On June 12th, the Quebec government introduced Bill 3 – An Act to Foster the Financial Health and Sustainability of Municipal Defined Benefit Pension Plans in Quebec (Bill 3). Bill 3 replaces Bill 79 – An Act to Provide for the Restructuring of and Make Other Amendments to Municipal Defined Benefit Plans (Bill 79) which was introduced in February 2014 by the previous government, but died on the Order Paper after the last election. For a more detailed discussion of Bill 79, see our previous post. During the election, the Liberal party committed to restructuring municipal pension plans and reigning in the ballooning deficits, currently estimated in the neighbourhood of $3.9 billion.
Bill 3 is a stricter version of Bill 79 and contemplates a significant shift in the structure of municipal sector pension plans. Unlike Bill 79, Bill 3 would make the restructuring process mandatory for all municipal defined benefit pension plans, not just plans that meet certain funding triggers. Another notable difference is that Bill 3 could impact retirees by allowing an employer to suspend the indexation of their pensions.
The key implications of Bill 3 for municipal bodies, plan members and retirees are:
Past and future pension plan deficits would be shared equally between the municipal body and the active plan members;
The municipal body could suspend indexation for retirees;
A stabilization fund would be created to protect plans from future adverse deviation; and
The parties could negotiate for one year, after which an arbitrator would be called to settle the dispute.
These proposed changes have triggered resistance from certain plan members. However, the amendments proposed in Bill 3 are consistent with the cost control measures recently introduced in other provinces in relation to public sector pension plans. As provincial governments struggle with limited resources and demographic challenges, changes to public sector plans are increasingly perceived as imperative.
We review the proposed amendments in Bill 3 in more detail below.
Actuarial Valuation Deadlines
An actuarial valuation must be prepared for all municipal plans in Quebec as at December 31, 2013 using prescribed demographic assumptions and a maximum discount rate of 6%. The actuarial report must be filed with the Régie des rentes no later than December 31, 2014.
Treatment of Funding Deficits
Any deficit identified in the December 31, 2013 valuation must be apportioned between the active members and the retirees in proportion to their respective liabilities. Bill 3 provides for the sharing in equal parts, by the municipal body and the active members, of the portion of the deficit attributable to them. With respect to members who are retired as of January 1, 2014, the municipal body is authorized to suspend indexation of their pensions. The municipal body is responsible for the remaining deficiencies. The portion of the deficit attributable to the municipal body must be paid over a period of 15 years and may not be consolidated.
Establishment of a Stabilization Fund
In addition, Bill 3 would mandate the establishment of a provision for adverse deviation to be funded through a 10% increase in the plan’s normal cost and actuarial gains. The additional contributions would be allocated to a stabilization fund. Such a reserve could be used to fund future indexation of pensions, to the extent that the reserve remains sufficient to protect the plan against the risk of adverse deviation.
Also, if passed, Bill 3 would prohibit the automatic indexation, but would permit ad hoc indexations in the event of surplus. Bill 3 would allow plans to amend or suspend any benefits in respect of active members from January 1, 2014, except for the normal pension and the surviving spouse’s pension. However, the definition of salary or wages and the accrual rate on which the normal pension of active members is based could be amended.
Plan Restructuring Negotiations
Bill 3 mandates that negotiations between municipalities and unions start no later than February 1, 2015 with a one-year deadline and one three-month extension allowed. The parties could also resort to conciliations, and if negotiations fail, the dispute would be referred to binding arbitration. Bill 3 provides that the arbitrator’s decision must be rendered within six months, and spells out the various factors the arbitrator must take into consideration in rendering the decision.
Transitional provisions require municipal bodies to report the financial situation of any pension plans they have established. They also impose on the municipal bodies any increase in the contributions attributable to active members from January 1, 2014 until an agreement is reached between the municipal body and the active members – seemingly indicating that the Quebec government is ready to “push forward” its pension reform agenda.