Pension plans in Canada are subject to provincial minimum standards legislation, with the exception of pension plans for the employees of undertakings that are under federal jurisdiction, such as banks and airlines, which are subject to federal minimum standards legislation. Ontario, Canada's most populous province, is the province in which the majority of Canadian pension plans are registered. In addition, plans registered in other provinces must comply with Ontario law for their Ontario members. Two aspects of Ontario's Pension Benefits Act are unique and are not found in any other provincial or federal pension legislation in Canada. These are the "grow-in" provisions and Ontario's Pension Benefits Guarantee Fund (PBGF). Both of these provisions are scheduled for a major overhaul this year.
What is "grow-in"?
It is common for pension plans to provide some form of early retirement enhancement, either because it has been negotiated as part of a collective agreement or it has been implemented to encourage employees to retire early. Early retirement enhancements were often created in the past when it was common for pension plans to have surpluses and pension funding issues were less important. Since 1987, Ontario's Pension Benefits Act has required that the benefits of employees who are affected by full or partial wind-ups of pension plans and whose age plus years of service total 55 must be calculated as though they would "grow in" to any early retirement enhancements available under the plan.
To understand how grow-in works, consider an employee whose employment terminates in the ordinary course before she reaches retirement age. Her pension benefit is calculated on the basis of her age and years of service to the date of termination and she may elect either to transfer the commuted value of that benefit into a locked-in retirement vehicle or to receive a deferred pension payable at normal retirement age. If the employee has not satisfied the eligibility requirements for any early retirement enhancements, her benefit will be calculated excluding the value of any such enhancements.
Under Ontario law, it is permissible to actuarially reduce the value of the pension payable before the normal retirement date so that the value of the pension payable upon early retirement is the same as the value of the pension that would have started at the normal retirement date. An early retirement enhancement lessens the actuarial reduction by providing a more generous early retirement pension. For example, an employee might be entitled to retire with a full pension and no actuarial reduction at age 60 if he has at least 25 years' service. The value of such an early retirement enhancement can be quite significant.
Ontario's grow-in requirements mean that an employer which winds up or partially winds up its pension plan must calculate the pension benefits of those employees affected by the wind-up or partial wind-up (and whose age and years of service total 55) as though they would "grow into" the early retirement enhancement even if at the date of the wind-up or partial wind-up they did not satisfy the eligibility criteria. This requirement does not apply on an ordinary termination of employment. Thus, the value of pensions paid on a wind-up can be significantly higher than on an ordinary termination.
On December 9, 2009, the Ontario government introduced Bill 236, An Act to amend the Pension Benefits Act. The Act has passed the Third Reading and is awaiting Royal Assent before coming into force. One of the more significant amendments contained in Bill 236 is to eliminate partial wind-ups of pension plans. In conjunction with that amendment, Bill 236 also provides that grow-in benefits will apply to persons whose employment is terminated by the employer otherwise than for cause, effective July 1, 2012. This will significantly increase the cost to employers of terminating employees even in situations where no wind-up or partial wind-up of a pension plan otherwise occurs.
Pension Benefits Guarantee Fund
Ontario has a Pension Benefits Guarantee Fund which is administered by the Ontario pension regulator, the Superintendent of Financial Services. The PBGF provides a limited guarantee of the pension benefits payable to members on the termination of a defined benefit pension plan in cases where the employer is insolvent and unable to fund deficiencies. The PBGF is financed through assessments on employers which administer pension plans with active members employed in Ontario and it only applies to employees whose pensionable service is rendered in Ontario. However, the assessments paid into the PBGF by employers have been insufficient to cover the cost of the bailout of several large pension funds that have become insolvent in recent years. The PBGF has thus been severely strained by large insolvencies, most notably Algoma Steel Inc. in 2000-2001 and more recently Nortel in 2009-2010. As a result, the Ontario government has had to lend or grant the PBGF hundreds of millions of dollars, with the most recent injection of $500 million being announced in the Ontario government's February 2010 Budget.
The Ontario government is concerned about the financial problems of the PBGF and wishes to avoid future surprises. It has undertaken an actuarial review of the PBGF and is expected to introduce proposals to reform the PBGF provisions later in 2010. Although we do not yet know what kind of reforms to expect, it seems unlikely that the government will reduce PBGF coverage. Instead the changes will probably make the PBGF function more like a true insurance program. As a result, employers who sponsor Ontario-registered defined benefit pension plans should expect that the cost of PBGF insurance coverage will increase significantly following these reforms.
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