Canada: Ontario Releases A Pension-Heavy 2012 Budget

OVERVIEW

On March 27, 2012, the Ontario government released the 2012 Ontario Budget, titled "Strong Action for Ontario" (the Budget). Included in the Budget are a wide array of proposals that relate to pension matters.

Highlights of the Budget include a number of proposals aimed at reducing the costs of public-sector pension plans, a suggestion that the federal government's pooled registered pension plan (PRPP) model should be tied to Canadian Pension Plan (CPP) enhancement, new proposals to affect private-sector pension plans, and a status update respecting previously announced pension reform.

Whether this Budget will pass is uncertain at this time. The initial Conservative reaction is to vote against it. The NDP have said that they will consult with Ontarians before deciding how to proceed.

In this bulletin, we will address the key features of the Budget as they relate to pension matters.

PUBLIC-SECTOR PENSIONS PLANS

In the Budget, the Ontario government makes a number of specific proposals relating to public-sector plans, which generally relate to reducing costs. These proposals can be separated into three categories: those relating to public-sector jointly sponsored pension plans (JSPPs), those relating to public-sector single-employer pension plans (SEPPs), and those relating to the pooling of pension fund assets for investment purposes.

Public-Sector Jointly Sponsored Pension Plans

The Budget states that Ontario's government plans to move to a 50-50 funding model between employers and employees for all JSPPs. The Budget also proposes consultations that are intended to create a legislative framework that operates within the following preset parameters in times of plan deficit:

  • reduction of future benefits or ancillary benefits would be mandatory prior to an increase in employer contributions;
  • accrued benefits would not be impacted by benefit reductions (current retirees would not be affected);
  • an increase in employee contributions would be an option where employer contributions are greater than employee contributions;
  • limits on reductions before contribution increases are considered will be available in "exceptional circumstances"; and
  • a third-party dispute resolution process will be invoked where sponsors cannot agree on benefit reductions.

A final parameter is that the framework will be reviewed after Ontario's budget is balanced.

Public-Sector Single-Employer Pension Plans

In the Budget, the Ontario government states that many public-sector employees, and those in the electricity and university sectors in particular, are members of SEPPs. The Budget asserts that under these plans, employers are responsible for funding deficits and also typically contribute more than employees. Consequently, the Ontario government sets forth the expectation that within five years these plans will move to a 50-50 cost-sharing formula for ongoing contributions. Nevertheless, employers will remain responsible for funding shortfalls.

In order to encourage implementation of the 50-50 cost-sharing formula, the Ontario government proposes to adjust temporary solvency relief measures in the five-year transition period and will also be supportive of plan conversions from SEPP to JSPP with 50-50 cost sharing. In this respect, the Ontario government proposes to remove what the Budget refers to as "a barrier" to the creation of an electricity-sector JSPP following consultations with stakeholders.

Pooling of Pension Fund Assets

The Budget states that the Ontario government intends to introduce a legislative framework in the fall that would facilitate the pooling of the fund assets of smaller public-sector plans. Such pooling could be accomplished either by building on larger public-sector pension plans or by way of a new investment management entity. The Budget provides that the Ontario government will appoint an adviser to lead the implementation process. The Budget emphasizes that studies have shown that there have been benefits in the form of cost savings and enhanced rates of return resulting from pooled pension fund investments.

CONTINUING PENSION REFORM

In the Budget, the Ontario government outlines a general implementation schedule for certain changes to the Pension Benefits Act (Ontario) (the PBA), which were announced in 2010 but are not currently in effect.

Specifically, the Budget announces the government's intention to proclaim the following measures effective July 1, 2012:

  • elimination of future partial wind-ups;
  • immediate vesting of pension benefits;
  • the ability for multi-employer pension plans and JSPPs to elect not to provide grow-in benefits; and
  • provision of grow-in benefits to all eligible members terminated from employment, other than for cause.

The Budget also announces the Ontario government's intention to post later this spring some of the long-awaited regulations under thePBA that will:

  • clarify the rules relating to pension surplus;
  • implement many of the asset transfer provisions that will apply on a corporate restructuring; and
  • implement the provisions affecting "retired members."

Additionally, later in 2012, the Ontario government intends to post draft regulations that will:

  • provide a "funding concerns" test for plans not required to fund on a solvency basis;
  • address the eligibility conditions for sponsors taking "contribution holidays"; and
  • provide for accelerated funding of benefit enhancements.

We expect that there will be at least a 45-day consultation period with respect to the proposed regulations.

Financial-Hardship Unlocking
The Budget also announces the Ontario government's intention to restructure the current regime for accessing locked-in accounts due to financial-hardship and create a simpler, more streamlined process. Consistent with the federal regime, individuals will be able to request withdrawals directly from their financial institutions, and consent of the regulator will no longer be necessary. Regulations implementing this change will be posted for public consultation.

Solvency Funding Relief

a) Extension of the 2009 Solvency Relief Regulations

In the Budget, the Ontario government also proposes to extend the temporary solvency relief measures for sponsors of private-sector defined benefit pension plans (the term used in the Budget), which were introduced in 2009. Consistent with the 2009 measures, plan administrators who file an actuarial valuation report dated September 30, 2011, or later will be able to:

  • consolidate existing solvency payment schedules into a new five-year payment schedule; and
  • extend the solvency payment schedule to a maximum of 10 years for a new solvency deficiency determined in the report, subject to the consent of plan beneficiaries.

b) Letters of Credit

Regulations are expected this spring that will permit employers to use irrevocable letters of credit from financial institutions to cover up to 15% of solvency liabilities.

c) Special Payments

Additional flexibility with respect to permitting solvency and going-concern special payments to be amortized beginning one year after a plan valuation date will also be introduced.

REACTION TO THE FEDERAL PRPP MODEL

In the Budget, the Ontario government explicitly expresses a number of concerns with the proposed federal model for PRPPs. These concerns include that PRPPs may replace one form of retirement arrangement with another instead of expanding retirement income savings and coverage, that members may not be adequately protected by the PRPP fiduciary framework, that the low-cost objective may not be achieved, that there may not be sufficient flexibility for life events, and that provincial licensing and regulation costs must be kept reasonable as such costs will be passed on to members. However, the Budget expresses the Ontario government's willingness to continue to work collaboratively to develop the PRPP model.

In the Budget, the Ontario government also expresses its continued support for a modest, phased-in and fully funded enhancement of the CPP and states that pension innovation should be tied to CPP enhancement as part of a comprehensive approach.

CONCLUSION

As noted above, the Budget must pass a confidence vote before the current Ontario government can take steps to implement the proposals it has set forth. Furthermore, even if the Budget survives a confidence vote, the consultations proposed in the Budget may result in modifications to a number of the proposals.

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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