Canada: Ontario Budget: Implications For Private And Public Sector Pensions

The Ontario government's 2012 Budget, released yesterday, includes a number of announcements which will be of interest to administrators of both private and public sector pension plans.

Some Good News for Private Sector Employers

The government recognized that as a result of ongoing market volatility and low interest rates many private sector defined benefit plans continue to struggle with solvency funding deficits. In response, the government announced an extension of the temporary solvency funding relief measures introduced in 2009. Employers will also be permitted to begin amortization of solvency and going concern special payments one year after a plan valuation date. These changes will go into effect when filing the first actuarial valuation report dated on or after September 30, 2011.

In addition, the government reiterated its plan to permit employers to use letters of credit for up to 15% of a plan's solvency liabilities. (This amendment was included in Bill 120, but is yet to be proclaimed in force.)

The Budget also announced the establishment of an "Unclaimed Intangible Property Program" to reunite owners with their "unclaimed property", including insurance policies, returned stocks and bonds, bank deposits, unpaid wages, and pension benefits. This may finally provide a mechanism for plan administrators to deal with the benefits of unlocated members.

Ongoing Pension Reform

The Budget recaps past pension reform (e.g., Bill 236 and Bill 120 amendments to the Ontario Pension Benefits Act) and indicates that draft regulations to implement these reforms will be released later this year – some as early as this spring – including regulations related to the following:

  • clarification of the surplus rules;
  • implementation of many of the asset transfer provisions;
  • implementation of a "funding concerns" test for plans not required to fund on a solvency basis; and
  • eligibility conditions for "contribution holidays" and accelerated funding of benefit improvements.

The Budget also states that a number of previously announced reform amendments will be coming into force on July 1, 2012, including:

  • immediate vesting;
  • elimination of future partial plan wind-ups; and
  • extension of grow-in benefits to all employees (other than those dismissed for wilful misconduct, disobedience or wilful neglect of duty) and the related ability of jointly sponsored and multi-employer pension plans to opt out.

"Sustainable" and "Affordable" Public Sector Plans

Taking its cue from the pension-related recommendations in Don Drummond's report on the Ontario public service, the Budget notes the increasing cost of the government's pension obligations and emphasizes the need for public sector plans to be "more affordable for taxpayers and sustainable for pension plan members." In this regard, the Budget includes (in addition to wage freezes, which would impact most public sector plans) the following announcements specific to pension plans:

Jointly Sponsored Plans

  • The government would develop a legislative framework, subject to consultation, to implement the objectives set out below.
  • Where employee contributions are currently less than employer contributions, increases to employee contributions would be considered as a means of reducing pension deficits. The goal being to split plan funding 50/50 between employers and employees.
  • Where there is a deficit, plans would be required to reduce future benefits or ancillary benefits (subject to limits in exceptional circumstances) before further increasing employer contributions.
  • Any benefit reductions would affect future benefits only. It would not impact benefits that have already been accrued or the benefits of current retirees.
  • If plan sponsors cannot reach an agreement on benefit reductions, a new third-party dispute resolution process would be triggered.

Single-Employer Plans

  • The government will adjust previously announced temporary solvency funding relief measures to encourage plans to split the cost of ongoing contributions evenly between employers and employees within five years.
  • Efforts to convert current single-employer defined benefit public-sector pension plans to jointly sponsored pension plans with equal cost-sharing will also be encouraged.

Pension Asset Management

  • Recognizing the effectiveness of the asset management strategies of some of the larger public sector plans, the government indicates that it will introduce legislation this fall to facilitate the pooling of pension fund assets and investment management functions of smaller public sector plans.
  • The Budget indicates that this pooling of resources may be achieved "through a new investment management entity or by building on existing large public-sector pension plans" and that further consultation will be required.

Enhancements to Canada's Retirement System

The Budget reiterates the Ontario government's commitment to"modest" enhancements to the Canada Pension Plan. At the same time, the government expresses its concerns regarding the federal government's proposed pooled registered pension plans, specifying that "the implementation of pension innovation should be tied to CPP enhancement as part of a comprehensive approach."

Next Steps

While much of the detail is yet to come, this year's Ontario Budget contains more pension announcements than we have tended to see in past years, indicating that pensions are higher up on the government's agenda. Private and public sector plans, and organizations that sponsor them, may want to start preparing (now) for the changes ahead.

Paul Litner is Chair of the Pensions & Benefits Department.

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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