Alberta's Pension Legislation Undergoes Significant Changes.

Article by Jessica Bullock, [c] 2007, Blake, Cassels & Graydon LLP 

Originally published in Blakes Bulletin on Pension & Employee Benefits, February 2007

Far-reaching amendments to the Alberta Employment Pension Plans Act (EPPA) and the Employment Pension Plans Regulation (Regulations) are now proclaimed in force and should be noted by all members of Canada's pension plan community.

The amendments to Alberta's EPPA and Regulations, in force since August 10, 2006, implement some much-needed clarification to certain sections of the province's law. In some instances, the amendments ensure Alberta is in step with the standards in other jurisdictions. In other cases, the amendments have implemented formidable policy changes that will place Alberta ahead of other jurisdictions.

Several amendments to the legislation will require plan amendments. All required plan amendments must be submitted to the Superintendent before June 30, 2007. Most of the changes to the EPPA and Regulations were expected and publicized as part of a government consultation process to the issuing of the draft Act and regulatory changes in 2005. Blakes Pension & Employee Benefits Group prepared detailed submissions to Alberta Finance regarding the proposed amendments to the EPPA which are available on our Web site.

That said, in the case of one amendment - 50% unlocking for members over age 50 - this is the first the industry has learned of the change. Also notable is the exclusion of letter of credit funding rules that the December 2005 draft amendments had originally proposed. Alberta Finance now intends to prepare a separate amendment for letters of credit at a later date. The key changes to Alberta's pension legislation include:

1. LIF-Like Payments from DC Pension Plan. As permitted by recent changes to the Income Tax Act, DC plans can provide LIF-like payments directly to plan members. The new arrangements are to be known as DC Retirement Income Accounts (DC RIAs). This may be cost-effective for certain, large DC plans where such a system would save members the costs associated with transferring their money to a life insurer or LIF issuer following termination of employment.

2. 50% Commutation for Members Over Age 50. The Regulations now permit members of pension plans and LIRA owners over age 50 who are transferring their benefits to a LIF, annuity or DC RIA at retirement, to elect on a one-time basis to unlock up to 50% of the value. Waivers will be required where spousal entitlements are involved. Individuals over the age of 50 with existing LIFs or DC RIAs may take advantage of the unlocking rule until December 31, 2007. Otherwise, unlocking will only be permitted upon termination over age 50 before money is paid to a retirement income product. The unlocked funds may be taken in cash, less withholding tax, or rolled over into an RRSP or RRIF. Plan sponsors will be required to notify members of the 50% unlocking option.

3. Elimination of Locked-In Retirement Income Fund (LRIF) and Changes to Life Income Fund (LIF). Alberta has followed the lead of several other provinces and has eliminated Locked-In Retirement Income Funds (LRIFs). Existing LRIFs will be converted to LIFs on December 31, 2007, however, LRIF owners have the option of purchasing an annuity with the LRIF. The LIF rules have also been amended to discontinue the requirement for annuities at age 80.

4. Locking-In Addenda. Alberta now requires RSP and RIF issuers to use a prescribed locking-in addendum instead of permitting them to draft their own interpretations of the LIRA and LIF regulations for Superintendent approval. All financial institutions currently on the Superintendent's list of authorized issuers of LIRAs and LIFs must complete a new form (Form 42) under which they warrant compliance with the mandatory addenda rules. The new addenda must be attached to all existing contracts as well as newly established contracts.

5. Unlocking for Non-Residency and Financial Hardship. Alberta now permits unlocking where a member or spouse has ceased to be a Canadian resident. Amendments to the temporary financial hardship unlocking provisions in the Regulations have been made permanent, subject to a maximum of two applications per year. There are no changes to the rules permitting unlocking where a member has a shortened life expectancy.

6. Pension Partner Waiver Requirements. The post-retirement spousal waiver rules have been amended to permit pension partners (opposite or same-sex spouses) to waive the minimum 60% survivor pension separately from the waiver of any balance of guarantee benefit. Waivers would have to be signed before the member's death. In addition, the Regulations now permit waiver of the pre-retirement death benefit for the first time, which is currently allowed in several other provinces. The new pre-retirement waiver rules also confirm that a pension partner who signs the waiver cannot be designated as a beneficiary for any lump sum that becomes payable as a result of the waiver.

7. Adverse Amendments. Prior notice of "adverse amendments" to plan members and others with entitlements will now be required. The Regulations describe "adverse amendments" as being those that negatively affect a person's entitlement to a benefit or increases the cost to the member of securing a benefit. The notices must be provided with a summary of explanation, and must be provided at least 45 days before the effective date of the adverse amendment.

8. Marriage Breakdown. Alberta law now permits plan sponsors to divide pensions based on Matrimonial Property Agreements. Matrimonial Property Agreements are not required to be filed in Court.

9. Missing Members. Alberta has now followed some other jurisdictions in permitting plan sponsors to transfer the pension credits of lost members to the office of the Public Trustee upon plan termination.

10. Publicly Funded Pension Plans. The Regulations now permit the Superintendent to exempt public sector plans from the solvency funding rules (but not the requirement to prepare solvency valuations), provided the participating employers contractually agree to pay their share of any solvency deficiency in the event of a plan termination in an underfunded state.

11. Solvency Payment Suspensions for Specified Multi- Employer Plans. The new regulations will provide solvency relief to Specified Multi-Employer Pension Plans (SMEPPs). Most SMEPPs are collectively bargained multi-employer pension plans with each participating employer's contributions limited to a collectively bargained amount. Up to three years of solvency funding relief will be available on several conditions: i) amortization of unfunded liabilities over a period not exceeding 10 years; ii) annual filing of valuations would be required while the deficiency remains; and iii) no benefit improvements may be granted while the deficiency exists.

12. Plans for Connected Persons. Alberta now exempts plans that are Plans for Connected Individuals from the filing requirements of the EPPA. This change does not exempt such plans for "specified individuals" (as defined in the Canadian Income Tax Act) who are not connected persons.

13. Employee Classes and Benefit Formulas. New rules grant the Superintendent greater discretion to approve customized benefit formulae and plan membership rules within a plan. Historically, Alberta has listed permissible classes (including hourly employees, salaried employees, unionized employees, non-unionized employees, executives, managers, etc.) and required future benefit formulae to be identical within each class. The new rules will make it easier for plan sponsors to differentiate membership and benefits for sub-groups of employees and to use narrower criteria to distinguish them, provided the Superintendent approves the class and the differentiation. This move to generate flexibility in employee classes is intended to facilitate bona fide business decisions.

14. Force Out Provisions. Defined contribution plans can now be amended to force terminated members to transfer their account when service terminates, regardless of the size of the account. This change may only be implemented prospectively, that is, only members who join the plan after the new provision is added may be forced out.

15. Fees. New provisions in the Regulations increase registration and annual filing fees, with the new maximum raised to CAD 20,000 from CAD 7,000. These increases place Alberta into territory consistent with other jurisdictions, and reflects government cost recovery objectives.

16. Reporting. Audited financial statements must now be filed for all SMEPPs; defined benefit plans with assets of CAD 3 million; and defined contribution plans where the investment of CAD 1 million or more of the defined contribution assets is employer-directed. Plan administrators are no longer required to file a plan's commuted value basis with the Superintendent.

17. Fund Holders. Where the fund holder of a plan is comprised of individual trustees, the funds must now be held through a custodian financial institution.

18. Remittance of Contributions. Employer contributions must be remitted to the fund holder or custodian monthly. Plan administrators must provide the fund holder or custodian with advanced information as to the contributions to be made in a form required by the Superintendent within 30 days at the beginning of each fiscal year and with updates as changes arise.

19. Transfer of Funds. Funds cannot be transferred between fund holders in respect of the same plan unless the Superintendent has consented to the transfer. This appears to preclude the transfer of defined benefit surplus held in a trust to an insurance contract for the payment of employer contributions under the defined contribution provision of the same plan without prior consent from the Superintendent.

LETTERS OF CREDIT AMENDMENTS TO COME

As noted above, the amendments brought into force did not include the far-reaching letter of credit rules originally proposed by Alberta Finance in 2005. Instead, Alberta proposes to bring in new rules at a later time. This may be wise since at least two other pension regulatory authorities (OSFI (federal pension jurisdiction) and Quebec)) are in the process of implementing letter of credit rules.

When first proposed, Alberta's letter of credit rules were somewhat controversial. We speculate they will go ahead, but only once certain concerns raised in the consultation process, including by trust companies and other fundholders, are addressed. As proposed, the Superintendent would establish an approved list of banks authorized to issue letters of credit. Detailed regulations would be enacted to provide processes for dealing with letters of credit.

For example, while the face value of a letter of credit may float as the size of the solvency deficiency changes (as verified by actuarial valuations), interest on the solvency deficiency would have to be paid. Once implemented, a letter of credit would not be cancellable until there ceases to be a solvency deficiency. This would have the effect of requiring letters of credit to be called by the fundholder if a replacement letter is unobtainable at any point in time and a cash contribution is not made.

It would also mean that, in case of bankruptcy or insolvency of the plan sponsor, the plan would be fully funded to the extent set out in the most recent valuation. The new rules may improve the security of plans sponsored by financially weak employers, however, many financially weak employers will have insufficient credit to pledge to obtain a letter of credit. We will be monitoring letter of credit developments and will continue to advise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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