Canada: Ontario Files Regulations In Support Of Pension Plan Administrator Discharge Upon Annuity Purchase

The Ontario government recently filed O. Reg. 193/18, Purchase of Pension Benefits From an Insurance Company – Section 43.1 of the Act (Regulation) under the Pension Benefits Act (PBA). The Regulation supports the provision in section 43.1 of the PBA that provides a discharge to the administrator of a single-employer defined benefit pension plan where the administrator complies with specified requirements regarding the purchase of a pension, deferred pension or ancillary benefits from an insurance company. Section 43.1 of the PBA was added by Bill 177, Stronger, Fairer Ontario Act (Budget Measures), 2017, as discussed in our November 2017 Blakes Bulletin: Bill 177, Stronger, Fairer Ontario Act (Budget Measures), 2017: Pension Issues, but has not yet come into force. Both section 43.1 of the PBA and the Regulation come into force on July 1, 2018. These new rules will be of interest to administrators of Ontario defined benefit pension plans.

As noted in our January 2018 Blakes Bulletin: Ontario Pension Funding Reform and Administrator Discharge upon Annuity Purchase, the government previously posted a description of proposed regulations under section 43.1 of the PBA (Proposed Regulation Description). The Regulation is similar to the Proposed Regulation Description, but some changes have been made.

This bulletin summarizes the requirements of section 43.1 of the PBA and the Regulation.

Section 43.1 of the PBA provides for the discharge of the administrator of a single-employer pension plan if the administrator complies with specified requirements in respect of the purchase of a pension, deferred pension or ancillary benefits from an insurance company, which are set out in both section 43.1 of the PBA and the Regulation. The discharge also applies to annuities purchased prior to the date on which section 43.1 of the PBA comes into force (i.e., prior to July 1, 2018).

In both cases, the administrator is required to file with the Superintendent of Financial Services (Superintendent) a certificate prepared and signed by an actuary certifying that the administrator has complied with the requirements of section 43.1 of the PBA and the Regulation (Compliance Certificate), and is required to provide a notice of the annuity purchase to the former and retired members for whom the annuity was purchased.

DISCHARGE EFFECT AND ENTITLEMENT TO SURPLUS ON PLAN WIND-UP

The effect of the discharge is that the former or retired member in respect of whom the annuity purchase was made will no longer be considered a former or retired member under the plan. However, if such former or retired member would have been entitled to surplus under the plan if the plan had been wound up on the date of the annuity purchase, the former or retired member will, on the eventual wind-up of the plan, have the same rights to any remaining surplus as former and retired members who, as of the date of the wind-up, are entitled to payments under the plan.

ANNUITY REQUIREMENTS

Section 43.1(4) of the PBA sets out the following requirements for the purchase of an annuity:

  1. In the case of an annuity purchase in respect of a former member, the deferred pension or ancillary benefit purchased from the insurance company must provide the same benefit as the benefit the former member would have received from the pension plan had the purchase not been made.
  2. In the case of an annuity purchase in respect of a retired member, the pension or ancillary benefit purchased from the insurance company must provide the retired member with payments in the same amount and form as the pension or ancillary benefit, as the case may be, that the retired member would have received from the pension plan had the purchase not been made.
  3. If a spouse of a retired member is receiving a specified amount or a proportion of the pension instalment otherwise payable to the retired member in accordance with subsection 67.4 (1) of the PBA (division of a pension for certain family law purposes), the pension or ancillary benefit purchased from the insurance company must provide the retired member and the spouse with payments in the same amount and form as the payments they would have received from the pension plan had the purchase not been made.
  4. The insurance company must be authorized to sell annuities.
  5. The annuity contract must satisfy the prescribed requirements, which are set out in the Regulation and discussed below.
  6. The annuity purchase must meet any other requirements, conditions or limitations that may be prescribed, including requirements, conditions or limitations relating to funding, which are set out in the Regulation and discussed below.

The Regulation provides that the annuity contract must set out the following:

  1. No money payable under the contract will be assigned, charged, anticipated or given as security except as permitted under the Family Law Act, a family arbitration award or a domestic contract;
  2. A transaction that contravenes the above is void;
  3. An order under Part I (Family Property) of the Family Law Act, a family arbitration award or a domestic contract is not effective to the extent that it purports to entitle a spouse or former spouse of the former or retired member to a share that exceeds 50 per cent of the payments under the contract, determined as of the family law valuation date;
  4. Where the former member has a spouse at the time payments commence, the pension paid shall be in the form of a joint and survivor pension in accordance with section 44 of the PBA unless the former member and the spouse provide a waiver as set out in section 46 of the PBA;
  5. On the death of the former member before payment of the first instalment of his or her deferred pension or pension is due, the deferred pension will be administered in accordance with section 48 of the PBA; and
  6. The insurance company shall provide a certificate confirming the purchase to the former or retired member and, in the case of a retired member, and in some cases, the spouse of the retired member.

The Regulation also requires the annuity purchase to comply with the following requirements:

  1. The solvency ratio of the pension plan on the day after the date of the annuity purchase must be:

    1. At least 1.0, if the solvency ratio of the pension plan as set out in the actuarial report most recently filed in respect of the plan before the date of the purchase was at least 1.0, or
    2. At least equal to the greater of 85 and the solvency ratio of the pension plan as set out in the actuarial report most recently filed in respect of the plan before the date of the annuity purchase, if the solvency ratio of the pension plan as set out in that report was less than 1.0.

The above requirement is hereafter referred to as the "Funding Requirement".

  1. If the plan's solvency ratio does not meet the applicable threshold in the above, the employer must remit contributions to the pension fund within 90 days of the date of the annuity purchase to cover the shortfall.
  2. The administrator must maintain certain records with respect to the annuity purchase. Such records include specified information and documents regarding the annuity, including the date of the purchase, information about the insurance company, as well as records relating to the former and retired members in respect of whom the annuity was purchased.
  3. When the administrator files the Compliance Certificate with the Superintendent, it must also file (1) the names and addresses of the former members and retired members and, in some cases, the spouse of the retired member, for whom the annuity was purchased, and (2) a copy of the annuity contract.

ANNUITIES PURCHASED PRIOR TO JULY 1, 2018

As noted above, the discharge under section 43.1 of the PBA will also apply to annuities purchased prior to the date that section 43.1 of the PBA comes into effect (i.e., before July 1, 2018), provided such annuities satisfy the requirements of the PBA and the Regulation (Existing Annuities).

In some cases, an additional payment will be required to be made to the insurance company from the pension fund for the purpose of adjusting the Existing Annuity contract to satisfy the requirements of the Regulation. In addition to the requirement to file a Compliance Certificate in respect of an Existing Annuity, the Existing Annuity must satisfy, or be adjusted to satisfy, the following specified requirements:

  1. The first four requirements for the purchase of an annuity under section 43.1(4) of the PBA, as set out above under "Annuity Requirements".
  2. If a payment is made to the insurer for purposes of making a subsequent adjustment to the Existing Annuity contract, the solvency ratio of the pension plan after the date of such subsequent adjustment must satisfy the applicable Funding Requirement noted above, based on the actuarial report most recently filed prior to the date of the subsequent adjustment.
  3. If the solvency ratio does not satisfy the Funding Requirement thresholds noted above immediately after the date of the subsequent adjustment, the employer must remit contributions to the pension fund within 90 days of the date of the subsequent adjustment to cover the shortfall.
  4. If a subsequent adjustment to the Existing Annuity is not required, the solvency ratio of the pension plan in the actuarial report most recently filed prior to filing the Compliance Certificate must be at least 0.85.

NOTICE REQUIREMENTS

A notice containing prescribed information must be provided to the affected former and/or retired members, and in some cases, the spouse of the retired member, before the administrator is discharged, including for an Existing Annuity.

ELECTION REGARDING PREPARATION OF ACTUARIAL COST CERTIFICATE

Finally, the Regulation allows the administrator to elect, after the purchase of an annuity from an insurance company pursuant to section 43.1 of the PBA, to cause an actuarial cost certificate to be prepared by an actuary, as of the purchase date. If such an election is filed, the employer, or a person or entity required to make contributions on behalf of the employer, shall commence making payments in accordance with the actuarial cost certificate within 90 days after the date of the purchase, in respect of the period beginning on the purchase date. The administrator will also have to file the cost certificate within 90 days after the date of the annuity purchase.

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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