The recent recession left many defined benefit pension plans underfunded, putting financial pressure on employers to top up the plans.The changes give plans up to 15 years to be fully funded.
People deserve and need their pension benefits to be there when they retire,” said Labour and Advanced Education Minister Marilyn More. “If we didn’t relax the rules around defined benefit pension plan funding, employers could be forced to lay off workers or reduce benefits.”
These changes give more employers breathing room to recover from the recession and low interest rates,” said Ms. More.
Pension plans grow from a combination of employer and members’ contributions, and the interest earned by investing those contributions. When a defined benefit plan has enough assets to deliver the promised benefits if the plan closed immediately, it is said to be solvent.
The recession that began in 2008-09 cut return on investments drastically, leaving many plans underfunded. The indicators that are used to determine whether a plan is solvent have dropped significantly since 2011.
When a plan was underfunded, the employer had five years to make the plan solvent. Some employers said it would take so much money to make their plans solvent, the company might need to close. Today’s changes give those employers up to 15 years to get their plans back to full funding.
“This announcement comes when many organizations and employee groups are trying to determine the right pension approach for their circumstances in an evolving pension environment,” said Derek Gerard, principal with Eckler Ltd., a leading financial consulting organization. “Allowing plan sponsors to spread solvency shortfall payments over 15 years, instead of five, will help tremendously during an expected period of transition for pension plans.”
Employers that want to move to 15-year recovery must notify plan members, working and retired. If more than one third of plan members do not write a letter to the employer to object, funding is extended. If more than one third of the members object, the employer must fund the plan within five years.
The extended funding would be available to plans that were found to be underfunded between 2011 and 2014.
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