Alberta Introduces Significant Pension Reforms Effective September 1, 2014
Date: November 11, 2014
On July 22, 2014, the government of Alberta passed the supporting regulations to the province’s new Employment Pension Plans Act (the “EPPA”), legislation enacted in December 2012 following recommendations from a 2008 report by the Alberta and British Columbia Joint Expert Panel on Pension Standards regarding pension reform in those two provinces. The new EPPA and accompanying Employment Pension Plans Regulation (“EPPA Regulations“) came into force on September 1, 2014.
The new EPPA is a complete overhaul of the existing pension legislation in Alberta, and both repeals and replaces the prior Employment Pension Plans Act. This reform requires significant alterations to the plan texts and administrative practices of pension plans registered in Alberta and pension plans registered elsewhere with members whose pension benefits are subject to Alberta pension legislation.
Plans must be administered to reflect the new legislative requirements from September 1, 2014 onwards, whether they are registered in Alberta or not. Amendments to plans registered in Alberta must be filed with Alberta’s Superintendent of Pensions (“Superintendent”) by December 31, 2014.
In this FTR Now, we highlight key changes to Alberta’s minimum standards pension rules.
KEY EPPA REFORMS
The reforms introduced by the new EPPA and supporting EPPA Regulations are broad and affect individual member rights, administration practices, funding and plan design. As identified below, some of the changes are required, while others are optional.
KEY MEMBER RIGHTS CHANGES
The following highlighted changes will affect all members subject to Alberta’s pension legislation, regardless of whether the pension plan is registered in Alberta:
The EPPA now requires that a member be immediately vested in his or her pension entitlement. There is no longer a two-year delay until a member becomes entitled to the employer-funded portion of his or her pension benefits.
EXCEPTIONS TO LOCKING-IN
Associated with the introduction of immediate vesting is a change to the small benefit unlocking threshold. Under the new EPPA, benefits with a lump sum value that is not more than 20% of Year’s Maximum Pensionable Earnings (“YMPE”) can be unlocked, regardless of the length of time it takes for the member to accrue that amount of benefit. The ability to unlock a benefit in the case of a defined benefit (“DB”) pension where the annual pension is less than 4% of YMPE has been eliminated.
In addition, all plans must permit unlocking due to shortened life expectancy and for deferred members who have become non-residents of Canada.
A pension plan must also provide that an unlocked lump sum can be transferred to a registered retirement savings plan (“RRSP”).
PRE-RETIREMENT DEATH BENEFIT
The minimum pre-retirement death benefit is 100% of the commuted value of the member’s benefit for all service. If the benefit payable to a surviving spouse is locked-in, the plan can force the surviving spouse to transfer it out of the plan.
New content must be added to member booklets and plan summaries, as well as the annual, termination, retirement and death statements.
There are also new required communications, including the following:
- an annual statement to retired members (but not deferred members); and
- a statement notifying members of changes to contributions or benefits (the adverse amendment notification that existed under the prior EPPA has been eliminated).
Some of the timing requirements for the various member communications, including plan summaries, have been adjusted. For example, a plan administrator is not required to provide a retirement statement until the member has applied and given the administrator all of the necessary information.
The number of prescribed spousal waiver forms has increased to reduce confusion that arose when one form could be used for more than one purpose.
The new content and forms must be in effect as of December 31, 2014.
DISCLOSURE OF PLAN INFORMATION
Spouses are now included in the list of individuals who are entitled to request information and documents from a pension plan administrator.
The new EPPA Regulations also expand the information that may be requested by listed persons to include the record that authorizes the establishment of the pension plan (e.g. board resolution), the plan’s governance policy and the plan’s funding policy.
New rules on the division of pension on marriage breakdown have been developed. Of note, two new disclosure statements are now required: (i) an initial statement of the value of the benefit to be used by the parties in negotiating the pension split, and (ii) an option statement for the spouse to determine how the benefit will be paid once the divorce order or separation agreement is filed with the plan administrator.
Also, the fees that a plan administrator may charge for a pension division under these new provisions have doubled.
The new EPPA allows a plan to offer phased retirement, which permits a member in certain circumstances to simultaneously work on a reduced basis and receive a partial pension from the plan. Plans are not required to offer this option.
Plans have the option to provide for either mandatory enrolment or automatic enrolment with an opt-out clause. If a plan is amended to include automatic enrolment, the plan text must specify the time period within which an employee can opt out of membership. Certain conditions apply, including information that must be provided to a member and the minimum time period a member has to opt out of the plan.
Where a terminated DB or target benefit plan member elects a deferred pension, the plan text may provide that the determination of excess contributions will be calculated on that person’s subsequent pension commencement date.
FORCED PORTABILITY FOR DC PLANS
A plan text can be amended to require that a terminated member (or surviving spouse) elect to transfer his or her account balance if the only entitlement the member (or the surviving spouse) has to benefits under the plan arises under a defined contribution (“DC”) provision.
LIF-TYPE BENEFITS FROM DC PLANS
A DC plan can be amended to pay variable or life income-type benefits directly from the plan, which allows a member to use his or her account to produce retirement income without having to transfer the account out of the plan.
RECALCULATION OF COMMUTED VALUES
For both DB and target benefit plans, the commuted value must be calculated as at the date of the member’s termination of membership or death. Where payment of the commuted value is not made within 180 days after that calculation, the commuted value must be recalculated before the payment is made.
CHANGES AFFECTING PLANS REGISTERED IN ALBERTA
Many of the new EPPA reforms will introduce significant new compliance requirements for plans registered in Alberta. These changes include the following:
ESTABLISHING GOVERNANCE AND FUNDING POLICIES
All pension plans must have a governance policy, and all DB or target benefits plans must have a funding policy. The EPPA Regulations outline the topics that these policies must cover at a minimum.
The administrator of an existing pension plan must ensure that these policies are in place no later than August 31, 2015. The policies do not have to be filed with the Superintendent, but must be available upon request. A copy of the funding policy must be given to the plan’s actuary.
ADMINISTRATOR MUST PERFORM A REGULAR COMPLIANCE ASSESSMENT OF THE PLAN
A plan administrator must review the plan on an annual basis to assess the administration of the plan, including whether the plan meets the requirements of the EPPA, and is being administered in accordance with the plan text, governance, funding and investment policies. Performance of the staff involved in plan administration is also to be assessed. The assessment must be in writing and kept on file, but does not need to be filed with the Superintendent.
The first assessment is not required to be completed until the second plan year after the new EPPA comes into effect, and must be completed annually thereafter. In other words, if a plan’s fiscal year is the calendar year, the first assessment must be performed by December 31, 2016, and then annually thereafter.
CHANGES TO ACTUARIAL VALUATION FILING DEADLINES
An actuarial valuation must be performed at least once every three years as of the plan’s fiscal year end, unless the plan text specifies a different review date. Once a valuation date has been set, it cannot be changed for at least nine years.
Significantly, regardless of the plan’s funded status as of the last valuation date, a new report must be filed before the next scheduled valuation date if an event occurs that materially affects the funding of the plan (either positively or negatively), such as a plan amendment, the sale or closure of part of the business, or a significant drop in the market value of plan assets.
Triennial actuarial valuations and cost certificates are now due no later than 270 days (or nine months) after the valuation date. Contributions must continue under the old report until the new report is filed.
Partial wind up valuation reports are no longer required due to the elimination of partial wind ups coinciding with the introduction of immediate vesting.
Other changes may serve to facilitate plan administration. These include measures dealing with the following:
AUDITED FINANCIAL STATEMENTS
The threshold for the requirement to file audited financial statements for a DB pension plan has increased from $3 million to $10 million in assets. Pension plans that have only DC benefits will no longer be required to file audited financial statements. However, the Superintendent has the authority to request year end account statements from the fundholder of a DC plan.
The EPPA Regulations provide the rules for transferring missing member benefits from a pension plan to the unclaimed personal property fund administered by the Alberta Treasury Board and Finance.
There are also new filing fees and filing forms of which plan administrators need to be aware:
Filing fees payable when registering a new pension plan and associated with the filing of an annual information return are changing to ensure that the regulatory costs of the Superintendent’s office are fully recovered. The fees will be adjusted annually.
The filing fee amount will be based on total plan membership, rather than in respect of active members only. The minimum fee has increased from $200 to $250, and the maximum fee has increased from $20,000 to $75,000. The per-total-member-fee will be published on the Superintendent’s website by September 30 of each year, and will apply to plan fiscal year ends starting on October 1 of each year (the date following the annual publication of the fee).
When registering a new pension plan or filing an amendment to an existing one, new prescribed forms must be used. These forms include a statement by the plan administrator certifying that the documents submitted for registration comply with the requirements of the EPPA.
NEW PLAN DESIGN AND FUNDING OPTIONS
The EPPA amendments introduce new provisions to facilitate the implementation of target benefit plans and jointly sponsored pension plans, and to address the possibility of “trapped” surplus inside a DB plan.
SOLVENCY RESERVE ACCOUNTS
In an attempt to address the concerns of some plan sponsors about the limited ability to access excess funds contributed to a DB pension plan fund (the “trapped capital” problem), the new EPPA permits the creation of a solvency reserve account (“SRA”).
The SRA is a separate fund into which solvency deficiency special payments are made instead of to the plan’s main pension fund. If a plan elects to establish a SRA, the employer will have greater ability to withdraw actuarial excess (i.e. surplus) on an ongoing basis.
The Superintendent’s consent is required before the funds can be withdrawn from the SRA, but it is intended that any actuarial excess (i.e. surplus) withdrawn from the account will not be subject to trust law restrictions on withdrawals. In addition to a limit on the amount that can be withdrawn and a requirement to maintain a specified cushion, the plan vcannot have an unfunded liability and the withdrawal of the accessible actuarial excess cannot create an unfunded liability. After a withdrawal of the assets from the SRA, members must be notified of the withdrawal on the next annual statement.
If a plan sponsor wishes to establish a SRA for a plan, it should consider whether a new funding agreement that is separate from the main funding agreement is necessary or desirable.
DEFAULT INVESTMENT OPTION IN DC PLANS
The default option for DC plan members who do not provide investment instructions must be either a balanced fund or a target date fund.
If the fundholder agreement specifies the default option, then the agreement must be amended to comply with these new requirements by December 31, 2014. The administrator must advise the fundholder as to which option the administrator wishes to use. If the fundholder agreement does not specify a default investment option, procedures must be changed to provide for one of the prescribed default options, as selected by the plan administrator.
TARGET BENEFIT PLANS
The EPPA now contains provisions explicitly authorizing and regulating target benefit plan designs as an alternative to the traditional DB plan. The EPPA Regulations outline the funding requirements for a plan with a target benefit provision, and various other sections of the EPPA and the EPPA Regulations were amended to reflect this new design. This option is not restricted to plans in a collectively bargained environment, and target benefits plans do not have to be jointly governed. The amendments do not allow a plan to convert existing DB benefits to target benefits.
JOINTLY SPONSORED PLANS
It is also now possible to establish a “jointly sponsored plan” (“JSP”) under the EPPA. Similar to the concept that has existed in Ontario for several years, under a JSP, the participating employer and the active plan members share responsibility for funding benefits under the plan, and also share in the administration, investment, funding and governance of the plan. Benefits in a JSP can be reduced with the consent of the Superintendent in certain circumstances.
The EPPA Regulations prescribe the criteria a plan must meet in order to be classified as a JSP, including that the plan must be administered by a board of trustees (or similar body acceptable to the Superintendent), and at least 50% of the trustees must be individuals appointed by plan members.
NEW REGULATOR PUBLICATIONS
To assist with the plan amendments and policies, Alberta Treasury Board and Finance released EPPA Update 14-03, “New Legislation – Summary of Changes,” which provides plan administrators and service providers with a brief summary of the changes in the EPPA Regulations and how they relate to the new EPPA. Additionally, EPPA Update 14-02, “New Legislation – Administrative Information and Checklists,” provides a checklist for the creation of documents and amendments to existing plan-related documents that will be required to bring the plan into compliance with the new legislation.
The Superintendent’s office will also be replacing the Policy Bulletins currently on its website with a series of Interpretive Guidelines, which will address topics formerly addressed under the Policy Bulletins and also topics based on the new EPPA requirements. The prior Policy Bulletins ceased to be effective on August 31, 2014.
As the Superintendent’s office develops these new Guidelines, it will post them online in draft form for a 60-day consultation period. All submissions received by the end of the consultation period will be reviewed and any changes and clarifications that are necessary will be made. A final version of each Guideline will be posted. To date, these draft Guidelines have included topics such as plan administration, unlocking of pension benefits and the division and distribution of pension benefits on marriage breakdown.
BILL 10 AND BRITISH COLUMBIA PENSION REFORM
On April 16, 2014, Bill 10, the Employment Pension (Private Sector) Plans Amendment Act (“Bill 10”), was introduced in the Alberta Legislature, and proposed several amendments to the new EPPA, such as the addition of provisions supporting the conversion of existing DB plans to target benefit plans for past service. However, on September 18, 2014, the Alberta government prorogued until November 2014, bringing all business and proposed legislation on the Order Paper to an end, including Bill 10. The Alberta government announced that it does not intend to re-introduce Bill 10 when the new session commences.
Additionally, British Columbia has also amended its pension legislation with the intent of harmonizing its rules with the Alberta rules. Regulations to support British Columbia’s pension reform are pending and the date for their release is not yet known.
Since the amendments to the EPPA are extensive, it is not possible to cover all of the details in this FTR Now. Please contact any member of our Pension, Benefits & Executive Compensation Group if you would like more information about the impact of these changes on pension plans registered in Alberta or on plans registered in another jurisdiction, but who have members employed in Alberta.
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