Canada: Ontario Pension Reform: Time To Amend Your Pension Plan?

Last Updated: June 30 2010
Article by Mark Dunsmuir

It's official: the Ontario government has voted to amend the Ontario Pension Benefits Act (PBA). This represents the biggest overhaul of Ontario's pension legislation in more than 20 years.

On May 5, 2010, the amendments to the PBA were passed on third reading in the Ontario legislature (the most recent on-line version of Bill 236 – An Act to amend the Pension Benefits Act). As of May 6, 2010, these changes have not received royal assent. We expect that the necessary government assents and proclamations to make these amendments law will be forthcoming.

If you are the administrator or the employer sponsor of a pension plan registered in Ontario, or a pension plan with Ontario members, these changes will significantly affect the operation and liabilities of your pension plan.

Most pension plans will have to be amended in order to comply with the new state of pension law in Ontario.

Some of the changes could have a substantial impact on pension plan liabilities whenever an employee's employment is terminated. Sponsors of defined benefit pension plans should consider whether they wish to amend their plans to avoid the new liabilities imposed by the changes.

The PBA reform also imposes novel obligations on administrators and sponsors that will not require pension plan amendments. Even if no amendments are required, sponsors and administrators should make sure that they understand all of the new and expanded obligations.

A not-so-fine balance?

Early government press releases claimed that the reforms were designed to strike a balance between the interests of employers and employees. However, most of the reforms impose new obligations on employers and pension plan administrators.

Certain administrative and funding costs will increase for sponsors of defined benefit (DB) and defined contribution (DC) registered pension plans. Sponsors of DB pension plans could see their contribution obligations increase due to the extension of special early retirement benefit enhancements known as "grow-in" benefits, depending on the structure of early retirement benefits in their particular plans.

On the other hand, there are some welcome improvements in the rules regarding pension plan mergers, procedures to implement surplus sharing deals and the elimination of partial wind-ups.

The Ontario government has achieved what no provincial government has been able to achieve in the past couple of decades: a significant "clean up" of surplus and pension plan merger rules to the benefit of many stakeholders in the pension world.

Compliance amendments

The following change to the PBA will require amendments to most pension plans with Ontario members:

  • Immediate vesting. As soon as Ontario employees join a pension plan, they will vest immediately. Most pension plans have a qualifying period of up to two years of membership before a member is entitled to the employer contributions made on their behalf. Pension plans that impose a qualifying period will have to be amended to eliminate this period. Employers may still impose a two-year waiting period to join a pension plan.

Amendments to avoid new obligations

The following change to the PBA could significantly increase the liabilities of a pension plan with Ontario members. Sponsors of pension plans affected by these amendments should consider amending their pension plan to reduce this increased liability:

  • Grow-in benefits in DB plans will be extended to employees unless terminated for wilful misconduct, disobedience or wilful neglect of duty. Currently, DB pension plans which provide enriched early retirement benefits must provide a "grow-in" benefit to employee members whose age and service total at least 55, only if the members terminate as part of a partial or full pension plan wind-up. Typically, this expensive grow-in benefit is granted only on plant closures. Not any more. Commencing July 1, 2012, grow-in benefits must be given to all terminating members whose age and service total at least 55, regardless of whether they are terminating due to a full or partial pension plan wind-up. The only exception will be if the affected employee voluntarily resigns or is fired "wilful misconduct." This could create a significant funding cost for sponsors of DB pension plans that have enriched early retirement benefits. The financial impact will depend on the design of the enhanced early retirement provisions in each particular pension plan.

In order to avoid this new liability, sponsors can consider amending their pension plan to remove or neutralize these enhanced early retirement benefits. If the enhanced early retirement provision is no longer in the pension plan, the new extension of grow-in will not apply.

New administrative obligations

The following changes will not require amendments to pension plans with Ontario members, but administrators and employers should be aware of them simply because they add new obligations:

  • Increased employer sponsor obligations to inform pensioners and members, and a requirement to give pensioners and members greater access to pension plan oversight. All pension plan sponsors, both DB and DC, will have to provide increased access to information for pension plan members and pensioners. In fact, administrators will now be required to facilitate the establishment of pensioner and member oversight committees and to assist in the operation of such committees.

    Although changes to the PBA will permit the costs of operating an oversight committee to be paid from the pension plan fund, sponsors are not required to permit this subsidization.
  • Expanded disclosure. The first version of the government's amendments to the PBA included a provision permitting sponsors to refuse to disclose certain records if the pensions regulator determined that the disclosure could be expected to prejudice the economic interests of the sponsor. The limitation on the expanded disclosure requirement has been removed; meaning sponsors and administrators may be required to hand over documents that may prejudice the sponsor's economic interests.
  • Expanded obligations regarding notice of amendments. Currently, an administrator is required to provide advance notice of a pension plan amendment only to members if the amendment is adverse in nature. Changes to the PBA will require administrators to provide advance notice to members for all amendments except for amendments that may be included in the regulations that will be released at a later date.
  • Phased retirement. Although not mandatory, sponsors of DB pension plans may now provide their employees with an option to receive their pension benefit through a phased retirement option. If a sponsor wishes to provide its employees with phased retirement, amendments to the pension plan will be required

Some excellent news: a reduction in costs and administrative obligations

The following proposed changes will simplify the administration of DB and DC pension plans, and reduce costs in certain circumstances:

  • The rules for merging or restructuring pension plans will be "clarified and simplified." Because the regulations have not yet been released, the potential benefits of this amendment may be reduced if the devil proves to be in the details. If the regulations prove to be sponsor friendly, this change could be significant for employers who have been unable to proceed with pension plan mergers over the past few years due to legal challenges.
  • Surplus sharing agreements will no longer require expensive historical reviews. If a sponsor can get the members of a terminated or partially terminated pension plan to agree to share the surplus of a pension plan, it will no longer be necessary for the sponsor to prove that it owns the surplus according to historical pension plan documents.
  • The elimination of partial pension plan windups. No partial pension plan wind-ups will be allowed, following a transition period that will end on a date to be proclaimed. This is very good news for DB and DC pension plan sponsors. The requirement to distribute surplus on partial wind-ups will disappear. The expense and delays in carrying out partial wind-ups will no longer exist and there will no longer be disputes regarding the annuitization of benefits in partial wind-up circumstances.

    Unfortunately, for sponsors of DB plans, the elimination of partial pension plan wind-ups comes at the cost having to extend grow-in benefits, and provide immediate vesting as explained above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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