In May 2021, the Canadian Association of Pension Supervisory Authorities (CAPSA) released updated Guideline No. 7, Pension Plan Funding Policy Guideline. CAPSA was engaged in a consultation process in the fall of 2020 and the updated Guideline is the result of that consultation process.
The updated Guideline No. 7 maintains the useful and clear guidance on pension plan funding policies (including format, content and specific issues such as use of funding excess). However, the updated guideline also contains provisions that relate specifically to target benefit plans. Guideline No. 7 reflects the unique challenge for target benefit plans in which benefit reductions are possible if funding objectives are not met.
Therefore, Guideline No. 7 is an important read for any pension plan sponsor, but with the most recent revisions, target benefit plan administrators should pay particular attention. For the administrators of target benefit pension plans, Guideline No. 7 also provides useful guidance on the following issues:
- The important connection between funding and benefit levels given that benefit levels can change if funding objectives are not met;
- The importance of communicating with target benefit plan members in light of the possibility that the benefit levels can change and the fact that contributions to the plan are usually fixed;
- The importance of determining what the funding objective for the plan actually is. This will require discussion with the plan administrator. For some plans “benefit stability” is the critical objective, while for others providing the “best possible benefit” is the primary objective. Whatever the funding objective is, it should be determined and well understood by the plan administrator so that the funding approach and funding policy appropriately reflect that funding objective; and
- How funding risks can be managed in the target benefit environment including through the use of margins and stress testing, all with a view to meeting the plan’s funding objective.
We strongly recommend that plan administrators of target benefit plans:
- Familiarize themselves with the updated Guideline No. 7;
- Review their own funding policies in light of the guidance in Guideline No. 7; and
- Invite their consultants to discuss the contents of Guideline No. 7 with them at their next meeting to ensure that they are comfortable with the application of Guideline No. 7 to their plans.
If you have any questions about updated Guideline No. 7, please contact a member of our Pensions and Employee Benefits Group for more information.
Lawson Lundell's Pension and Employee Benefits Law Blog provides updates on the most recent legal developments impacting pension and employee benefit plans. We cover a range of topics, including recent case law and changes to relevant provincial and federal legislation.
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