Canada: New Funding Framework For DB Pension Plans Announced A Follow Up From The 2017 Ontario Budget

On May 19, 2017, the Ontario Government announced that it is implementing a new funding framework for defined benefit (DB) pension plans in Ontario. Highlights include:

  • requiring funding on an enhanced going concern basis: changes to the going concern funding rules include shortening the amortization period from 15 years to 10 years for funding a shortfall in a plan and consolidating special payment requirements into a single schedule;
  • requiring funding of a reserve within the plan, called a "Provision for Adverse Deviation" or PfAD: this reserve will help manage future risk and help ensure benefits are secure; and
  • requiring funding on a solvency basis only in the event that a plan's funded status falls below 85 percent.

To help ensure benefit security in underfunded pension plans where the employer goes bankrupt, the government will also be increasing the monthly guarantee provided by the Pension Benefits Guarantee Fund for a plan member's pension by 50 percent, to $1,500 from $1,000.

Plans will be required to develop funding and governance policies and plan administrators will be required to provide to plan beneficiaries updated information on the status of their plan. New funding rules for plan benefit improvements are also expected. In addition, where annuities are purchased for retirees or deferred plan members, the Pension Benefits Act (PBA) will be amended to provide a discharge to the plan and the employer from further liability in connection with the annuitized benefits.

The government intends to introduce legislation in the fall to enable these changes and will also be consulting on draft regulations at that time. Interim measures will also be implemented in the coming weeks to assist DB plans that are required to file valuation reports dated on or after December 31, 2016, and before December 31, 2017, in order to assist plans that would otherwise face new solvency funding requirements due to those filings. With these changes, employers will have greater flexibility in managing their pension contributions and will be able to better plan for their pension costs.

What Else Was Announced for Pensions in the Recent Ontario Budget?

The May 19 announcement was a follow up to the 2017 Ontario Budget, A Stronger, Healthier Ontario, released on April 27, 2017 (the Budget). The Budget included a status update on three existing pension initiatives, as well as an announcement on some new pension initiatives. What follows is a summary of the pension-related Budget measures and how they affect employers, administrators and plan sponsors. 

New Financial Services Regulatory Authority

The government has reconfirmed its commitment to " ... establishing a new, flexible and innovative financial services and pension regulator that will strengthen consumer, investor and pension plan beneficiary protection, and is taking key steps to begin the transition to a new regulatory authority". The Financial Services Regulatory Authority of Ontario Act, 2016 was passed in December 2016 and sets the stage for the new regulator. 

The government will appoint a board of directors which will serve to oversee the new regulator, which will be known as the Financial Services Regulatory Authority (FSRA), in spring 2017. Consultations with stakeholders on the establishment of FSRA will continue, as government continues to review the recommendations from the expert advisory panel that recommended the creation of FSRA.

Legislative amendments regarding the development of FSRA's mandate and governance structure, as well as the structure and powers of the Financial Services Tribunal (FST), are anticipated by the end of 2017. In the interim, the government intends to pass legislative amendments enabling the FST to manage its caseload more efficiently.

Framework for Target Benefit Multi-Employer Pension Plans (TBMEPPs)

The government remains committed to developing a new regulatory framework for target benefit multi-employer pension plans (MEPPs). This framework is intended to replace the regulations respecting specified Ontario multi-employer pension plans (SOMEPPs) in respect of pension plans for unionized members. The government is also continuing to explore target benefit MEPP framework options for other plans that do not fall within that category.

A proposed target benefit MEPP framework is expected later this spring. Target benefit MEPP draft regulations are expected to be released for public consultation in fall 2017.

New Pension Initiatives

Framework for Defined Contribution (DC) Plans

The government is increasing its attention on DC pension plans with a focus on the importance of ensuring that members have sufficient funds to maintain their standard of living throughout retirement. To this end, the government is working towards expanding and modernizing the DC plan legislative and regulatory framework.

As a priority, the government has introduced amendments to the PBA in order to facilitate the implementation of variable benefits so that pension payments can be made directly from DC plans. In this way, retirees with variable benefit accounts can benefit from a plan's investment expertise and cost efficiencies.

A further government focus is providing effective disclosure to DC members. The government believes that member annual statements could be improved by including information about a DC plan member's expected retirement income. The government intends to collaborate with DC plan sponsors, the financial services industry and pension experts on revisions to annual member statements in an effort to assist DC plan members better prepare for retirement. Finally, the government is also considering measures to strengthen DC plan participation and performance. No anticipated timelines have been announced for these latter measures.  

Treatment of "Missing" Plan Members

The government has acknowledged that the current statutory framework in Ontario does not address locating missing pension plan members, nor does it address how to deal with the pension funds owed to these members. The situation of missing plan members is especially problematic for plan administrators attempting to wind up a pension plan. The government has proposed allowing the wind up of a plan to proceed even in the case where some plan members remain missing, but wants to ensure that any missing members' benefits are protected in this situation. The government has also introduced amendments to the PBA granting the Superintendent of Financial Services (Superintendent) the authority to waive the requirement to provide periodic pension statements for members that are considered missing.

The government intends to instruct the Superintendent to develop a policy to provide direction to administrators on steps they should take to locate missing members. Finally, the government is also contemplating establishing a registry where employers and administrators could post information about missing members and individuals could search for missing benefits. The government has not yet announced anticipated timelines for these latter initiatives.

Expanding the Powers of the Superintendent

Amendments to the PBA have also been released which will serve to enhance the powers of the Superintendent, including the authority to direct a plan administrator to provide plan beneficiaries with certain information, as well as the authority to hold a meeting to discuss specific matters. 

Plan Mergers Affecting Jointly-Sponsored Pension Plans

Finally, PBA amendments have been introduced that are intended to facilitate mergers of public sector single‐employer pension plans with existing jointly sponsored pension plans.

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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