Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Pension and Employee Benefits, June 2011
On May 20, 2011, Ontario released new solvency funding regulations for several large jointly sponsored pension plans (JSPPs) and certain other public sector plans ( Ontario Regulation 177/11) and new solvency funding relief regulations for certain stipulated single-employer public sector pension plans, largely in the university sector ( Ontario Regulation 178/11). Regulation 178/11 follows the Ontario Government Release in February 2011, when Ontario announced its intention to consider providing additional temporary solvency funding relief to single-employer defined benefit or hybrid pension plans in the broader public sector and results also from consultations between the Ontario Ministry of Finance and the sponsors of the affected plans.
Regulation 178/11 came into force on May 20, 2011 and Regulation 177/11 comes into force on various dates over the period May 20, 2011 to December 31, 2012.
Effective June 1, 2011, certain stipulated pension plans (which are large JSPPs) may specify a zero or "nil" solvency deficiency for a valuation date that falls on or after December 31, 2010. Essentially, this means that such plans, provided they comply with various restrictions imposed in the new regulation, will not require funding on a solvency basis. The stipulated plans are:
- Pension Plan for the Employees of the Ontario Public Service Employees Union
- Ontario Teachers' Pension Plan
- OMERS Primary Pension Plan
- Healthcare of Ontario Pension Plan
- Colleges of Applied Arts and Technology Pension Plan
- Ontario Public Service Employees' Union Pension Plan.
Where any of the listed plans ceases to be a JSPP, the solvency funding relief no longer applies.
Where an eligible JSPP decides to take advantage of this relief, it will be required to include additional information in annual member statements including:
- a statement that the pension benefits provided in the pension plan are not guaranteed by the Pension Benefits Guarantee Fund;
- a statement that on wind-up, pension benefits may be reduced if the assets of the plan are not sufficient to meet the liabilities of the plan;
- a statement that contribution rates for the employer(s) and for members could change depending upon how well the plan is funded on a going concern basis.
Plans which are subject to the new regulation will, of course, still be required to determine the funded status of the plan on a solvency basis and will, for example, be required to file a valuation report under section 3 of Regulation 909 (the General PBA Regulation) where an amendment changes the amount of the plan's solvency deficiency determined under the ordinary rules. The administrator of a plan listed in the regulation who takes advantage of the new regulation will be required to file a statement in conjunction with the filing of the first valuation report – in most cases after June 1, 2011 – certifying that the particular plan satisfies the criteria to be a JSPP.
Effective May 20, 2011, the annual filing of an actuarial valuation report will not be required, irrespective of whether the plan has solvency concerns as described in the General PBA Regulation, for the plans listed in the new regulation as well as a multi-employer pension plan that has made the election to be a specified Ontario multi-employer pension plan under section 6.0.1 of the General PBA Regulation.
Effective June 1, 2011, for plans which are not exempt from the usual requirement to file an annual valuation report where the plan has a solvency concern, a solvency concern will be deemed to have occurred where the employer has elected to exclude plant closure benefits/permanent layoff benefits from the determination of solvency liabilities and the ratio of the solvency assets to solvency liabilities is less than .8 – .85 where the valuation date is on or after December 31, 2012. More generally, a solvency concern, which, as noted above, triggers the requirement to file an annual valuation report, except in the case of plans excluded in the new regulation from the requirement for an annual valuation – will be deemed to have occurred where the ratio of solvency assets to solvency liabilities is less than .85 for a valuation date on or after December 31, 2012.
Finally, the relief provided under section 47.7 of the General PBA Regulation to single-employer public sector defined benefit plans is amended, with effect from May 20, 2011, to permit payment of amounts due under a valuation report with a valuation date between August 2, 2010 and May 30, 2011 to be made on or before March 1, 2012.
Regulation 178/11 implements a new solvency funding relief regime for certain public sector single-employer defined benefit or hybrid plans and replaces, for those plans, the optional forms of solvency relief provided under section 5.6 of the General PBA Regulations (see our July 2009 Blakes Bulletin on Pension & Employee Benefits which reviewed optional forms of solvency relief).
The affected plans are:
- Retirement Plan of the University of St. Michael's College
- Contributory Pension Plan for Hourly-Rated Employees of McMaster University
- Pension Plan for Professional Staff of Lakehead University
- Wilfrid Laurier University Pension Plan
- Pension Plan for Professional Staff of the University of Guelph
- Retirement Plan of the University of Guelph
- York University Pension Plan
- The Royal Ontario Museum Pension Plan
- Carleton University Retirement Plan
- The Contributory Pension Plan for Trent University Faculty Association Employees of Trent University.
The Regulation provides for two stages or phases of funding relief. Stage one relief will essentially operate over a three-year period following the stage one valuation date. If substantial progress is made during stage one, the Regulation contemplates further funding relief to be provided to eligible plans (stage two relief). Otherwise, the normal PBA funding requirements would become effective at the end of the stage one relief period, subject to transitional funding relief which is also provided in the new Regulation.
Stage one relief will start from the plan's stage one valuation date which is set out in a schedule to the new regulation – the dates vary from as early as December 31, 2009 to January 1, 2011. Essentially, the stage one relief period may not exceed a period of three-years following the stage one valuation date. During the stage one relief period, the new regulation provides various forms of solvency funding relief including:
- annual filings of actuarial valuations would not be required regardless of whether the plan has solvency concerns as prescribed in the General PBA Regulation;
- the prior year credit balance would be set to zero at the beginning of the stage one relief period;
- commencement of new going concern special payments (disclosed by the stage one valuation report) may be deferred for up to one year from the date of the report;
- going concern payment schedules established in valuation reports prior to the date of the stage one valuation report would continue;
- solvency payment schedules established in valuation reports
prior to the stage one valuation would be suspended. Instead,
during the stage one relief period, the annual minimum solvency
special payments would be the greater of A and B below, less the
going concern special payments due for the year:
- A – the amount of the annual interest charge on the solvency deficiency disclosed in the stage one valuation report excluding any solvency asset adjustment and solvency liability adjustment; and
- B – 50% of the special payments that are required to amortize the excess, if any, of 80% of the solvency liability over the solvency assets, as disclosed in the stage one valuation report, over a four-year period commencing at the date of the stage one valuation report.
During the stage one relief period, additional disclosure requirements will be imposed on the plan administrator for members and retirees. The prescribed information can be provided in annual statements given to members after the stage one valuation report is filed.
Importantly, there will be accelerated funding requirements for benefit improvements during the stage one relief period. The proposed rules on benefit improvements would be in addition to restrictions imposed more generally with respect to the funding of benefit improvements in certain circumstances under Bill 120. In brief, it is proposed that plans seeking stage one relief would be subject to additional restrictions including:
- to the extent that a going concern unfunded liability is created or increased due to a plan amendment that increases pension or ancillary benefits, such unfunded liability must 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 the General PBA Regulation in effect at that time.
- to the extent that the transfer ratio of the plan is reduced to below .9 due to a plan amendment, a lump sum special payment would be required immediately to restore the transfer ratio to at least .9. The balance of the increase in the going concern unfunded liability would need to be amortized over a five-year period.
As expected, the new regulation does not set out the circumstances or savings targets that are expected to be achieved in order for a pension plan to take advantage of stage two relief. The savings targets and other aspects of stage two relief were described in the background document released by the Government of Ontario in February 2011.
Plans which do not make substantial progress in meeting the savings target and therefore are not eligible to enter stage two relief or which choose not to enter stage two relief, would be required to exit stage one, and various provisions are set out in the new regulation to deal with this.
In brief, a pension plan listed in Regulation 178/11 will be required to prepare a transition valuation report as of a transition valuation date which must not be more than three years after the stage one valuation date. The report would need to be prepared in accordance with the applicable provisions of the General PBA Regulation. The transition valuation report would be filed with the Financial Services Commission (FSCO) no later than one year after the transition valuation date. Any solvency deficiency disclosed in the transition valuation report would be required to be amortized over a period of not more than five years, with the first payment starting no later than 12 months after the valuation date. Going concern special payment schedules established in valuation reports prior to the transition valuation report would continue. Any new going concern unfunded liability identified in the transition valuation report would be amortized over a period of no more than 15 years, with the first payment starting no later than 12 months after the transition valuation date.
Additional limits on contribution holidays – in particular, a requirement that the transfer ratio of the pension plan not be below 1.1 immediately after the contribution holiday – and accelerated funding requirements on benefit improvements (i.e., above and beyond those imposed under Bill 120) would remain in effect for plans exiting stage one relief until the earlier of 14 years from the stage one valuation date or the date on which the second of two consecutive valuations are filed with FSCO indicating a transfer ratio of at least 1.0.
Finally, there are various disclosure requirements imposed under Regulation 178/11 with respect to the plans exiting from stage one relief. The information which is set out in the regulation may be provided in the annual statement given to members after the transitional valuation report is filed with FSCO.
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.