Yes. Federal pension legislation allows a defined benefit pension plan to operate in an underfunded or deficit position. Being in an underfunded position means that the plan’s liabilities (i.e. the present value of all current obligations to pay benefits to members) exceed the plan’s assets.
Administrators of defined benefit pension plans must submit actuarial reports to OSFI indicating the funded status of the plan under two different assumptions:
- that the plan will be ongoing (this is called a going concern valuation) and
- that the plan terminated on the date of the actuarial report (this is called a solvency valuation).
OSFI has the authority to ask for actuarial reports at any time and most underfunded plans are required to file actuarial reports annually.
If either the going concern valuation or the solvency valuation indicates that a plan is underfunded, the employer must fund the shortfall by making special payments into the plan. The going concern shortfall must be paid to the plan by making equal annual payments over no more than 15 years. Required solvency special payments may be offset by the use of Letters of Credit, which are held in trust for the pension plan, subject to a maximum of 15% of the plan’s solvency liabilities.