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George & Bell Perspectives.

Target Benefit Plans: Use of Surplus

Target Benefit Plans: Use of Surplus

January 19, 2016. Category: Benefits, Firm News, Legislation, Pension and Benefit Plans. No Comments on Target Benefit Plans: Use of Surplus.
Written by Harry Satanove.

On August 12th last year, we posted an article on our blog “New Funding Rules for Target Benefit Plans”, in which we reviewed the new funding rules that will apply to the collectively-bargained multi-employer pension plans that elect to convert to target benefit plans. That article identified what we considered at the time to be a couple of flaws in the legislation. One of the big ones was the inability of these plans to apply surplus to the cost of benefits for current and future service (“current service cost”).

Since the date the article was posted, we have had discussions and have exchanged emails with the regulator, FICOM, who in turn, have been reviewing the legislation to determine how the new rules should be applied. We have now been advised by FICOM that the rules for funding the current service cost will be more favourably interpreted than we originally anticipated.

We noted in our earlier post that the contributions must be sufficient to fund the current service cost plus a provision for adverse deviation (“PfAD”). The PfAD is intended to protect the plan from adverse experience, and could be as high as 25% of the current service cost; depending on the plan’s allocation to equities, it could be even higher. While there is some temporary relief – this requirement will be phased in over three years – we still identified this requirement as a concern for plans that had contribution rates that barely exceed the current service cost, but are very well funded on a past service basis.

In our earlier post, we opined that based on our reading of the regulations, a plan’s negotiated contributions must be sufficient to fund the current service cost plus the PfAD, even if the plan had substantial surplus (in this specific usage, the regulations use the term “accessible going concern excess”). We have now been informed that this is not the case – if a plan has a surplus, that surplus may be applied to top up the negotiated contributions so that the contributions are equal to the current service cost plus PfAD.

It is possible that this may be clarified in writing by FICOM at some future date in a bulletin or similar guidance.

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