Phase 2 of Ontario Pension Reform

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Pension & Employee Benefits, August 2010

INTRODUCTION

On August 24, 2010, Ontario introduced several proposals for further reform of Ontario's pension legislation that will address another 40 recommendations from the Expert Commission on Pensions. The proposals are summarized below. To view the Ministry of Finance's Press Release, click here. To view the Technical Backgrounder, click here.

The government also said it will continue discussion with federal and provincial counterparts to provide a modest expansion of the Canada Pension Plan. They are also working on that separate collaborative track to permit financial institutions to sponsor defined contribution pension plans without the precondition of an employee/employer relationship. As part of this separate track, they will also consider other innovations in defined contribution arrangements, such as autoenrolment, auto-escalation of contributions and safe harbour rules for default investments. The hope is that a pan-Canadian approach can be achieved.

The government stated that the recommendations of the Expert Commission not addressed to date will be considered for inclusion in a subsequent round of pension reform.

TIMING AND COMMENTS

The reforms announced today provide broad policy direction; however, they are fairly light on detail. At a stakeholder briefing this morning, the Ministry indicated that it wishes to encourage stakeholders to provide their views on implementation over the next two to three weeks as Finance officials work on draft legislation that they hope to introduce in the legislature in "midfall". This appears to provide a genuine opportunity for employers and administrators to make their views known on material aspects of the proposed reforms.

In response to questions at the briefing, the Ministry also indicated that its focus would be on getting the legislation finalized, and it appears that this goal will supersede the preparation of Regulations relating to either Phase 1 or Phase 2 of the pension reform process.

MODERNIZE FUNDING RULES

The government is obviously concerned about the effect of low interest rates and investment returns on plan fund performance and thus they propose tightening funding and valuation rules. In particular, but subject to stakeholder comments, they are considering the following:

1. Restrictions on the averaging of solvency interest rates and smoothing of going-concern assets.
2. Ensure that the difference between market values and the actuarial value of going-concern and solvency assets is not more than 20%.
3. Require indexing to be valued in going-concern valuations (it is now optional).
4. Impose solvency concern restrictions on plans at the 85%, rather than 80% funding level.
5. Enable the government to prescribe acceptable actuarial methods and assumptions.
6. Require that benefit improvements be funded over no more than eight years, rather than the current 15 years.
7. Further acceleration of funding will be required where plans are less than 85% funded on an ongoing basis.

"CONTRIBUTION HOLIDAYS"

The Proposals

1. Expressly permit contribution holidays, unless prohibited by plan documents, only if they do not reduce the plan's transfer ratio below 105%. The government will be accepting comments regarding whether resort to historical documents will be required.
2. Require plans to disclose contribution holidays to members, retirees, and other beneficiaries of the plan, as prescribed, and file annual statement with the regulator to confirm eligibility.

CLARIFY SURPLUS ENTITLEMENT

The Proposals

1. Require binding arbitration for surplus distribution where entitlement or a sharing agreement cannot be obtained. The government is seeking comments regarding how much time should be permitted before requiring arbitration, what member consent should be required for an arbitration, if any, and whether the arbitration rule ought to apply to existing plan wind-ups. (The government confirmed that Regulation 8(1)(b) will be amended to ensure consistency with the entitlement or sharing arrangement as provided in Bill 236.)
2. Allow ongoing surplus withdrawals where there is entitlement or a sharing agreement provided the remaining surplus is no less than the greater of (i) 25% of wind-up liabilities, and (ii) two times the current service cost plus 5% of wind-up liabilities.

NEW RULES FOR MEPPS AND JSPPS

Expert Commission recommendations to accommodate different funding rules that recognize the different nature of a target benefits MEPP or JSPP are included in the proposals. These changes include a permanent solvency exemption for plans meeting certain criteria, retired member representation in plan governance, and more robust disclosure.

PBGF

The 2010 Ontario Budget announced that the government was making a C$500-million grant to the PBGF to stabilize the fund.

The new proposed measures include:

1. Raising the base fee per plan member from C$1 to C$5. In addition, there will be a minimum assessment of C$250 per covered pension plan.
2. Raising the maximum fee per plan member in underfunded pension plans from C$100 to C$300 with no cap.
3. Extending the exclusion period under the PBGF to five years. If these proposals had been in effect last year, the contributions to the PBGF would have been C$73-million rather than C$43-million. Sponsors may wish to comment on the economic effect of these changes.

TEMPORARY FUNDING RELIEF FOR THE BROADER PUBLIC SECTOR INCLUDING UNIVERSITIES

The government confirmed its August 5, 2010 announcement proposing to extend the time to amortize solvency deficiencies where the conditions outlined in that announcement were met.

FURTHER CHANGES ANNOUNCED

1. Permits irrevocable letters of credit to be used to cover as much as 15% of solvency liabilities.
2. Allow variable benefits from defined contribution plans.
3. All flexible defined benefit pension plans, as permitted under the Income Tax Act (Canada) and as currently available in other provinces.
4. Permit a one year funding deferral by allowing defined benefit plans to amortize payments over a time period beginning up to one year following the valuation date.
5. Exploring with the federal government and stakeholders jointly governed target benefit plans.
6. Allowing reasonable expenses to be paid from the pension fund, unless prohibited by the plan terms. The government will be accepting comments regarding whether resort to historical documents will be required.
7. Enabling the Minister to enter into a Multi-Lateral Agreement.
8. Parallel the federal investment changes and accept comments regarding whether Ontario should move independently to eliminate the 30% limit.
9. Require the pension legislation to be reviewed every five years.

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.