Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Pension & Employee Benefits, November 2010
On October 19, 2010, the Ontario government introduced the second phase of provincial pension reform into the Legislative Assembly through the first reading of Bill 120, An Act to amend the Pension Benefits Act and the Pension Benefits Amendment Act, 2010. The second phase of pension reform builds on the first phase, which was previously discussed in our June 2010 and December 2009 bulletins.
Bill 120 introduces many, but not all, of the reform initiatives announced by the Minister of Finance in his August 24, 2010 Press Release and Technical Backgrounder, as covered in our August 2010 bulletin. Additionally, Bill 120 introduces new initiatives that were not mentioned in the Press Release and Technical Backgrounder. In this bulletin, we will address the key changes initiated by Bill 120 to the Ontario Pension Benefits Act (PBA). We are speaking with the government on a number of issues which we believe would benefit from clarification.
TYPES OF BENEFITS AND PENSION PLANS
Bill 120 makes three major changes to the types of benefits and pension plans authorized under the PBA. These include the provision of target benefits and optional benefits, as well as explicit authorization for payments out of defined contribution (DC) plans.
One of the new inclusions to this phase of pension reform in Ontario is the addition of target benefits into the scheme of the PBA. This addition was among the recommendations in the Expert Commission on Pensions, A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules (the Expert Report). The purpose of target benefits is to allow for an evolution from those benefits provided under traditional defined benefit (DB) plans and those provided under DC plans. Like traditional DB plans, contributions are to be based on a target relating to projected benefits. Unlike traditional DB plans, if the target cannot be achieved then benefits are reduced.
Bill 120 proposes that a pension plan would provide target benefits where three requirements are met. First, the benefits provided must not be DC benefits. Second, the employer's contribution obligation must be limited to a fixed amount that is set out in one or several collective agreements. Finally, the administrator must be authorized to reduce a benefit, deferred pension, or accrued pension and the authority is not restricted by the terms of agreements or legislation.
While there is a requirement that employer contributions be limited to a fixed, collectively bargained amount, the target benefit provisions are not limited to jointly sponsored pension plans (JSPPs) or multi-employer plans but should also be applicable to single employer plans provided employees who participate in the plan are represented by a "trade union" (within the meaning of the Labour Relations Act, 1995 (Ontario)) that can enter into a collective agreement with the employer. We note that "trade union" may include certain employee associations that are not traditionally viewed as "unions".
2. Optional Benefits
Bill 120 proposes allowing members of DB pension plans to make contributions in order to receive optional benefits such as enhanced spousal benefits or an unreduced early retirement pension. Contributions made by members would be used solely for the purpose of providing such optional benefits. Where a plan so allows, members would be permitted to vary the amount of contributions.
3. Defined Contribution Benefits
Currently, options for payment out of DC plans are limited to annuity purchases and transfers to accounts such as Registered Retirement Income Funds (RRIFs) and Life Income Funds (LIFs). Bill 120 proposes to allow DC pension plans to authorize payment of benefits in any manner authorized by the Income Tax Act (ITA), subject to restrictions that may be made in future regulations. As such, in addition to the presently available options, variable benefits may be paid directly from DC accounts, so long as ITA authorization exists and the restrictions provided for in future regulations are met.
It is clear that the government remains concerned about the effects of low interest rates and investment returns on plan fund performance, and has consequently introduced several provisions into Bill 120 that are focused on plan funding requirements. These amendments include the following:
1. Solvency Exemption for Jointly Sponsored Pension Plans
Bill 120 appears to adopt the recommendation of the Expert Report that different funding rules should be implemented to accommodate JSPPs. Bill 120 provides that JSPPs in existence as of August 24, 2010 may cease requiring contributions to be made for solvency deficiencies. This permanent solvency exemption would be available for those plans that meet criteria to be prescribed.
The reason for the requirement that a JSPP be in existence as of August 24, 2010 is unclear. One possible answer is that new JSPPs (and multi-employer plans) should be able to be structured as target benefit plans, thereby benefiting from the ability to eliminate solvency deficiencies through the use of target benefits, which may be reduced where solvency deficiencies arise. The reason for the August 24, 2010 date may also become more apparent as Bill 120 makes its way through the required process, and as the regulations are released.
2. Restriction of Amendments Authorizing Benefit Improvements
Bill 120 proposes to restrict the circumstances in which a pension plan can be amended to authorize benefit improvements. In particular, an amendment will be void if it reduces the plan's transfer ratio or going concern funded ratio below a prescribed level, and the amendment purports to improve any of:
- the amount or commuted value of pension benefits accrued under the plan before the effective date of the amendment;
- the amount or commuted value of a pension or deferred pension accrued under the plan; or
- the amount or commuted value of an ancillary benefit for which a member or former member has met all eligibility requirements.
While until the release of the regulations the prescribed level cannot be verified, the August 24, 2010 Technical Backgrounder suggested that the threshold will be 85%. It is worth noting that an exemption will exist if the amendment is due to a judicial decision, or a prescribed circumstance.
3. Contribution Holidays
Bill 120 proposes to amend the PBA by setting forth the circumstances in which employers and members are permitted to reduce or suspend contributions to a pension plan. Plan contributions may be reduced or suspended if the plan is in surplus, prescribed conditions are met, and the "documents that create and support the pension plan or pension fund" do not prohibit contribution holidays. The August 24, 2010 Technical Backgrounder suggested that a potential prescribed condition would include a 5% security margin.
There is a lack of clarity respecting whether the reference to documents that create and support the plan or fund relate to current documents or also include historical documents. It is our hope that the regulation will make clear that the focus is on the current version of the plan text and related agreements.
4. Letters of Credit
Bill 120 contains provisions that will enable an employer to use one or more letters of credit in lieu of cash contributions towards a solvency deficiency. However, letters of credit will not be an option for multi-employer pension plans or public sector pension plans, other than those prescribed. The employer can use letters of credit meeting the prescribed criteria in order to cover up to 15% of solvency liabilities. While most of the fees or expenses associated with obtaining or holding a letter of credit cannot be paid for from the pension fund, those associated with enforcing a letter of credit may be.
Bill 120 takes a different approach from legislation in other jurisdictions, as it requires letters of credit to be held by the administrator and not the plan trustee.
The full breadth of the letters of credit portion of Bill 120 will only be known with the release of the regulations.
As presented in the August 24, 2010 Technical Backgrounder, the government has attempted to provide more certainty in respect of surplus entitlement, as well as binding arbitration for surplus distribution on wind-up. As with many of the provisions in Bill 120, the release of the regulations will determine the final operation of the regime.
1. Payment of Surplus
Bill 120 indicates three ways that surplus may be paid out of a plan. First, as is presently the case, if surplus is to be paid out to employees, no consent of the Superintendent will be required, as the plan can be amended to provide for payment. Second, where an employer is entitled to surplus as per the plan and fund documents, a full historical review would be needed for payment to be permitted. Third, written agreement may be used to authorize payment of surplus to the employer.
The requirements for agreement would be the same as those currently existing in Regulation 8(1)(b), suggesting that the regulation will be repealed.
Bill 120 proposes that an agreement would prevail over plan and fund documents, over statutory restrictions in certain circumstances, and over any trust existing in favour of any person. As a result, no proof of entitlement in plan or fund documents would be required.
2. Arbitration on Wind Up
Bill 120 proposes the use of binding arbitration to allocate surplus in the case of full or partial windup of a pension plan where the surplus distribution has not been completed within the time period to be prescribed. Bill 120 also sets out the details of the arbitration process. However, factors to be considered by the arbitrator are not yet included. We hope that such factors, as well as the authority of the arbitrator, will be provided for in future modifications of Bill 120, or in new regulations.
Any person, employer or member of a trade union representing plan members may request arbitration and provide notice to the other party. The Superintendent may also propose arbitration. Appointment of the arbitrator may be made by agreement of the parties authorized to reach a surplus sharing agreement, or by the Superintendent where there is no agreement. An arbitration award will prevail over plan and fund documents. Additionally, the arbitrator is to determine who will be responsible for the cost, however, the Superintendent cannot be held responsible.
PENSION BENEFITS GUARANTEE FUND COVERAGE
The proposed amendments to the PBA provided for in Bill 120 include changes to the Pension Benefits Guarantee Fund (PBGF).
Presently, the PBGF does not guarantee pensions and pension benefits under plans established for less than three years on the date of wind-up. Similarly, the PBGF does not guarantee increases to pensions and pension benefits that take effect within the three years before the date of wind-up. Under the proposed amendments, the three-year periods will be extended to five years, except in the case of wind-ups or benefit improvements already in effect before Royal Assent.
In addition, Bill 120 makes clear that the PBGF will not guarantee target benefits or optional benefits.
PENSION PLAN ADMINISTRATION
Among the amendments proposed by Bill 120 are changes and clarifications with respect to plan administration. The amendments include the following:
1. Payment of Administrative Fees and Expenses
Bill 120 includes an express right of the administrator of a pension plan to charge to the pension fund the reasonable fees and expenses relating to the administration of the plan and the pension fund. An exception is provided where the documents that create and support the plan or fund, the PBA, or regulations prohibit the payments, or otherwise provide for them.
As with the contribution holiday provisions, it is unclear whether reference to documents creating and supporting the plan or fund relate to current documents or also include historical documents. We hope that the regulation will make clear that the focus is on the current plan text and related agreements. Clarification as to when plan or fund documents will be considered to otherwise provide for the payment of expenses so as to preclude them being paid from the fund would also be desirable.
2. Commuted Value Transfers
Pursuant to the amendments proposed by Bill 120, in order to transfer a member's commuted value from one pension fund to another, the administrator of the new pension plan must agree to accept the payment, and the pension plan must be registered under the PBA, governed by statute in a designated jurisdiction, or be a prescribed pension plan.
3. Public Sector Transfers
The proposed amendments also address the transfer of provincial public sector employees from prescribed public sector pension plans to the federal Public Service Superannuation Plan (Canada). These transfers will require the Superintendent's consent. We will have to wait for the regulations to see what plans are prescribed.
OVERSIGHT AND ENFORCEMENT BY THE SUPERINTENDENT
Bill 120 proposes a number of new provisions relating to oversight and enforcement by the Superintendent of Financial Services.
1. Power to Appoint or Act as Administrator
Pursuant to Bill 120, the Superintendent would obtain the power to appoint an administrator or to act as administrator in prescribed circumstances. Where an administrator is appointed by the Superintendent, the Superintendent would also be permitted to terminate the administrator if reasonable to do so.
2. Actuarial Methods and Assumptions Used in Preparation of Reports
Bill 120 proposes to permit the Superintendent to make an order requiring an administrator to take action, where the Superintendent is of the opinion that the assumptions or methods used in the preparation of a report are not consistent with accepted actuarial practice. Moreover, the Superintendent would be permitted to make an order requiring the administrator to take action where the Superintendent is of the opinion that the assumptions or methods used in the preparation of a report are inappropriate in the circumstances, regardless of the use of accepted actuarial practice.
3. Extension of Time Limits
Presently, the Superintendent may only extend procedural time limits. Bill 120 proposes to expand this power by permitting the Superintendent to extend the time limits for filing prescribed documents, before or after the initial time limit has expired. The Superintendent would need to be satisfied that there are extraordinary grounds for the extension, and that no person would be unduly prejudiced by it. It remains to be seen what documents will be prescribed under future regulations.
4. Registration and Revocation of Part of an Amendment
Under current legislation, the Superintendent may only register or revoke entire amendments. Bill 120 proposes to permit the Superintendent to register part of an amendment or revoke registration of part of an amendment where only a portion of the amendment makes the pension plan not comply with the PBA and/or regulations.
The remaining amendments proposed by Bill 120 are generally technical or complementary in nature. However, a couple of the more significant ones are worth noting:
- The Lieutenant Governor-in-Council is permitted to create different requirements in the regulations for public sector pension plans.
- The Minister must initiate a review of the PBA and regulation, or portions of it, every five years.
It is clear that Bill 120 initiates a variety of important additions, subtractions and tweaks to Ontario's pension scheme. However, it is important to recognize that, to this point, Bill 120 has only passed first reading. In order to become law, current debates will need to be completed. Bill 120 will then receive second reading and go to committee. The committee will report back and Bill 120 will be debated at third reading. Bill 120 will not become law until it passes third reading and receives Royal Assent. Even upon Royal Assent, actual implementation may require proclamation.
As such, the language and consequence of Bill 120 may still undergo changes before coming into effect. Additionally, as discussed throughout this bulletin, many of the changes rely heavily on regulations, the core of which have yet to be established. The substance of these regulations may dramatically alter the effect of Bill 120.
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