Originally published in Blakes Bulletin on Pension and Employee Benefits, August 2007
In November 2006, the Government of Ontario established a Commission to examine legislation governing the funding of defined benefit pension plans, the rules relating to pension deficits and surpluses, and other issues relating to the security, viability and sustainability of the pension system in Ontario. The Minister of Finance appointed Professor Harry Arthurs as Chair of the Commission (Commissioner) and also an Advisory Panel composed of the author, Ian Markham, Bob Baldwin and Murray Gold to assist the Chair (Advisors). The Commissioner is solely responsible for the final contents of the Commission’s report, and the direction and oversight of the Commission staff.
Those involved, however, agreed the best outcome of the Commission’s work for all stakeholders and the Province of Ontario will be achieved if they can come to an agreement on the conduct of the Commission’s work and recommendations. The Commissioner will, with the assistance of the Advisors, prepare a report to the Minister for delivery in the summer of 2008.
The government has provided the following Guiding Principles that the Commission should observe to guide the process:
- The importance of maintaining and encouraging the system of defined benefit pension plans in Ontario
- The importance of maintaining the affordability of defined benefit pension plans for both members and sponsors
- The importance of pension plans in supporting a competitive economy
- The need to safeguard the security of pension benefits
- The need to balance the rights and obligations of employers, plan members and pensioners
- The impact of demographics and the changing nature of the workforce on the provision of employment pensions.
The government has also stated that the Commission should consider the following factors in its deliberations:
- The need to encourage the appropriate funding of pension plans and acknowledge the connection between surplus and funding. The recent case law and its implications for employers, plan members and pensioners
- The need to avoid costly litigation regarding pension surplus issues
- The desirability of facilitating negotiations between employers, plan members and pensioners, and balancing their interests in the surplus withdrawal process
- The risks and obligations assumed by employers, plan members and pensioners in defined benefit pension plans
- Developments in other Canadian jurisdictions and the harmonization of pension laws in Canada
- That recommendations should be practical, affordable and implementable.
Issues To Be Addressed
The government has also stated the following issues are to be addressed in the Report:
- Pension Plan Funding
- The adequacy of regulatory tools, existing reporting rules and timing of required actuarial valuations
- The rules governing the payment of going concern unfunded liabilities and solvency deficiencies
- The effect of indexation and other non pre-funded benefits on a plan’s funded status
- The impact of funding rules on the Pension Benefits Guarantee Fund
- The funding of multi-employer pension plans
- Pension Plan Surplus
- Surplus rights and deficit obligations
- Surplus distribution from defined benefit pension plans on full and partial wind-up, and from continuing plans
- Reductions or suspensions of contributions (contribution holidays) to defined benefit pension plans
- Pension Benefits Guarantee Fund
- Coverage, assessments and allocations from the Fund
- Its role in providing security of pension benefits to plan members and its continuing viability
- Pension Plan Wind-Ups
- Benefits added by law
- The determination of a partial plan wind-up
- Plan wind-ups when an employer is in deficit
- Unlocated beneficiaries
- Pension Plan Splits and Mergers
- The allocation of plan surpluses and deficits following mergers and divestments
- Pension asset transfers involving groups of employees
- Pensions as an important policy instrument that support workforce attachment and foster an entrepreneurial economy
- Any other matters relevant to enhancing the viability of defined benefit pension plans in Ontario.
Commission Discussion Paper
In February 2007, the Commission released a discussion paper. Much of it addresses issues listed in the Commission’s detailed mandate, upon which it must and will make recommendations. A second set of issues has to do with the social and economic environment in which pension plans operate, and the principles the Commission has been asked to follow. The Commission will no doubt have to address those matters in its deliberations and its report, but more by way of establishing a context for its analysis than with a view to making concrete recommendations about them.
A third group of issues is raised for discussion – not because they fall directly within the Commission’s mandate – but because they are known to be of great concern to people who think about pension policy and work with pension plans. Given that these issues are almost certain to be raised in submissions to the Commission, it has tried to frame them in such a way that discussion about them will, in the end, assist the Commission in investigating the concerns at the core of its mandate, as set out above.
As the paper notes, mention of a particular issue in this paper by no means signals the Commission will be dealing with it in its final report, nor does failure to mention an issue imply it will be ignored. The discussion paper, which can be viewed on the Commission’s web site noted at the end of this article, asks over 60 questions for which it is seeking input and invites other questions.
The Commission is also now assigning over 20 research papers and will start meeting with stakeholders in May and June 2007. Public hearings for the presentation of briefs will occur in the fall of 2007 in six cities. There will be three days of hearings in Toronto currently scheduled for October 17, 18 and 19. Persons wishing to participate in these hearings should register with the Commission ahead of time and submit briefs no later than October 15, 2007. In addition, submissions can be continued to be made up to November 21, 2007, for consideration by the Commission.
Plan Sponsor Need And Service Provider Input
Given the breadth of the inquiry and competing agendas, it will be important that input is received from the plan sponsor and service provider communities. One can expect that labour will be well-organized and, because of the centralization of many of their functions, they are often in a better position to respond to the general inquiries than individual plan sponsors and service providers who may not wish to be publicly aligned with specific issues. Organizations such as ACPM, Ontario Bar Association, Canadian Bar Association, Canadian Institute of Actuaries and Canadian Institute of Chartered Accountants may be important voices to raise plan sponsor and service provider concerns.
It is possible to look through the questions raised under consideration and be concerned that some questions, if not properly answered, could lead to inappropriate results. It is likely that reform will result in compromises by both plan sponsors and members, so it will be important to consider all questions in this context.
For example, questions about whether pension plans have been properly managed and whether the appropriate oversight mechanisms exist are questions many sponsors would believe inappropriate on the basis that the problems in current Canadian pensions are not due to a lack of proper management or oversight. Also, questions on indexation of benefits in the context of a struggling defined benefit system seem to require a quick and clear response.
Significant questions are raised about whether greater emphasis should be on jointly sponsored or co-operative plans. It will be important for private plan sponsors to speak to this issue and indicate whether that would solve their concerns. Questions were also raised about joint administration of defined benefit pension plans and whether they would make them more attractive to employers. It is going to be important for the government to hear plan sponsors’ views on that issue.
Questions have also been raised regarding whether more flexibility (that is, room to contribute) under the Income Tax Act (Canada) would help employers. Again, this is an area where plan sponsors are going to have to be clear about what concerns they have about funding defined benefit plans. Funding concerns for many plan sponsors have less to do with the Income Tax Act maximum and more to do about accessing those funds after they have been contributed due to surplus withdraw rules and difficulty with mergers. If this is a view, the government needs to hear it.
There are also questions that seem to query the requirement for increased oversight where "riskier investment strategies" are undertaken. Plan sponsors are going to want to speak to how the prudent person investment rules have been working and whether they wish any further oversight in this regard, and also what effect additional oversight may have on defined benefit plans. Plan sponsors may also like to speak on their view of the Ontario Pension Benefits Guarantee Fund and whether it was necessary to increase the cost of that system to make it financially viable.
Questions also deal with pension plan mergers, splits and restructuring, which many plan sponsor and service providers will have an opinion on since the Transamerica case. To the extent that plan sponsors have had dealings with the Financial Services Tribunal and the courts, it would be useful to let the Commission know whether they think there is efficiency in the Financial Services Tribunal or whether it has developed into a sufficiently legalistic body that it may be more appropriate to go directly to court.
Questions also arise about whether the lack of more harmonization between the governments is problematic to the pension system. While we would all like absolute uniformity, one wonders if plan sponsors ought not to indicate how much difficulty they are having with the lack of uniformity, recognizing that gaining the interprovincial agreement may create further delays in getting any changes in legislation completed.
In the pension community, we have all felt the need for significant pension reform for many years. This Commission is an important opportunity to finally see reform occur. It is vital, however, that plan sponsor and service provider issues and views are heard. It is hoped such views will be presented at the public hearings and in written briefs. The Commission web site at www.pensionreview.on.ca provides further information and updates.
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.