Our last post on the topic of Target Benefit Plan (TBP) PfADs was in early 2021, noting that temporary relief had been approved by the B.C. government. We also noted that a Working Group had been formed and was developing a long-term solution for the problem. We are pleased to report that, at long last, the new rules are final and take effect for valuations conducted as at December 31, 2022 and later. The details of the changes are included in an Order in Council approved on October 3, 2022, but the more informative piece is the BC Financial Services Authority’s Advisory notice which may be found here: https://www.bcfsa.ca/media/3012/download.
Why are the changes important?
As noted in the BCFSA’s Advisory, these changes are necessary to allow administrators of TBPs (typically a board of trustees or other representatives) to effectively manage their plans’ benefit levels in light of their unique risk characteristics (e.g., investment, demographic, assumption, and industry risks). Based on the current flawed rules, some plans have had to defer benefit improvements that would otherwise have been prudent, while in more extreme cases benefits have been reduced.
The changes will allow B.C.’s roughly 40 target benefit plans (TBPs) to control their destiny, so to speak, by establishing appropriate margins that are more suited to their plan’s needs.
It took some time, and a lot of effort, to get to this point. While flaws with the current rules were identified early on (as early as 2013, even before the current rules became law), they were magnified as interest rates continued to drop and plans continued to transition to investments that were not stocks or bonds. Lobbying efforts commenced in earnest in 2016/2017 and were spearheaded by a small but proactive group of large TBPs. Dozens of meetings were held with regulators and government officials and culminated with the formation of the Working Group in mid-2020 (not 2019 per the Advisory note).
The New PfAD
The BCFSA Advisory describes the new PfAD as 7.5% plus an additional amount to be set by the administrator. We prefer to think of it instead as the administrator now sets their own PfAD, which can vary by, for example:
- plan design,
- investment strategy,
- past and future service liabilities,
- different economic environments, etc.,
but the minimum PfAD is always 7.5%. That is how boards should approach setting the new legislated PfAD, supported by advice from their actuaries and a written rationale in their funding/benefit policies.
The BCFSA has advised that it is currently working on a Regulatory Guideline to supplement the legislative changes and set out their expectations for the development and documentation of this new PfAD. We expect that this guideline will focus on documentation of the outcomes that the boards wish to achieve while at the same time identifying risks and establishing how those risks will be mitigated.
In the meantime, many boards will be turning their minds to a more thorough evaluation of the risks they face, what changes might need to be made to their plan management strategies, and the documentation in their various written policies. Some boards might even choose to revisit their investment policies in light of the fact that the new PfAD is agnostic when it comes to asset mix. Regardless, in light of the new PfAD, boards will have more control and flexibility over their TBP’s benefit levels, but as we all know “with great power, comes great responsibility”.
There were a number of other technical changes included in the Order in Council. Briefly, they include:
- Enhanced communication to members of TBPs on their statements (annual and otherwise).
- Recognition that some negotiated cost plans may have contributions and benefits based on a percentage of pay versus dollars per hour. Unfortunately, the wording does not address other plan designs (where benefits could be a percentage of contributions).
- Additional requirements for the funding policy document (related to the PfAD change).
- Update to the CANSIM rate reference, used to set interest under the Regulation for various purposes (primarily on employee contributions).
- Effecting the phasing out of the temporary TBP PfAD relief that was previously enacted effective December 31, 2019.
- Other technical corrections.
Should you have any questions on the above, please feel free to contact your favorite G&B consultant; we are here to help.