Canada: Pension Reform: Ontario's Bill 236 and Canada's Bill C-9 Are Now Law — Are You Ready?

After many years of political inaction, a number of jurisdictions have taken up the pension reform banner. Very recent changes affect employers sponsoring pension plans in Ontario and those operating within the federal jurisdiction.

The first major pension reform legislation to affect Ontario in decades received royal assent this spring. On May 18, 2010, Bill 236, the Pension Benefits Amendment Act, 2010, became law1 and, while some provisions were immediately effective, all plan sponsors in the province will be affected when many of the provisions come into force at a later date, to be proclaimed by regulation. Sponsors of registered pension plans in Ontario should acquaint themselves with the various changes to the Pension Benefits Act ahead of time.

Moreover, on August 24, 2010, the Hon. Dwight Duncan, Minister of Finance for the Province of Ontario, announced the main pillars of his second round of pension reform. Following our review of Bill 236, we review the upcoming changes that will form part of the new pension environment.

While the Ontario government was busy reforming the Pension Benefits Act, the Federal government, as part of the budget implementation process, introduced substantial changes to the Pension Benefits Standards Act, 1985 and to the Income Tax Act (Canada) by adopting an omnibus bill, Bill C-9. These federal changes are reviewed last.

BILL 236

Plan Members' and Retirees' Access to Information

The reform makes a distinction between a pensioner (i.e., a retired member under the Pension Benefits Act) and a former member, and the rights of each to participate in pension advisory committees is clarified. Also, each group will have a right to obtain specified information about the pension plan.

While pension advisory committees can currently be established, they are still rare except in the public sector or unionized contexts. These will now be easier to establish, thereby giving active plan members and retired members a method to monitor plans, with the cooperation of the plan administrators.

This greater access to information requires plan administrators to supply all members, including retired members, specific information about the funded status of the plan.

In this same vein, both plan administrators and the regulator will need, on written request, to supply copies of certain documents, by mail or electronically.

All plan amendments (subject to some exceptions) will require advance notice to active members, retired members, and former members prior to registration. This regime replaces the current adverse amendment rules, under which plan administrators only inform affected members if an amendment would reduce future pension accruals or otherwise adversely affect their pension entitlements.

To prepare for this set of changes, plan administrators will want, at a minimum, to ensure they have adequate procedures to respond to requests from members and retirees with respect to pension advisory committees. They will also need to provide statements containing plan-related information to former members and retirees. These new rules are not yet in force.

Introduction of Immediate Vesting

Probably the most significant change for all pension plans is the introduction of immediate vesting for all accrued pension benefits (past and future). The existing two-year maximum eligibility for membership requirement, however, has not been removed.

Sponsors wishing to avoid having to administer pensions for highly mobile workers may wish to amend their pension plans to introduce a waiting period (if none currently exists), so as to delay the automatic vesting for employees who, under a two-year vesting rule, might not have qualified for a deferred pension.

This change remains to be brought into force.

Change to Rule of 55 Grow-in Benefits

Effective on July 1, 2012, the current Rule of 55 grow-in benefits (i.e., the right to grow into eligibility for early retirement benefits provided under the pension plan on wind-up) are extended to all eligible members whose employment is terminated by the employer (other than for just cause).2 Grow-in benefits will continue to be available when a plan is fully wound up.3

Surplus Sharing Settlements

Employers who wind up their pension plans in part (prior to January 1, 2012) or in full will now have the option of accessing surplus by either establishing legal entitlement to the surplus or by entering into a surplus sharing agreement with members, former members and other plan beneficiaries, regardless of whether they have entitlement under historical plan documentation. Where a surplus sharing agreement is used, the key will be to ensure appropriate member consents are obtained alongside other requirements. Until regulations are passed to clarify the requirements to use surplus sharing agreements under the new regime, some uncertainty remains whether the current surplus rules continue to apply. The Financial Services Commission of Ontario has recently taken the position that, until further legislative and regulatory changes occur, it will process applications based on entitlement alone only if the employer secures two–thirds consent of members and former members, while applications solely based on a written agreement will be accepted only if all members and former members agree. It also conceded that, in light of stated governmental intentions to modify the surplus sharing regime (as part of the second phase of pension reform described below), a plan sponsor would be allowed to put a surplus application on hold pending further legislative changes.

Partial Wind-ups Eliminated

All partial wind-ups, effective on or after January 1, 2012, are to be eliminated. Those declared prior to that date are grandfathered and will continue to be processed.

Streamlined Asset Transfers and Plan Mergers

While plan-to-plan transfers will no longer require the replication of exporting plan benefits in the receiving plan, the new rules will not permit the commuted value of members' benefit entitlements to decline. As is currently the case, asset transfers will require prior approval of the Superintendent. Plan administrators may agree to give individual plan members the option of transferring, or not transferring, their pension benefit to a successor plan. Bargaining agents will be given the authority to exercise this option for union members. A portion of any surplus related to the assets being transferred (calculated using prescribed rules) from the previous employer's plan would be transferred to the successor plan.

Until July 1, 2013, pension plans affected by past restructurings can enter into agreements to give current individual plan members an opportunity to consolidate their pension benefits in a single plan through an asset transfer.4 Consolidation gives members whose pensions are currently split between two plans a chance to enhance their total retirement income. However, significant costs may be incurred for the plan in which benefits are consolidated. This amendment seems to answer the call for reform of plan members in the broader public sector who were placed into new plans when their employers were privatized.

Since the new legislation is broader in scope than the amendments discussed above, and given that most of the new Pension Benefits Act remains to be brought into force, we will continue to monitor the reform initiatives in the coming months.

Second Round of Ontario Pension Reform

Under the August 24, 2010, announcement, Ontario proposes to tighten funding rules for defined benefit plans and to restrict the use of contribution holidays while accelerating the funding of benefit improvements. On the thorny issue of surplus ownership, the legislation would provide for a binding arbitration process where the parties cannot achieve a surplus sharing deal (or where the employer cannot demonstrate clear legal entitlement to surplus) and would require surplus-sharing agreements in instances of asset transfers between plans where plan provisions differ.

Recognizing the peculiarities of multi-employer pension plans and jointly-sponsored pension plans, the new pension regime would remove the need for solvency funding and substitute a number of restrictions on plan amendments to allow for more rapid funding of benefit enhancements.5

Outside of pension plan regulation, the Ontario government is also looking at ways of putting the Pension Benefits Guarantee Fund on a more sustainable path. To achieve this, a minimum assessment level of $250 per plan covered by the PBGF will be levied and the base fee per plan member will rise from $1 to $5. The maximum per member in underfunded plans will increase from $100 to $300, and the previous $4 million assessment cap for underfunded plan will be eliminated. Moreover, collecting under the PBGF will be more difficult since the exclusion period for coverage of newly established plans and benefit improvements will increase from three years to five years. These adjustments will not translate into an increase in the maximum guaranteed monthly payment of $1000, which will remain unchanged.

Finally, in the broader public sector, pension plans will be given the ability to amortize solvency deficiency payments over longer schedules so long as steps are taken to make the plans more sustainable. To benefit from this solvency relief, public plans would have to be less than 90 percent funded and propose a plan with changes such as increased member contributions, conversion to joint sponsorship for future service and prospective benefit adjustments. After three years, an assessment (based on technical criteria presumably spelt out in future regulations) would be made to determine whether the plan can enter a second stage of solvency relief in which the plan would have ten years to liquidate the solvency deficits resulting from the plan amendments. Failure to enter phase two would translate into a return to normal solvency rules. While benefitting from solvency relief, contribution holidays and benefit improvements would be limited.


Changes to the Pension Benefits Standards Act, 1985

Sponsors of federally-regulated pension plans should prepare for the amendments to the Pension Benefits Standards Act, 1985 brought about by the passage of Bill C-9 on July 12, 2010. While the overwhelming majority of the substantive changes that will impact plans have yet to be proclaimed into force by Order-in-Council, some provisions are already in effect.

Of particular interest to spon-sors of defined contribution plan sponsors is the removal of the requirement to seek the Superintendent's approval when DC assets are transferred to another money purchase provision – a change that became effective on July 12, 2010. Other immediate legislative changes include:

  • Plans may now permit a joint and survivor pension that is in pay to be increased in instances where a spousal or common law relationship breaks down and the pension is not divided as a result.6

  • The existing requirement that a joint annuitant's consent be made in writing when phased-retirement benefits are accessed will now be on a prescribed form (yet to be released).

  • Annuity purchases and transfers (outside of portability) that would impair the solvency of a plan will now require Superintendent approval.7

  • The Superintendent now may declare a partial wind-up of the pension plan, if crediting of benefits to members has ceased.8 Another immediate change that may trigger a need for a plan amendment is the loss by plan sponsors of the power to declare a partial wind-up of their own plan.9

  • The Superintendent may now appoint an actuary to prepare reports when the Superintendent is of the opinion that to do so is in the best interests of the plan and any funding obligations established by the appointed actuary would replace those set out in any prior valuation filed by the administrator.10

  • The regulation-making powers have been expanded to set out how plan administrators are to deal with complaints or inquiries addressed to them from members, former members and other persons entitled to benefits.11

As for legislative changes that have yet to come into force, the following list summarizes some of the most important ones:

  • Immediate vesting (as is the case currently in Quebec and now Ontario) on termination of employment or upon death will apply to all years of service in the plan. The 50-percent rule used for defined benefit plans will also now apply for all years of service, which may increase the cost to many plan sponsors. Both changes will most likely require plan amendments for many plans that are currently drafted to comply with statutory minimum standards.

  • The right of members to unlock up to 25 percent of benefits accrued prior to January 1, 1987, is removed, which will require some plans to be amended.12

  • Variable defined contribution benefits can now be provided directly from the plan for terminated members if they are of retirement age and have obtained the consent of their spouse/common law partner.13 (The Income Tax Act (Canada) has permitted variable benefits for a number of years.)

  • Pre-retirement death benefit rules are being simplified to do away with pre- and post-reform treatment. Under the new provision, the pension benefit credit (calculated by reference to all years of service) is simply paid to the survivor. Where there is no survivor, the payment is made to the designated beneficiary (assuming one has been designated), failing which, it is paid to the member's estate.14

  • Plan administrators will now have an obligation to issue annual pension statements to former members and their spouses or common law partners15 and will provide prescribed information including the funded ratio of the plan (if the plan offers defined benefits).

  • In the area of funding rules, detailed rules relating to the use of letters of credit to secure funding obligations have been introduced. Perhaps troubling to plan sponsors is the new requirement that the employer must make good on the face value of the letter of credit if the issuer of the letter refuses to honour it.16 Moreover, the fees incurred by the employer to secure the letter of credit may not be paid from the pension fund.17

  • Significant changes have been introduced to require additional employer funding on plan termination for federally-registered plans. On a plan termination, the funding rules now require that a number of payments be made:

(a) normal cost and special payments accrued to the plan termination date;

(b) deducted employee contributions if due on or before the plan termination date;

(c) prescribed special payments falling between the termination date and the end of the plan year in which the termination date falls;

(d) the face amount of any letter of credit that an issuer has refused to honour; and

(e) where applicable, payments under any workout agreement falling between the plan termination date and the end of the plan year in which a termination date falls.

  • Lastly, in light of the financial turbulence of the last few years, OSFI has adopted a flexible approach to underfunded plans culminating in the adoption of the "distressed pension plan workout scheme" rules.18 While the workout scheme regime is not available to bankrupt or liquidating employers, or to multi-employer pensionplans, it remains open to employers in proceedings under the Companies' Creditors Arrangement Act, or who simply anticipate having difficulties making their required solvency payments. A declaration must be filed with both OSFI and the federal Minister of Finance, and notification provided to plan members and beneficiaries. A number of detailed rules must also be followed for this type of relief.


Surplus Change to the Income Tax Act (Canada)

All registered pension plans in Canada must comply with the rules found in the Income Tax Act (Canada) and its regulations. Bill C-9 has increased the amount of surplus that can accumulate in a defined benefit provision of a plan for contributions made in respect of post-2009 service from 10 percent to 25 percent of actuarial liabilities without triggering adverse tax consequences.19 While few plans can at present benefit from this change, as economic conditions improve, this amendment should put less pressure on pension plan sponsors to deal with surplus management issues.


1. S.O. 2010, c.9.

2. This grow-in benefit will not apply where there is wilful misconduct, disobedience or wilful neglect.

3. Note that multi-employer pension plans and jointly sponsored plans may opt-out of this grow-in requirement.

4. This situation resembles the 2007 changes under the Police Services Act that gave officers an opportunity to consolidate pension entitlements in either OMERS or the Public Section Pension Plan. See Police Services Act, R.S.O. 1990, c. P. 15, Part VIII.1.

5. A technical backgrounder setting out Ontario's second wave of pension reform initiatives can be found at

6. See new subsection 25(7.1) of the Pension Benefits Standards Act, 1985 added by subsection 1811(5) of Bill C-9.

7. See new section 26.1 of the Pension Benefits Standards Act, 1985 added by section 1814 of Bill C-9.

8. See new subsection 29(2.1) of the Pension Benefits Standards Act, 1985 added by subsection 1816(1) of Bill C-9.

9. See new subsection 29(4.1) of the Pension Benefits Standards Act, 1985 added by subsection 1816(3) of Bill C-9.

10. See new section 9.01 of the Pension Benefits Standards Act, 1985 added by section 1794 of Bill C-9.

11. See new subsection 39(j.1) of the Pension Benefits Standards Act, 1985 added by subsection 1820(5) of Bill C-9.

12. See revoked paragraph 18(2)(a) of the Pension Benefits Standards Act, 1985 to be deleted by subsection 1806(2) of Bill C-9.

13. See new section 16.2 of the Pension Benefits Standards Act, 1985 added by section 1804 of Bill C-9.

14. See amended section 23 of the Pension Benefits Standards Act, 1985 amended by section 1809 of Bill C-9.

15. See new paragraph 28(1)(b.1) of the Pension Benefits Standards Act, 1985 added by subsection 1815(2) of Bill C-9.

16. See new subsection 9.14(2) of the Pension Benefits Standards Act, 1985 added by section 1795 of Bill C-9.

17. See new section 9.15 of the Pension Benefits Standards Act, 1985 added by section 1795 of Bill C-9.

18. See new sections 29.01 to 29.3 of the Pension Benefits Standards Act, 1985.

19. See amended paragraph 147.2(2)(d) of the Income Tax Act (Canada).

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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