The Ontario government has announced several sweeping changes to Ontario pension laws over the last two years. July 1, 2012 is a key date when many (but not all) of the changes will become effective. This FMC Law client bulletin describes most of the Ontario pension changes, and the actions that plan sponsors should take now in response to the changes.
In summary, sponsors of defined contribution ("DC") and defined benefit ("DB") pension plans must ensure that their plan texts provide immediate vesting for all Ontario members, effective July 1, 2012. There is no legal requirement to make other changes to plan texts at this point. However, DB plan sponsors may wish to consider changes to their plan texts in order to try to avoid the potentially costly new "grow‐in" rules described below. In addition, all plan sponsors should consider making additional changes to their plan texts regarding some of the other pension reforms, even though they are not legally required to do so.
Immediate vesting and locking in
Under the current rules, employers can require Ontario members of pension plans to wait two years after joining a pension plan, to "vest." In other words, if an employee terminates employment within the first two years of joining a pension plan, it has been permissible, until now, for plan texts to state that he is not entitled to receive anything (other than a refund of employee contributions, if any).
Starting July 1, 2012, the two‐year vesting rule will no longer be permitted. Ontario is adopting the approach that has long been in place in Quebec: as soon as an Ontario employee becomes a member of a pension plan, he is immediately vested and his benefit is locked‐in. There will no longer be any forfeiture amounts in pension plans with respect to Ontario members.
In reaction to this change, plan sponsors may want to consider lengthening the eligibility period for joining the plan, if it is currently less than two years. Ontario pension law will continue to permit employers to impose a two‐year waiting period to join a pension plan.
Cashing‐out of small benefits
The rules for cashing‐out or "unlocking" small benefit amounts have been overhauled. It is expected that effective July 1, 2012, it will be a lot easier to pay cash to a departing plan member who has a small benefit. In summary:
- The threshold amount for cashing‐out has been increased such that administrators can pay a terminating employee a lump sum amount in cash from the pension plan, if the amount of the employee's annual pension is less than 4% (rather than the current 2%) of the year's maximum pension earnings (YMPE) amount. The 2012 YMPE is $50,100; it increases annually. For 2012 that annual pension amount is $1,002 under the old rules, and $2,004 under the new rules.
- DC plan administrators will no longer have to convert a departing employee's individual DC account into an annual pension amount in order to determine if the cash‐out threshold is met. Under the new rules, the benefit can be cashed‐out if the DC account is less than 20% of the YMPE (in 2012, that's $10,020).
Many DB and DC plan texts set out the current small benefit payout threshold of 2% of the YMPE. There is no legal requirement to change plan texts to adopt the higher thresholds. However, we recommend that plan sponsors amend their plan texts so that they can adopt these higher cash‐out thresholds. Doing so will significantly lessen the administration costs of dealing with employees who terminate plan membership with small pension benefit amounts.
Extension of grow in benefits
Plan sponsors with certain types of DB plans must familiarize themselves with the new grow‐in rules. They come into effect on July 1, 2012. They may entitle terminating employees to much more valuable benefits from the pension plan.
The grow‐in rules apply to DB pension plans that have "early retirement enhancements". These are plans that say, for example, that employees who meet certain types of age and service criteria (such as a "rule of 80") are entitled to start collecting their pensions prior to age 65, with little or no reduction in the amount of their monthly pension.
The new rules extend the existing grow‐in rules. If a DB pension plan has never had to provide growin benefits on plant closures or other partial windup events, the new rules will have no effect.
The existing grow‐in rules provide that if there is a partial wind‐up event, such as a plant closure, a terminated plan member has the right to receive his early retirement pension under the same terms as if he had continued as an employee and plan member until reaching the early retirement eligibility age set out in the plan text (as long as the member's age plus service as at the date he actually terminates employment is 55 or more ‐ this is the "55 points" requirement).
The new extended grow‐in rules will say that all terminating plan members get grow‐in (if they have "55 points"), whenever they terminate employment, even if it's not a plant closure or other partial wind‐up event. The reason for this change is that partial wind‐ups will no longer exist under Ontario pension law, which is good news for plan sponsors. The bad news is that for some DB plan sponsors, the extension of grow‐in to all employee terminations is potentially very expensive. It could result in a large increase in the value of a terminating employee's benefit. Employers with DB plans should make sure they're aware of this valuable benefit when they structure severance packages.
The new grow‐in rules will apply to all terminations after June 30, 2012. As at the date of this FMC Law client bulletin, all of the details of the new rules have not been finalized by the Ontario government, but it seems likely that terminating employees will not be entitled to the grow‐in benefit if they:
- were terminated due to willful misconduct, disobedience or willful neglect of duty that was not trivial and was not condoned by the employer;
- were hired for a defined period of time, or for the completion of a specific task;
- are a "construction employee" as defined under Ontario employment law;
- are on a temporary lay‐off as defined under Ontario employment law; or
- resign more than 60 days prior to the end of the period of termination of employment given by the employer (this applies only in situations where the employer has provided a lengthy period of notice of termination).
FMC Law recommends that plan sponsors affected by these new rules consider whether they can, and should, change the terms of their pension plans to remove the early retirement enhancement provisions. If that is done, the grow‐in rules will not apply.
Pension plan mergers and asset transfers
Two years ago Ontario pension legislation was changed to provide for new rules that will make asset transfers and the merger of two or more pension plans much simpler. These are welcome changes since it has been expensive, and sometimes legally impossible, to merge pension plans under the current rules. Unfortunately, employers cannot proceed under the new rules yet. Specific regulations are required to implement them. The Ontario government announced in its 2012 budget that these regulations would be released this spring, but we haven't seen anything yet. Plan sponsors wishing to take advantage of the simpler asset transfer and plan merger rules will have to wait a bit longer.
In December of 2010, changes were made to Ontario pension laws to make it easier for employers to withdraw surplus. Employers no longer have to conduct tedious and expensive historical plan reviews in order to implement a surplus‐sharing deal. Rules were also introduced to create a new arbitration process in cases of disputes with pension plan members. Employers are now allowed to receive surplus if:
- the employer is entitled to the surplus according to the pension plan documents;
- there is a written surplus sharing agreement with pension plan members (and possibly other persons); or
- a court order or arbitration award provides for the payment.
Additional changes to the surplus withdrawal rules were recently released but are not yet in force. They are expected to come into effect on July 1, 2012. The recent pension reforms will further simplify the surplus withdrawal rules by removing the requirements that employers provide information relating to surplus attribution and contractual authority in the written surplus notice to the plan members. In addition, the recent changes make it clear that if an employer is funding a wind‐up deficiency and has contributed to the plan more than the amount required to fund the deficiency, the remaining assets in the plan may be refunded to the employer as an overpayment, rather than be treated as surplus.
Interest on employee contributions and lump sum payouts
We recommend that plan sponsors check what their plan texts say about the crediting of interest on contributions made by employees to the plan and lump sums payable to terminated members. New rules were recently introduced to clarify the interest that should be applied to those amounts. For DB plans that are not insured, if the plan text is silent on this issue, the interest rate must be at least the prescribed bank deposit rate. A plan sponsor may be able to credit employee contributions with interest equal to the pension fund rate of return; however, this must be expressly provided for in the plan text for DB plans. For DC plans that are not insured, the new rules require that the interest rate be at least equal to the pension fund rate of return. These new rules are expected to be effective July 1, 2012.
Superintendent's power to order a plan to be wound up
The Ontario Superintendent of Financial Services' powers to order the wind‐up of a pension plan will be expanded to include instances where the plan has no active members, or the plan members are no longer accruing pension benefits. This strengthening of the Superintendent's authority is expected to become effective July 1, 2012. A wind‐up order will not be automatic. It is possible that the Superintendent will not exercise his authority to order a wind‐up unless he believes that the security of the members' benefits is in jeopardy. This will be a sensitive issue for plan sponsors who have ceased accruals in DB plans, who do not wish to carry out a wind‐up in the current environment where solvency deficiencies are at an all‐time high.
Expanded rights of plan members regarding advisory committees
Ontario pension law has always permitted active members, deferred vested members and retired members of a pension plan to establish an "advisory committee." They were toothless committees. Ontario pension reforms will make changes regarding the membership and administrative burden of advisory committees. Advisory committees will continue to have no real power to direct the administration of pension plans.
Retired members have always been permitted to participate in advisory committees; however the pension reforms will guarantee retired member participation in these committees.
The reforms will also empower advisory committees to (i) charge their costs to pension funds; (ii) force pension plan administrators to meet with them; and (iii) force administrators to provide the committee with wide array of information. The regulations detailing these new financial and documentary powers have not been released by the Ontario government.
We will keep an eye out for the creation of broad rights that may give advisory committees the right to ask for an employer's sensitive financial or legal documents under the guise of monitoring the pension plan.
The reforms have created additional disclosure statement obligations that administrators should consider when they work with their third‐party service providers to create annual, termination and death benefit statements.
Regulations that came into force in May 2011 require that annual member statements include the transfer ratio of the pension plan as calculated in the most recent two valuations reports and an explanation of what the transfer ratio means. Basically, the transfer ratio describes the funded status of the plan on a solvency basis. For example, if the transfer ration is 0.85, then the plan is 85% funded. The Financial Services Commission of Ontario has indicated to some plan administrators that this requirement will not be applied to annual statements covering periods ending on or before December 31, 2011.
The reforms also indicate that retired members will be entitled to receive periodic benefit statements. The Ontario government has not yet released details specifying the frequency and content of what must be communicated to retirees.
Division of pensions on marriage breakdown
Significant changes came into effect on January 1, 2012, regarding the treatment of pension benefits of Ontario members who go through a breakdown of their spousal relationships. The new regime is a big improvement over the old regime. There are now very detailed, clear rules as to exactly what has to happen when a plan member's former spouse wants to receive the value of the pension he or she is entitled to.
Plan sponsors should consider whether they need to amend their pension plan texts to comply with the new regime in Ontario. The significant features of the new rules are:
- the non‐member former spouse can get a lump sum payout from the pension plan, even if the employee is continuing to accrue a pension;
- the plan administrator is required by law to calculate the value of the non‐member former spouse's entitlement, in accordance with formulas set out in new regulations under Ontario pension law; and
- specific request forms must be used by the plan member and former spouse, in order to request that the plan administrator calculate the value of the former spouse's entitlement.
The Ontario government has accomplished a great deal in improving and clarifying several challenging areas of pension plan administration. However, many employers who sponsor DB plans affected by the extended grow‐in rules will not be pleased with the additional costs of Ontario pension reform. The details of the ongoing reform will continue to be rolled out by the Ontario government in the coming months. FMC Law will issue additional client bulletins to explain what the future changes mean to our clients.
About Fraser Milner Casgrain LLP (FMC)
FMC is one of Canada's leading business and litigation law firms with more than 500 lawyers in six full-service offices located in the country's key business centres. We focus on providing outstanding service and value to our clients, and we strive to excel as a workplace of choice for our people. Regardless of where you choose to do business in Canada, our strong team of professionals possess knowledge and expertise on regional, national and cross-border matters. FMC's well-earned reputation for consistently delivering the highest quality legal services and counsel to our clients is complemented by an ongoing commitment to diversity and inclusion to broaden our insight and perspective on our clients' needs. Visit: www.fmc-law.com
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.