Alert on Alberta Solvency Funding Relief

Written By Sean L. Maxwell and Susan G. Seller

The Alberta government has finalized the regulatory amendments supporting its temporary solvency funding relief package.

This relief is available to sponsors of Alberta registered pension plans filing actuarial valuations with a review date between September 1, 2008, and December 31, 2009. The provisions are amongst the most extensive provided by any Canadian government in response to the precipitous market declines of late 2008/early 2009.

Solvency Funding Moratorium

Administrators of single employer plans or multi-unit pension plans may seek consent for an exemption from making solvency payments for a period of three years after the effective date of the filing. An application must be made subject to the following conditions:

• Confirmation that no benefit improvements will be made while the moratorium is in effect;
• Previously established unfunded liabilities must be amortized over the lesser of the remaining amortization period and 10 years;
• Newly established unfunded liabilities must be amortized over 10 years;
• On making benefit payments, a “top up” payment equal to the transfer deficiency must be made to the plan prior to paying out the benefit or included in the next remittance of contributions;
• Annual member statements must include a statement that the plan has a moratorium on making solvency deficiency payments; and
• The plan complies with any other conditions set by the Superintendent of Pensions.

Within 180 days of the conclusion of the moratorium, the administrator must file an actuarial valuation and fund any solvency deficiency over a five-year period.

Extended Amortization Periods

Administrators may elect instead to apply for permission to extend the amortization period for new unfunded liabilities (i.e., liabilities created between the date of the last filed valuation and the new valuation report) from five years to 10 years. Previously identified solvency deficiencies (i.e., solvency deficiencies which predate the market meltdown) must continue to be amortized over the remainder of the five-year schedule.

Any such application must be made subject to the following conditions:

• For purposes of calculating solvency assets, the actuary may include the actuarial present value of 10 years worth of going concern unfunded liability specialty payments;
• On making benefit payments, a “top up” payment equal to the transfer deficiency must be made to the plan prior to paying out the benefit or included in the next remittance of contributions;
• Annual member statements must include a statement that the plan has a moratorium on making solvency deficiency payments; and
• The plan complies with any other conditions set by the Superintendent of Pensions.

Unlike administrators opting for a solvency funding moratorium, administrators choosing to extend an amortization period may make benefit improvements, but any solvency deficiency created as a consequence of benefit improvements must be amortized over five years.

Superintendent's Conditions

In order to balance the relief provided by the new regulation, the Superintendent is imposing additional requirements on administrators seeking such relief to protect member interests. If the Superintendent approves the actuarial valuation report, the requested relief will be granted.

Economic and demographic assumptions used to calculate going concern liabilities will be subject to minimum levels of conservatism. While actuaries maintain some discretion, the assumption set, in aggregate, must be comparably conservative to baseline assumptions which include a discount rate of 6.5 percent or less, and a UP94 mortality table. Assumptions must meet the requirements of the Canadian Institute of Actuaries' Final Standards for Independently Reasonable Assumptions, despite the fact that the standard is not effective until March 1, 2009.

If going concern assets are to be calculated using a smoothing method, the adjustment may not result in asset values greater than 115 percent of the market value of the assets at the review date. The actuarial valuation report must also outline the expected growth in solvency liabilities over the first year following the valuation date.

The Superintendent will also consider certain of the following items when reviewing valuation reports and applications for funding relief:

• Liability valuation method;
• Use of an explicit Provision for Adverse Deviation;
• Asset/liability matching;
• Plan demographics;
• Immunization of pensioner liabilities;
• Variations in discount rate between active and inactive members;
• Plan expense policy;
• Differential between discount rate and the salary escalation assumption (for final average earnings plans); and
• Comparison of actual plan experience to the economic and demographic assumptions.

Other Items

Plan administrators will continue to have the opportunity secure some or all of the plan's solvency deficiency through a letter of credit. Administrators will also be able to use the revised standards of practice for pension commuted values when calculating solvency liabilities for all valuations with an effective date on and after September 1, 2008, despite the fact that such standards are not effective until April 1, 2009. Existing standards of practice must continue to be used to determine commuted values for members terminating prior to April 1, 2009.

Next Steps

Alberta is among the first jurisdictions in Canada to finalize the terms of its temporary solvency funding relief for defined benefit pension plans in response to the 2008 market decline and the current economic situation. Proposed solvency relief measures are currently pending in a number of provinces, including Ontario, as well as federally. Pension plan administrators in Alberta that wish to apply for the solvency funding moratorium must do so by December 31, 2009. Alternatively, plan administrators may elect to apply by such date to extend the amortization period for new solvency deficiencies under the plan.