Archived - Backgrounder – Regulatory Impact Analysis Statement

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Regulations Amending Certain Regulations Made Under the Pension Benefits Standards Act, 1985

Executive summary:

Issue: Pension plan funding volatility in recent years, combined with the challenges posed by the economic environment following the 2008 global financial crisis, resulted in the Government implementing funding relief regulations and special regulations for specific pension plan sponsors. This experience points to the need for changes to the legislative and regulatory framework to make funding requirements less sensitive to short term changes in financial conditions, while at the same time providing additional protections to plan members and retirees.

Description: The amendments to the Pension Benefits Standards Regulations, 1985, would:

  • permit plan sponsors to secure properly structured letters of credit in lieu of making solvency payments to the pension fund, up to a limit of fifteen per cent of plan assets;
  • require the plan sponsor to fully fund pension benefits on plan termination;
  • void any amendments to a pension plan that would reduce the solvency ratio of the pension plan if the plan’s solvency ratio would be below a ratio set out in regulations; and
  • permit sponsors, plan members and retirees of a distressed pension plan to negotiate their own funding arrangements to facilitate a plan restructuring.

Cost-benefit Statement: The proposed amendments would provide plan sponsors with the tools to better manage their funding obligations, and give them greater flexibility to fulfill their obligations and to protect the interests of plan members and other beneficiaries. In doing so, the proposed amendments would reduce the probability of having to adopt other temporary regulations.

Only modest additional costs are anticipated in administering the amendments. In addition, some costs relating to obtaining a letter of credit would be assumed by the plan sponsors that sought relief through this measure.

Business and consumer impacts: The amendments to the Pension Benefits Standards Regulations, 1985 recognise the potentially negative impact of funding pension deficiencies on the sponsor, while at the same time providing protections to mitigate risks to plan members and retirees.

Domestic and international coordination and cooperation: Provinces may look to the federal rules when reviewing or making changes to their rules.


Under the Pension Benefits Standards Act, 1985 (the “Act”), the federal government regulates private pension plans covering areas of employment under federal jurisdiction, such as telecommunications, banking and inter-provincial transportation.  The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of such plans.  At March 31, 2009, OSFI supervised some 1,380 pension plans or about seven per cent of all pension plans in Canada, representing about twelve per cent of trusteed pension fund assets in Canada; 449 of the federal plans were defined benefit pension plans.

Under the Act and the Pension Benefits Standards Regulations, 1985 (the “Regulations”), minimum standards are set for a number of areas, including for funding, investment, membership eligibility, vesting, locking-in, portability of benefits, death benefits and members' rights to information.  For defined benefit pension plans, the Act requires that promised benefits be funded in accordance with the standards provided for under the Regulations.

Recent Challenges and Government Action

Pension plan funded levels have experienced much volatility in recent years.  In the early to mid-2000s, a sharp decline in long-term interest rates along with changes in actuarial standards, such as the longevity assumptions, resulted in increased plan liabilities.  Combined with poor investment returns, these factors led to many plans being underfunded on a solvency basis.  More recently, the 2008 global credit crisis led to a sharp decline in global equity markets, which further reduced the funded status of federally regulated private pension plans.

To address the pressure that increased funding requirements put on plan sponsors, the Government adopted two temporary Solvency Funding Relief Regulations (the “2006 and 2009 Regulations”).  The 2006 and 2009 Regulations provided solvency funding relief by allowing plans to extend their solvency funding payment schedule from five to ten years, subject to the condition of either members’ and retirees’ consent, or securing the difference between the five- and ten-year payment schedules with a letter of credit. These measures provided for the solvency deficiencies of federally regulated defined benefit pension plans to be addressed in an orderly fashion while providing safeguards for pension benefits.  In addition, the Government also brought into force special regulations for two specific sponsors with the Canadian Press Pension Plan Solvency Deficiency Funding Regulations (2009), the Air Canada Pension Plan Funding Regulations, 2009 and the Air Canada Pension Plan Solvency Deficiency Funding Regulations (2004) in order to help these entities deal with their own specific challenges to funding their pension plans.

The existence of the temporary solvency funding relief measures and special regulations points to the need to improve the legislative and regulatory framework respecting federally regulated private pension plans on a permanent basis.

On October 27, 2009, the Government announced a series of proposals to improve the legislative and regulatory framework respecting federally regulated private pension plans.  Divided into five main themes, the announcement notably proposed to make it easier for participants to negotiate changes to their pension arrangements and to allow sponsors to better manage their funding obligations, while at the same time protecting member benefit security.  To put these measures into effect, legislative and regulatory changes are required.

In respect of legislative amendments, the Jobs and Economic Growth Act, adopted by Parliament in July 2010, included amendments to the Act which implemented a number of the announced pension proposals, such as the enabling legislative provisions to permit letters of credit and void amendments, as well as those related to disclosure on plan termination.
In June 2010, a number of amendments to the Regulations, which did not require the Royal Assent of the Jobs and Economic Growth Act, were finalized. These amendments included:  1) the adoption of a new standard for establishing minimum funding requirements on a solvency basis that will use average – rather than current – solvency ratios to determine minimum funding requirements; 2) the introduction of a solvency margin which precludes plan sponsors from taking contribution holidays, unless the solvency ratio exceeds full funding plus a margin, which is set at a level of five percent of solvency liabilities; and 3) the removal of the quantitative investment limits in respect of resource and real property investments.

With the Royal Assent of the Jobs and Economic Growth Act, the Government is now proceeding with further regulatory changes.


The proposed regulatory amendments contain the details concerning a number of amendments made to the Act through the Jobs and Economic Growth Act (i.e. allowance of letter of credit, full funding on plan termination and the creation of the workout scheme). It would also put into force the void amendment provision in setting out the prescribed threshold for voiding plan amendments that would reduce the solvency position of the plan.

The proposed amendments to the Regulations would seek to achieve three main objectives.  First, amendments have been proposed to the Regulations to allow sponsors to better manage their funding obligations through the use of letters of credit in order to provide more flexibility in fulfilling their funding obligation. Second, a workout scheme for distressed pension plans would be established to facilitate the resolution of plan-specific problems that arise in circumstances where a particular plan sponsor cannot meet near term funding requirements. Finally, the requirement for full funding on plan termination and the void amendment regulations are directly designed to enhance benefit protection for plan members.

Overall, these amendments are proposed with a view to ensuring that the rights and interests of pension plan members, retirees and their beneficiaries are protected.


Letters of credit

Amendments to the Act passed in July 2010 permit employers to provide letters of credit instead of making required payments to a pension plan. The proposed Regulations would set out requirements and limits for letters of credit to be used to satisfy solvency payments.  

The proposed Regulations would allow plan sponsors to satisfy solvency payments up to a limit of fifteen percent of plan assets. Letters of credit could be reduced by the plan sponsor upon a return to fully funded status, subject to a five percent solvency margin remaining in the plan.  If the plan returns to full funding plus the solvency margin without factoring in the value of the letters of credit, any outstanding letters of credit would be allowed to expire as they would no longer be required.  The proposed amendments also set out that letters of credit would need to be properly structured to qualify as a solvency funding asset.  This includes what entity (e.g. banks and cooperative credit societies) could issue a qualifying letter of credit and ensuring that a letter of credit would be called in certain circumstances, such as insolvency, with a view to protecting benefit security.   

Requirement for full funding on plan termination

Existing pension regulations permit defined benefit pension plans to be less than fully funded provided that the plan sponsor is making required special payments.  This provides reasonable benefit security for plan members while providing plan sponsors with the flexibility to address any funding shortfall over a manageable period of time.  However, there is the possibility, under existing rules, that a pension plan could be terminated at a time when plan assets are not sufficient to pay the full amount of promised benefits. 

To remove this possibility, the Jobs and Economic Growth Act amended the Pension Benefits Standards Act, 1985 to require plan sponsors to fund any deficiency that exists at the date of plan termination, subject to the Regulations. The proposed amendments to the Regulations set out a payment schedule to fund the termination deficiency.  In particular, the Regulations would require that the solvency deficiency that exists at the time of termination be amortised in equal payments over no more than five years.  Unlike the solvency funding requirements for ongoing plans, the annual consolidation of payment schedules and the average solvency ratio method of determining solvency payments would not apply where a termination deficiency is being amortised. Annual actuarial reports and contributions following the plan termination would be required until all promised benefits are funded in full.

As with other required contributions to a pension plan, payments required under this schedule would be subject to the deemed trust provisions under subsection 8(1) of the Act.  As such, any contributions that are due but have not been remitted to the pension fund by the sponsor would be subject to a deemed trust and would thus have an enhanced status in bankruptcy proceedings.  If the sponsor were to become bankrupt at some point during the payment schedule to make up the termination deficiency, any payments that were not yet due according to that schedule would not be subject to the deemed trust provisions of the Act.  The amount of any remaining shortfall would then be considered an unsecured debt of the plan sponsor.

Void Amendments

Section 10.1(2) of the Act voids any plan amendment that would have the effect of reducing pension benefits accrued before the date of the amendment, or if the solvency ratio of the pension plan would fall below a prescribed solvency ratio level set out in the Regulations.  The latter provision aims at preventing significantly underfunded plans from implementing amendments if they would further reduce the plan’s funded position. 

The proposed amendments to the Regulations would prescribe that the solvency ratio level be set at 85 per cent. As well, they would stipulate that, to put into effect a plan amendment that would otherwise be voided under this provision, the sponsor could fund the benefit up front such that the amendment would not have the effect of lowering the solvency ratio of the plan.

Distressed Pension Workout Scheme

The proposed amendment would establish a workout scheme that provides a framework for parties of a pension plan sponsored by a distressed employer to put in place a negotiated settlement agreed to by members, retirees and the plan sponsor, which may, subject to the Minister of Finance’s approval, include a funding schedule different from what would be required by normal funding rules.  The workout scheme is intended to be used by plan sponsors who are legitimately at risk of immediate insolvency unless relief on pension obligations is forthcoming. 

The proposed amendments incorporate a provision in the framework for distressed plans to commence negotiations between the plan sponsor, members and retirees to come to their own arrangements respecting pension obligations in order to facilitate a plan restructuring. 

To trigger entry into the distressed pension plan workout scheme, a declaration by the Board of Directors stating that the plan sponsor does not anticipate being able to meet its upcoming special payment, would be required. Upon entry, the plan sponsor would be eligible for a short moratorium on special payments of up to nine months after the filing date of its valuation report.  The moratorium would be a ‘quick-response’ to immediate pressures, such as a severe cash crunch rendering a company unable to meet its payment obligations, while the negotiated workout would respond to longer term concerns. 

The parties would then be at liberty to negotiate changes to their pension arrangements, including the schedule of special payments, with representation provided for plan members, deferred vested members and retirees.  Where a workplace is unionised, the bargaining agent would provide representation, while in non-unionised environments and for retirees and other beneficiaries, the Act provides that a representative would be appointed for these groups by the Federal Court, with the consent of members and retirees required.

Consequential amendments
In 2007, as part of a package of proposed amendments to financial services legislation included in the Act to amend the law governing financial institutions and to provide for related and consequential matters, a change was made to the Insurance Companies Act (ICA) to clarify that the ICA governs risks insured in Canada by foreign insurers, whether or not the risks that they insure are Canadian risks. The proposed regulatory amendments are consequential to ensure that their provisions are consistent with this change (i.e. replacement of the expression “the insurance of risks in Canada” by “the insurance in Canada of risks”).  

In addition, consequential amendments have to be made to reflect the name change of the “Canadian Depository for Securities Limited” to the “CDS Clearing and Depository Services Inc.”.

Regulatory and non-regulatory options considered

Letters of credit

Allowing letters of credit to satisfy solvency payments would provide additional flexibility to sponsors in order to meet their funding obligations. As an alternative, the option of extending the solvency funding payment schedule from five to ten years was considered. However, such an extension of the period for an employer to fund its deficiencies could result in an increased probability of a plan terminating in an underfunded position. Therefore, extending the solvency funding target period to more than five years without any additional protections could negatively affect benefit security. Allowing the use of letters of credit for solvency funding purposes has the advantage of not compromising benefit security while providing additional flexibility to sponsors.

Requirement for full funding on plan termination

Maintaining the status-quo and not implementing full funding on plan termination has been considered.  Without a requirement to fully fund on plan termination, if a defined benefit pension plan is terminated for any reason, the plan sponsor is required to pay any outstanding payments to the plan, such as contributions that have been deducted from employees but not yet paid into the plan, and/or employer contributions owing but not yet remitted. This provides a certain level of security of benefits in case of a plan termination. However, there is the possibility under existing rules that a pension plan could be voluntarily terminated by the sponsor at a time when plan assets are not sufficient to pay the full amount of promised benefits.

In contrast to maintaining the status-quo, amending the Regulations to require full funding of pension benefits on plan termination would improve incentives for plan sponsors to fund their pension plans because it would remove the possibility of terminating a defined benefit pension plan as a way of not addressing a funding deficiency. Accordingly, this option would also enhance benefit security for plan members.

Void Amendments

Different thresholds for the solvency ratio level - higher or lower – than 85 per cent have been examined. A solvency ratio threshold of 85 per cent would represent a balanced option that is generally supported by stakeholders.  This threshold is based on the judgment that plans with solvency ratios below this level could generally be considered significantly underfunded to restrict plan benefit improvement and by the fact that plans with solvency ratios above this level do not necessarily compromise the level of benefit security in improving plan’s benefits.

Distressed Pension Workout Scheme

Under the current rules, no specific mechanism exists for a sponsor to facilitate the resolution of plan-specific problems that may arise in financially difficult circumstances. Accordingly, the current regulatory framework may impose near term funding requirements that cannot be reasonably met, which also may be detrimental to benefit security.

In the last few years, two major sponsors took advantage of special regulations which granted funding relief to facilitate the company’s ongoing operations in the near-term. With the same objective, temporary solvency funding relief regulations were also implemented to provide relief to a wider range of sponsors. Bringing forward temporary funding relief regulations or special company specific regulations can be inefficient due to the substantial resources that are required to put the regulations into effect.  Moreover, this can result in a lack of certainty over the regulatory framework and could be requested by many sponsors facing different situations.

The adoption of the pension workout scheme presents many advantages.  For sponsors, the benefit of the pension workout scheme would be similar to special regulations and funding relief regulations in allowing them more flexibility to meet their obligation. In addition, the workout scheme process would be more efficient than putting in place special regulations.  The workout scheme would also provide more equitable treatment of different sponsors and would set common principles that could be followed by any sponsor.  Furthermore, it would limit the need for special regulations since a clear scheme would be available for all sponsors. By facilitating the resolution of plan specific problems that could lead to plan termination, the distressed pension workout scheme would also be beneficial for members and retirees.

Benefits and costs


Overall, the key benefits of the amendments is that they provide sponsors with tools to better manage their funding obligations while giving them greater flexibility to fulfill their obligation to protect the interests of plan members and other beneficiaries. Additionally, with the workout scheme, the amendments would reduce the probability of having to adopt other temporary regulations.


Only modest additional costs are anticipated for OSFI to administer the amendments, as additional guidance will need to be issued to plan administrators.  Existing supervisory procedures and information systems will not require significant changes and are accommodated in the existing OSFI budget.

Plan sponsors may incur some costs in relation to the amendments depending on whether the plan sponsor chose to avail themselves of the additional options that the amendments propose. Specifically, costs in relation to obtaining a letter of credit would be assumed by plan sponsors.  In the case of agent Crown corporations, there could be a cost associated with the fee to the Government that would be comparable to the fee that would be paid to obtain a letter of credit.

There will be no direct or indirect cost to beneficiaries of pension plans. 


Letters of credit

Amending the Regulations governing the use of properly structured letters of credit would permit employers to provide increased security to plan members in the event of, for example, insolvency, while providing greater funding flexibility to plan sponsors. It aims to ensure that a letter of credit would provide a level of security generally comparable to the payment of money into the pension fund. 

Full finding on plan termination

The requirement to fully fund pension benefits on plan termination is consistent with the policy view that promised benefits ought to be funded and paid. The proposed amendments would provide the plan sponsor with up to five years after the termination of the plan to make the necessary payments to fund the promised benefit, as requiring immediate payments could be too onerous in some cases.

Void Amendments

Plan members should have a realistic expectation of receiving promised benefits. It is consequently reasonable to apply restrictions and conditions on benefits improvements. While current Regulations require that pension plans make special payments to fund solvency deficiencies over 5 years, they do not restrict even significantly underfunded plans from making plan improvements that would further weaken the plan’s funded status. Putting into effect the void amendments provision with a prescribed solvency ration of 0.85 per cent would limit the ability to make benefit improvements in such situations and thus reduce the risk that the promised benefits will not be paid.

Distressed Pension Workout Scheme

In allowing a plan sponsor to negotiate an agreement with plan members and other beneficiaries in situations where funding requirements cannot be reasonably met, the pension workout scheme would facilitate a plan restructuring with a view to increasing benefit security.  In addition, it would provide some certainty in respect of the regulatory framework and would reduce the possibility of having to create special regulations.


On January 9, 2009, the Government released a discussion paper entitled “Strengthening the Legislative and Regulatory Framework for Private Pension Plans Subject to the Pension Benefits Standards Act, 1985.”  This was followed by a series of public meetings, led by Mr. Ted Menzies, Parliamentary Secretary to the Minister of Finance, in Ottawa, Halifax, Montreal, Toronto, Vancouver, Whitehorse, Edmonton and Winnipeg.  Concerned stakeholders were afforded the opportunity to make their views known to the Government by speaking at one of the public meetings or by making a written submission.  Although the deadline for written submissions was initially March 16, 2009, this was extended to May 31, 2009 based on the level of interest and stakeholder engagement.

The Government received a wide range of views during the consultation.  Over 200 unique submissions were made on behalf of a range of stakeholders, including plan sponsors, industry associations, pension actuaries, members of the legal profession, labour unions, pensioner organisations and plan members.   In addition, dozens of individuals made their views known at the various public meetings.  The views expressed through the public meetings and consultation paper responses regarding defined benefit plans were diverse in areas such as solvency measurement and funding, benefit security and investment strategies. The proposed amendments incorporate, in a balanced fashion, comments and suggestions that were made by these various stakeholders.

Implementation, enforcement and service standards

OSFI’s current supervisory processes, which include conducting examinations, regular reporting by plan administrators and risk assessments, will enable OSFI to administrator the amended Regulations.  The Superintendent has the authority to issue a direction of compliance to the administrator of a pension plan, an employer, or any person to ensure that the funding requirements are being met.

The proposed amendments would not require any significant change in OSFI procedures or significant additional personnel resources.


Leah Anderson
Financial Sector Division
Department of Finance
L’Esplanade Laurier, 20th Floor, East Tower
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-6516
Facsimile:  613-943-8436