On June 20, 2024, in a fortunate turn of events, the Government of Alberta adopted long-awaited changes to the calculation of the Provision for Adverse Deviation (PfAD) applicable to target benefit provisions under pension plans registered in the province. These changes bring Alberta’s target benefit plan (TBP) PfADs in line (for the most part) with those applicable to B.C.-registered TBPs. The changes were effected by Order-in-Council 181/2024 via the Employment Pension Plans Amendment Regulation. Coincident with these changes, the Superintendent of Pensions issued EPPA Update 24-01 and draft Interpretive Guideline #22. The rest of this memo addresses the background and reasoning behind the changes, our views, and recommended next steps for sponsors of affected plans.
Background
In 2020, a Working Group was convened to explore alternatives for plan administrators to address concerns about the size and volatility of TBP PfAD funding requirements. As the existing rules were effectively the same in both Alberta and B.C., the Working Group was comprised of representatives from both Alberta’s and B.C.’s pension regulators, Ministries of Finance, and were joined by industry experts (for the most part, actuaries practicing in the multi-employer plan space). Following the Working Group’s recommendations, B.C. proceeded quickly with temporary relief followed by changes which took effect on December 31, 2022. Alberta has now adopted similar changes, bringing to completion the collaborative efforts of both provinces.
What has changed?
The amendment introduces a refined method for calculating the PfAD. The PfAD now consists of two components:
- A fixed 7.5%, and
- A supplementary percentage, equal to or greater than 0%. How this percentage will be determined must be clearly documented in the plan’s funding policy.
For those familiar with B.C.’s rules, the above looks the same. However, there are two key differences with Alberta’s approach:
- In B.C., a sponsor may have two separate PfADs, one for past service and one for future. Alberta will require that the PfAD be the same for both periods of service.
- Alberta has greater powers with respect to the supplementary percentage; specifically, the Superintendent must be satisfied that the percentage be sufficient to meet the plan’s funding objectives and cover material risks while complying with the conditions established under section 44 of the Act.
Commentary
In our view, the above differences are not material. If there is a compelling reason for a plan to require different PfADs for past and future service, there are other ways to accomplish this (via other margins or buffers). To be clear, only one PfAD will be allowed to be entered into Alberta Treasury Board and Finance’s online filing system.
And regarding the specific extra powers given to the Superintendent, it is our view that any pension superintendent can reject a valuation report if they feel the end result is insufficient to achieve the plan’s funding objectives or manage/mitigate risks. We already operate on this basis for every report we file.
Other Requirements
In addition to the above substantive changes, we also note the following:
- Regulatory expectations: administrators are expected to align their funding policies and actuarial valuation reports with the new PfAD definition to ensure transparency and consistency in managing pension plan risks.
- Documentation: Administrators must document how the PfAD aligns with the plan’s funding objectives and risk management strategies. This documentation should include:
- A rationale explaining how the PfAD supports the plan’s objectives and risk profile.
- A method or approach for determining the supplementary percentage, which could involve quantitative or qualitative assessments based on factors such as asset allocation, demographic trends, and investment policy.
Conclusions and Next Steps
B.C.’s experience with the new PfADs over the past year and a half is instructive. Benefit improvements have been commonplace for well-funded plans, having been freed up from the uncertainty that existed under the prior rules. We expect Alberta plans will exhibit the same pattern (although some Alberta plans have already been able to improve benefits given that the higher interest rate environment has taken the sting out of the old rules … at least for now).
By refining the PfAD calculation methodology and enhancing documentation requirements, the Government of Alberta aims to bolster the resilience of these plans against economic uncertainties while safeguarding the retirement benefits of plan members. Sponsors of Alberta-regulated TBPs must now go through the process of reviewing their risk profile in detail and establishing mechanisms within their policies to link those risks to an appropriate PfAD at each valuation date. This will take a little time if it is to be done right.
While the Superintendent has indicated in the guideline that expectations are that the plan’s funding policy, as well as all actuarial valuation reports filed after June 20, 2024, will reflect the new PfAD, they have also noted verbally (at the press conference announcing the change) that they will continue to allow plans to file their December 31, 2023 actuarial valuations based on the old PfAD rules (which is a practical approach and allows sponsors a little more time to set their new policy).
We are proud to have been an advocate for these pivotal changes and we look forward to working with our clients as we navigate this new regime together.