholders had been expecting this announcement, since this regulation covers the specifics of funding and administering defined benefit pension plans in the municipal and university sectors.

The main changes to pay attention to, since they could affect your plans, are as follows:

Asset smoothing for each component will be permitted in future. This mechanism would effectively reduce fluctuations of the financial situation on a funding basis, as well as required amortization payments and surplus assets. Asset smoothing will not be used for the purposes of the statutory reserve, the restructuring reserve, the stabilization fund or the assets on a solvency basis. Asset smoothing is optional—it’s not mandatory. Consequently, some thought should be given to whether it should be used and how it would impact the plan’s funding.

The maximum period for paying deficits will be gradually reduced from 15 years to 10 years. Consequently, actuarial valuations as at December 31, 2024, should amortize deficits over a 14-year period, while valuations at December 31, 2025, should amortize them over a 13-year period, and so on until a 10-year period is reached at December 31, 2028.

The employer is responsible for the deficits of the Previous component. Shortening the amortization period will result in an increase of approximately 35% in the monthly contribution required to repay a deficit reported in an actuarial valuation. This may be reduced by using asset smoothing for this component. As long as the employer has to pay at least the contributions for the amortization of the restructuring deficit and these contributions amount to more than those required to fund the deficit reported in an actuarial valuation, the reduction of the amortization period won’t affect the contributions required for the Previous component.

For the New component, the deficit is borne by the employer and members, but is generally covered by the stabilization fund. Consequently, the shorter amortization period will not affect required employer and employee contributions as long as the stabilization fund remains sufficient.

Certain terms and conditions for paying benefits to plan members will be modified. The most anticipated change involves the additional contribution for benefit payments made in a proportion that is greater than the degree of solvency, which will no longer be required under applicable legislation. Consequently, in future, the amounts owing to plan members who do not have the option of maintaining their benefits in the pension plan and those for whom the plan provides for the payment of the value of members’ benefits in a proportion that is greater than the degree of solvency will immediately be paid in full, without creating residual benefits. Any loss resulting from these payments that is not offset by an additional contribution shall be borne by the plan.

After the Regulation is officially published, plan members should be consulted regarding any amendments to provisions related to surplus assets. Amendments can only be made if they are opposed by less than 30% of plan members. For example, a change to the order in which surplus assets will be used will require a consultation. However, the planned enhancement of a benefit based on the provisions regarding the use of surplus assets would not require a consultation.

For the Previous component, many observers expected the share of contributions for deficits paid by the reserve to increase. No change was made to this provision and the share is still 50%.

The draft Regulation also confirms certain elements and provides clarifications regarding:

• Surplus assets
• Provisions for when an employer withdraws from a multi-employer plan
• Rules for deferring contributions, and
• Information to be disclosed in an actuarial valuation report and in statements sent to plan members

A 45-day period has been set aside for those who wish to comment on this draft. The Regulation will take effect after it is officially published. The proposed changes should not affect actuarial valuations as at December 31, 2022.

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Normandin Beaudry’s experts on the municipal and university sector are constantly on the lookout for changes in legislation so that they can keep you informed on developments that may affect your pension plans. Email us if you have any questions.