Target Benefit Pension Plans: A New Option for Quebec Employers and Employees

On December 11, 2020, Quebec’s National Assembly adopted Bill 68, with certain amendments made to its original text, thereby enacting An Act mainly to allow the establishment of target benefit pension plans (Act).
 
The Act, which took effect on that date, provides for the establishment of a supplementary retirement savings option for Quebec workers by paving the way for the implementation of a new type of pension plan, namely a target benefit pension plan (TBPP).
 
As indicated by Quebec’s Minister of Finance, Éric Girard, upon the adoption of Bill 68, the TBPP is a pension plan that sits between a defined benefit pension plan and a defined contribution pension plan. As is the case for defined contribution plans, the employer contribution to a TBPP is limited to the amount stipulated in the plan, while risks associated with longevity and return on savings are borne by workers and retirees. Furthermore, like defined benefit pension plans, TBPPs offer their members benefits at a certain level; however, unlike defined benefit pension plans, TBPP benefits may be reduced according to the plan’s financial situation. 

TARGET BENEFIT PENSION PLAN CHARACTERISTICS

Since December 11, 2020, Quebec employers, employees and unions may establish a TBPP with the following characteristics:

• The obligations of the plan are to be borne by the plan’s members and beneficiaries

• The employer contribution is to be limited to that stipulated in the plan

• The plan must determine the benefit target to be used as a basis for determining the current service contribution

• The normal pension, as well as any benefit provided for in the plan, may be reduced due to insufficient contributions

• With some exceptions, only the members and beneficiaries are entitled to the surplus assets

• The plan may not be amended or terminated, directly or indirectly, unilaterally by an employer that is a party to the plan

It should be noted that an amendment was made to the initial bill, providing that a TBPP can only be established if eligible employees consent to their obligations under the TBPP. Where employees are represented by a certified association, such consent may be given by their union. For non-unionized employees, consent will be deemed given if fewer than 30 per cent of eligible employees are opposed to the establishment of the TBPP. The consent of employees who are eligible to participate in the TBPP, or that of their certified association, as the case may be, will also be required in the event of a plan amendment that increases member contributions, subject to certain exceptions set out in the Act.
 
The Act also provides that the registration of a TBPP with Retraite Québec must be made by the pension committee or, alternatively, by the person establishing the pension plan.

PROHIBITED PROVISIONS

The Act also prohibits certain provisions in a TBPP. For example, a TBPP may not include provisions:

• Establishing that the remuneration used to calculate a member’s pension corresponds to the average salary of that member’s last remunerated years or to the average of the member’s best remunerated years over a specified number of years

• Granting benefits subject to the termination of the plan

• Granting early retirement benefits that depend on a member’s number of years of employment or of credited service

According to the bill’s initial text, a TBPP could not include a provision that provided for the periodic increase of a member’s pension after retirement according to an index or rate specified in the plan. However, amendments made to the bill allow for the indexation of post-retirement pensions, but only based on a fixed rate provided for in the plan. 

FUNDING RULES

The TBPP funding rules state that:

• The current service contribution must be established according to the benefit target.

•  The plan’s liabilities must be equal to the value of the obligations arising from the plan, taking into account the service credited to the members, which are established considering any benefit adjustments made in relation to the target that result from recovery measures, the restoration of benefits or the appropriation of surplus assets.

•  An actuarial valuation must be carried out at the date of the end of the TBPP’s fiscal year, which must correspond to the calendar year. However, an exception is made for the first fiscal year, subject to authorization by Retraite Québec. An actuarial valuation report must be sent to Retraite Québec within the six-month period following the valuation date.

It should be noted that no amendment was made to the initial text with respect to TBP funding rules following the consideration process of the bill. 

RECOVERY MEASURES AND PROCEDURE FOR RESTORING BENEFITS

Under the Act, a TBPP’s text must include recovery measures applicable in the event of insufficient contributions, as well as a procedure for restoring benefits.
 
Recovery measures must not confer on the pension committee any discretion with respect to:

• The election of applicable measures.

• The order in which such measures are to be applied.

• How such measures are to be distributed among members (both active and non-active) and beneficiaries. The same principle applies to the conditions and procedure for restoring benefits.

Furthermore, separate recovery measures must be established for an insufficiency relating to service after the actuarial valuation date and an insufficiency relating to service credited at that date.
 
A TBPP may include any one of the following recovery measures or a combination thereof:

• An increase in member contributions

• An increase in the employer contribution (subject to limits set by the plan)

• A reduction in the benefits if the insufficiency of contributions relates to service credited at the valuation date

• A reduction in the benefit target if the insufficiency relates to service after the valuation date

Moreover, a recovery measure may not become effective before the day following the date of the actuarial valuation regarding which the report showed insufficient contributions but must become effective no later than one year after that day. This also applies to the conditions and procedure for restoring benefits. Of note, an amendment to the initial text of the bill allows for benefits to be reinstated before the plan's stabilization provision is fully funded, subject to certain conditions.
 
In addition, if a recovery measure may reduce a pension benefit the payment of which began prior to the measure’s effective date, it may not have an effect on amounts or benefits already paid.
 
It should be noted that amendments to a TBPP’s recovery measures, or to a TBPP’s conditions or procedure for restoring benefits, are strictly controlled and may only be carried out if fewer than 30 per cent of the TBPP’s members and beneficiaries are opposed to them. 

OTHER RULES SET OUT BY THE ACT

The Act also includes several provisions that set out rules applicable to multiple-group pension plans established by unions, the conversion of certain multi-employer pension plans into TBPPs, as well as special provisions for certain existing TBPPs in specific sectors (such as the pulp and paper sector).
 
For further information, please contact:

Natalie Bussière                        514-982-4080              
Catherine Gagné                       514-982-4085

or any other member of our Pensions, Benefits & Executive Compensation group.