How do you solve a problem like Surplus?

The typical Defined Benefit pension plan is very healthy these days, with higher long-term interest rates and decent investment returns, which means that many DB plans have significant surplus.  While surplus may sound like a good thing, that’s not always true, and pension surplus can be one of those intractable problems.  Let’s explore some ways that plan sponsors can take advantage of their good fortune.

Contribution Holidays

The #1 way that employers take advantage of surplus in their pension plan is to take a contribution holiday, as this immediately saves on cash.  Now, if you have a DB pension plan with surplus that is closed and frozen, then no new benefits are being earned by employees and therefore there are no contributions required, so a contribution holiday is useless.  However, if you have a combination DB & DC pension plan under the same registration number, then it’s likely that you can use the DB surplus to pay for employer DC contributions (check your plan text and trust agreement to be sure).

If you have two separate pension plans – one DB and one DC – then perhaps you should consider merging the plans into one to take advantage of this strategy.  You could even transition an existing Group RRSP program to a DC plan by adding a Defined Contribution component to your existing DB pension plan.  However, keep in mind that a combo DB & DC pension plan will complicate any future DB wind-up – although we have a solution for that, see Wind-up by Stealth™.

When taking a contribution holiday, you also need to be mindful of the provincial rules that apply to your pension plan as they will govern things like how much of the surplus you can use for the holiday (in Ontario there is the concept of Available Actuarial Surplus), notice requirements for the plan members, and the need for any actuarial reporting between triennial valuations to confirm that sufficient surplus remains to continue the contribution holiday.

If you’re feeling generous, then you could even extend the contribution holiday to the employees – although this would typically involve a plan amendment so can be more complex to implement.


For as long as I can remember, getting surplus out of a DB pension plan has been difficult to impossible, especially while the plan was still ongoing and not wound-up.  There have also been countless fights in the courts about who ‘owns’ the surplus.  This has been slowly changing and there are a number of ways to withdraw surplus from a pension plan these days.

Entering into a surplus sharing agreement with the plan members is one way.  The problem is that the plan sponsor will typically spend a small fortune on professional fees to undertake the onerous process established by the regulators, and will invariably need to give some of the surplus to the plan members in order to get enough of them to vote in favour of the surplus sharing agreement.

Another way is for the plan sponsor to prove to the pension regulator that the historical plan texts and trust agreements have always permitted the employer to unilaterally withdraw any surplus.  This path has become a little clearer recently with the Crosby Canada Inc. v. Ontario decision which took a broad approach in interpreting the plan documents instead of FSRA’s very strict approach.

Improve Benefits

Improving the benefits under the plan is a classic way to ‘spend’ some surplus.  Things like early retirement windows, ad-hoc indexing, career average upgrades, and other past-service benefit improvements are always welcomed by employees.  One thing to watch out for is timing, as you will trigger the requirement for an actuarial valuation when you amend your pension plan to improve benefits.  So, for efficiency’s sake, it can sometimes be a good idea to schedule the effective date of the improvement to be the same date as the next regularly scheduled actuarial valuation.  Another thing to watch out for is triggering the reporting of Past Service Pension Adjustments to CRA which adds administrative complexity and reduces the employees’ RRSP contribution room.


If you’re fortunate that your DB pension plan has surplus, maybe now is a good time to de-risk by buying annuities (no top-up contributions will be required) or moving to a more conservative asset mix (even though it will be expected to generate lower investment returns it should be less volatile).  You’re effectively deciding to lock-in some of your past gains.


The ultimate form of de-risking is a pension plan wind-up.  Many DB pension plans have been winding up over the past few decades, but it’s often a bit easier to wind-up the plan when it’s well funded and no additional cash contributions are required.  That being said, winding up a pension plan with surplus will crystallize that surplus and force the plan sponsor to deal with it, either by making a case that it 100% belongs to them or entering into a surplus sharing agreement with the plan members – either way, there will be some legal and actuarial fees in your future.  It’s also important to think about the order of operations – strategically, it may be best to negotiate a surplus sharing agreement with the plan members before declaring the wind-up and crystalizing the surplus.

An alternative to winding up your DB pension plan would be to merge it with a jointly-sponsored pension plan like CAAT.  We’ve helped a number of plan sponsors transition their DB plan to CAAT, and while CAAT can replicate and administer the existing past-service DB promises as-is, something that we’re seeing more and more is employers deciding to ‘spend’ some of their plan’s surplus on benefit improvements such as indexing past-service benefits upon the transition into CAAT.

Save It

Today’s sunny skies can lead to tomorrow’s rainy days, so as you consider uses for the surplus in your DB pension plan, don’t spend it all!  Keeping some level of surplus in your plan can be a very useful cushion against volatile contribution rates caused by gains and losses that will invariably be experienced by your pension plan in the future.

Don’t Rush

As with most things involving a DB pension plan, the key is to not jump to conclusions and rush to a solution.  DB plans are very complex and before making any changes it’s best to give your actuary a call to explore all the pros and cons of the paths in front of you.  Maybe surplus will turn out to be one of your favourite things.

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