Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Pension & Employee Benefits, February 2011
The Ontario Minister of Finance announced in the 2010 Budget that the government was considering providing additional temporary solvency funding relief for public sector and broader public sector pension plans. Further details were provided through separate announcements on August 5, 2010 and August 24, 2010. On February 10, 2011, the government released a description of the proposed regulation and said that comments on the proposals were due by March 28, 2011. It is not clear that draft regulations with respect to the proposals will be published for comment. Accordingly, comments should be made on the proposal by the March 28, 2011 deadline. The new regulations are expected to come into effect mid-May 2011.
In exchange for the relief, sponsors of "public sector pension plans" would be expected to adopt plan changes that would make their plans more sustainable in the long term. For purposes of these proposals, "public sector pension plans" include plans provided by the Crown, Crown agencies and corporations, school boards, colleges, universities, municipalities and certain health service providers and children's aid societies. In addition, the plan must provide defined benefits and have at least 25% of the total plan membership who are active members that accrue defined benefits. Multi-employer and jointly sponsored pension plans are specifically excluded from this funding relief proposal.
Plan changes, as indicated in the 2010 Budget, could include the following:
- converting to joint sponsorship for future service;
- more equitable sharing of the normal cost of providing benefits between employers and members;
- linking some future benefits, such as inflation protection, to plan performance; and
- enhancing cost certainty and affordability through benefit adjustments that make plans more sustainable.
Examples of steps that eligible pension plans could take and the measurement of financial impacts are outlined in the "Savings Target" section of the most recent release. The "Savings Target" generally provides that the plan should determine a normal cost contribution rate such that the present value of future normal cost contributions would at least equal the present value of future service benefits and a sharing of costs or benefit adjustments going forward. It is stated that the savings target will not be set out in the new regulation, although the February 10, 2011 release by the government provides various definitions and guidelines for determining a savings target for different types of defined benefit (DB) pension plans.
The proposed measures would provide temporary solvency funding relief in two stages with eligibility criteria attached to each stage.
If accepted into Stage 1, plan sponsors would file a valuation report with the Financial Services Commission of Ontario (FSCO) in accordance with the proposed regulation. Plan sponsors would have three years (3-year-period) from the valuation date of this report to determine plan changes, a process that may include discussions with unions or other processes to be followed in accordance with the plan's governance requirements. They would be required to make minimum payments during this 3-year-period to ensure the solvency shortfall does not increase.
At the end of the 3-year-period, plan sponsors would be required to prepare another valuation and submit a report (Stage 1 progress report) to the Ministry of Finance. The results revealed in this report would be measured against established savings targets.
If substantial progress has been made in meeting the targets, it is contemplated that the Ministry of Finance would recommend further funding relief to be provided to eligible plans (Stage 2 relief). Otherwise, the normal funding provisions of the Pension Benefits Act (Ontario) (PBA) effective at the time would apply and specific exit rules will be contained in the regulation.
It is proposed that plans seeking temporary solvency funding relief under this regime would be subject to additional conditions and limits, as follows:
- The transfer ratio of the plan shall not fall below 1.10 after the application of contribution holidays;
- To the extent that a going-concern unfunded liability is created or increased due to plan amendments that increase pension benefits or ancillary benefits, such an unfunded liability shall be amortized over a period of no more than five years with the first payment commencing in accordance with the funding requirements under the PBA and regulation in effect at the time.
- To the extent that the transfer ratio of the plan is reduced to below 0.90 due to plan amendments that increase pension benefits or ancillary benefits, a lump sum special payment should be made immediately to restore the transfer ratio to at least 0.90.
Plans which intend to apply for the two-stage solvency funding relief will need to submit an application to the Ministry of Finance prior to filing the Stage 1 valuation report. There will be a number of windows of opportunity to apply. The first window is from the date of posting of this document to March 23, 2011. Eligible pension plans with a valuation date as at December 31, 2009 or with a valuation date in 2010 could apply during this window.
Other windows of opportunity for eligible pension plans with valuation dates in 2011 and 2012 will be announced at a future date.
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.