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George & Bell Perspectives.

B.C. Target Benefit Plans: PfAD Suspension Effective December 31, 2019

B.C. Target Benefit Plans: PfAD Suspension Effective December 31, 2019

January 6, 2021. Category: Actuarial, Pension and Benefit Plans, Pension Plans. Comments Off on B.C. Target Benefit Plans: PfAD Suspension Effective December 31, 2019.
Written by Greg Heise.

While it may have gotten lost in the run-up to holiday season, the Order in Council passed on December 18, 2020 to suspend the application of the PfAD to B.C.’s roughly 40 target benefit plans (TBPs) and was a welcome turn of events from the normal course of things during 2020.

In a nutshell, this temporary suspension means that those plans that would have otherwise needed to reduce benefits due to not being able to demonstrate contribution sufficiency (in light of the egregiously high level of the PfAD) need not worry – at least not for now. The temporary suspension applies for the three-year period following any actuarial valuation filed with an effective date of December 31, 2019 up to December 30, 2022. You can file multiple times during this period too. But, all things considered, the government, aided by the Working Group it established last summer, now has 2 years to come up with a long-term fix for this issue which has plagued TBPs over the past 5 years.

The BC Financial Services Authority has outlined the details of the temporary suspension here: https://www.bcfsa.ca/pdf/Pensions/RegulatoryStatement/PENS20-005.pdf

What’s Next?

This change is not immediately impactful for many TBPs in that they may already be able to demonstrate contribution sufficiency despite the high PfAD. But what is important is that this suspension is the first formal recognition that the existing PfAD rules are flawed and the government is willing to fix them. The Working Group, consisting of government, regulatory, and industry representatives (including Greg Heise!), is now preparing for what the revised PfAD should be in the long-term. We are hopeful that the new structure will offer greater flexibility to TBPs to better manage their own funding in the context of the particular circumstances of their plan.

Timing is Important

Because the temporary suspension is only granted under the condition that the particular TBP not improve benefits, it is important that we get to a long-term solution as quickly as possible, hopefully well in advance of the end of 2022. Despite declining interest rates, many B.C. TBPs are currently faced with very well-funded plans. Even so, sponsors have been loathe to grant benefit improvements to plan members because the PfAD has been very high and, more importantly, unpredictable. Getting to a long-term solution to the PfAD quickly will allow these TBPs to move ahead with long-term plan design decisions. Maintaining excessive surpluses in pension plans is not helping British Columbians who could be putting this money to better use.

In the meantime, TBP sponsors would do well to re-examine their investment/benefit/funding policies, along with actuarial methods and assumptions, to ensure they are prepared for a scenario where they could have more control over the level of PfAD or margin they maintain in their plans. These actions will then allow them to make long-term decisions regarding their plan design (and – funding permitting, benefit improvements) once the new PfAD structure is known.

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