The pension and benefits landscape continues to evolve. With the election of a Liberal majority government in Ontario, it appears that retirement programs will be a key focus for the next several years. Here are a few of the most noteworthy developments to keep an eye on for 2015:
1. Rethinking Investment Rules: Following the Money
The Ontario government introduced changes to the investment rules under the Ontario Pension Benefits Act (PBA) for Ontario registered pension plans. Some of the notable revisions include:
- securities issued and fully guaranteed by the Government of the United States are no longer subject to the 10% rule;1
- pension plan investments in eligible Ontario public infrastructure projects may no longer be subject to the 30% rule;2 and
- effective January 1, 2016, pension plan administrators will be required to file their Statement of Investment Policies and Procedures (SIPP) with the Financial Services Commission of Ontario, and disclose whether, and if so, how, their SIPP addresses environmental, social or governmental factors.
The changes to the investment rules are aimed at both increasing the use of "safe" securities that are linked with inflation and stimulating investment in Ontario's economy. The latter amendment is in response to plan members and administrators' increasing use and awareness of the principles of social responsibility and transparency in plan investment. Plan administrators will need to review and revise their SIPPs in order to comply with these requirements by January 2016.
2. Alternative Plan Designs: Trying Something New
Target benefit pension plans (TBPs) and Pooled Registered Pension Plans (PRPPs) are two notable pension design developments that will continue to gain momentum in the coming months.
PRPPs are large-scale defined contribution pension plans intended to lower pension costs for both members and employers by leveraging economies of scale. This plan design was introduced federally in 2012 through the Pooled Registered Pension Plan Act. Alberta, British Columbia, Nova Scotia, and Saskatchewan have already adopted parallel provincial legislation and, in late 2014, Ontario introduced Bill 57 to incorporate PRPPs into its provincial pensions framework.
TBPs are an alternative to traditional defined benefit and defined contribution plans. Under TBPs, both employer and employee contributions are fixed. While such plans are designed to pay a target benefit on retirement, accrued and future benefits can be decreased if plan performance differs from projections. TBPs allow employees to pool longevity and investment risk while providing employers with contribution stability. In 2012 New Brunswick adopted its "shared risk model," the first TBP regime formally adopted in Canada. Since then, various provinces have adopted TBP legislation. However, in many cases such legislation has not been proclaimed in force, awaiting regulations detailing how these plans are to be implemented.
3. Pension Asset Transfers: They're Baaaaaaaaack!
Historically, the transfer of pension plan assets and liabilities between the vendor and purchaser in the context of a sale of a business was quite common. This practice slowed down significantly in 2003 with the release of the Ontario Court of Appeal's decision in Aegon Canada Inc. v. ING Canada Inc.3 In an effort to make it easier to facilitate a pension asset transfer, amendments to the PBA and corresponding regulations came into force on January 1, 2014.4 Under the new regime, when assets are transferred, they are no longer identified as assets of those of the pre-merger plans. Unlike the old rules, the new amendments do not require the successor plan to provide identical pension benefits for transferred members. The amendments only require that: (i) transferred assets which relate to defined benefits in the pre-merger plan be used to provide defined benefits in the successor plan; and (ii) the commuted value of the benefits in the post-merger plan be no less than the commuted value of benefits in the pre-merger plan.5 Furthermore, if the asset transfer is made with the consent of transferred members, former members and retired members, then the administrator of the original plan is discharged from its responsibilities relating to the transferred benefits once the asset transfer is complete.6 We anticipate that there will be an increase in the use of pension asset transfers in 2015.
4. "All for one...": Buy-ins and Buy-outs
As a result of strong market returns in 2013, Canadian pension funds started 2014 with strong solvency positions. Many commentators predicted that 2014's "return of the surplus" would prompt plan sponsors to engage in de-risking strategies, such as annuitization.
There are two methods of annuitization, both of which are aimed at shifting the risks of providing defined benefits from the plan sponsor to a third party insurance company:
- Buy-in: a premium is paid to an insurer and a single annuity contract is issued to the pension fund. The pensions are paid to retirees by the plan fund and not by the insurer. The annuity contract is considered an investment made by the pension fund.
- Buy-out: a premium is paid to an insurance company to purchase an annuity contract on behalf of each retiree.
However, due in part to low interest rates and increased longevity data, plan solvency levels actually declined throughout 2014.7 As a result, the trend toward annuitization did not materialize quite as predicted. While it appears that low interest rates and a moderate economic outlook will keep annuitization off the table in the short term, plan sponsors will look to this as an option if and when their defined benefit plans return to fully funded positions.
5. "... and One for All": The ORPP
On December 8, 2014, the Ontario Government introduced Bill 56, which would commit the provincial legislature to establishing the Ontario Retirement Pension Plan (ORPP) by January 1, 2017. The ORPP is the Ontario Government's proposed solution to the problem of low rates of retirement savings and low workplace pension coverage.
The ORPP, as currently proposed, will have several key elements, including:
- mandatory participation of eligible employees employed in Ontario;8
- exemptions from participation for employees with a "comparable" workplace pension plan or who are similarly exempt from contributing to the Canada Pension Plan;9
- equal contributions from employers and employees not exceeding 1.9% each on employee earnings up to the maximum annual income threshold of $90,000;
- providing a defined benefit income stream for life, which will be indexed to inflation; and
- administration by an arm's-length entity with "a strong governance structure."
The 2014 Ontario provincial budget indicates that the ORPP will aim to replace 15% of a person's earnings up to the maximum annual income threshold of $90,000. In December 2014, the Ontario Government released a consultation paper on the ORPP requesting comments from both employees and employers on issues regarding what constitutes a "comparable" workplace pension plan, the minimum earnings threshold and the preferred approach for the self-employed.10 We expect 2015 to be an eventful year as the plan design features of the ORPP are fleshed out in more detail.
* With assistance from Marc Soscia, Articling Student.
1 The 10% rule prohibits a plan administrator from investing 10% or more of a pension plan's assets in a single entity, or two related entities. The exemption for U.S. securities became effective March 7, 2014.
2 The 30% rule prohibits a plan administrator from investing the moneys of the plan in the securities of a corporation to which are attached more than 30% of the votes that may be cast to elect the directors of the corporation. Comments on this proposal were due January 9, 2015.
3 (2003) 127 A.C.W.S. (3d) 556, 179 O.A.C. 196 (Ont. C.A.), leave to appeal to S.C.C. refused,  S.C.C.A. No. 50.
4 O. Reg. 308/13, Asset Transfers Under Section 80.1 of the Act, O. Reg. 310/13, Asset Transfers Under Sections 80 and 81 of the Act, and O. Reg. 306/13.
5 PBA, s. 79.2.
6 PBA, s. 79.2(14).
7 Mercer, Funded Status of Canadian Pension Plans Dips in Third Quarter, October 1, 2014 online: http://www.mercer.ca/content/mercer/north-america/ca/en/newsroom/funded-status-of-canadian-pension-plans-dips-in-third-quarter.html .
8 Eligible employees are individuals between the age of 18 and 70 who are employed in Ontario in 'eligible employment' and earning above a minimum threshold (currently contemplated as $3,500 per year).
9 A consultation paper released in December 2014 indicates that the Ontario Government's preferred approach is to define "comparable" as defined benefit and target benefit multi-employer pension plans, meaning that under the current proposal, employers who sponsor defined contribution-style pension arrangements would be required to contribute to the ORPP.
10 Comments on the consultation are due by February 13, 2015.
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