Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Pension & Employee Benefits, July 2009
The Ontario government published its long-awaited regulation under the Pension Benefits Act (Ontario) (the Ontario PBA) to provide temporary solvency funding relief to Ontario registered defined benefit pension plans. The new provisions are contained in Regulation 239/09 under the Ontario PBA (the Regulation), which was published on June 23, 2009. The Regulation also includes new rules which permit residents of Ontario to unlock up to 50% of the funds held in a life income fund (LIF), on and after January 1, 2011. (O. Reg. 239/ 09 and www.fsco.gov.on.ca)
ELIGIBILITY FOR TEMPORARY SOLVENCY FUNDING RELIEF
The relief provided in the Regulation will apply to solvency deficiencies reported in the first filed valuation report with a valuation date on or after September 30, 2008 and before September 30, 2011 (referred to in the Regulation as the Solvency Relief Report).
The new solvency funding relief can apply to most pension plans that provide defined benefits (including hybrid plans); however, various plans are expressly excluded, including:
- specified Ontario multi-employer plans;"
- participating pension plans covered by the Stelco Inc. Pension Plan Regulation;
- pension plans that made the "jumbo plan" election under section 5.1 of the Ontario PBA Regulation;
- pension plans established after September 29, 2008, unless the plan is formed as a result of a merger of plans and one of the pre-merger plans was established before September 30, 2008 or as a result of a division or split-off from another pre-September 30, 2008 pension plan.
OVERVIEW OF RELIEF OPTIONS
As promised in the March 26, 2009 Ontario Provincial Budget, the Regulation provides three different temporary funding relief options. Under the Regulation, any or all of the three options can be used subject to meeting the applicable conditions, consent requirements and disclosure requirements.
Option 1: 12-Month Deferral of Catch-up Payments
The Regulation provides for a deferral of up to 12 months for the special payments required to fund any new going concern unfunded liability and/or new solvency deficiency determined as of the valuation date in the Solvency Relief Report.
At the end of this temporary deferral period, payments will be required over an ensuing period of 15 years for a going concern unfunded liability and five years for a solvency deficiency or (10 years if Option 3 below is also elected).
In order to take advantage of this option, the plan administrator must notify eligible members and eligible former members of the election within 60 days of the start of the special payments required under the Solvency Relief Report. The Regulation prescribes certain information that must be included in the notice about the elected relief option and its implications.
Member consent is not required for this option, nor is any further disclosure required after the initial notice. This option is not available for jointly sponsored pension plans, since, in effect, those plans already have the ability to defer catch-up payments by one year.
Option 2: Consolidation into New Five-Year Solvency Payment Schedule
The Regulation provides a second option under which existing solvency special payment schedules that were established in previous valuations may be consolidated into a single amount and amortized over a new five-year period commencing on the valuation date of the Solvency Relief Report.
Depending on the circumstances of the particular plan, the effect of the consolidation may be to simplify the existing schedule of special payments and potentially reduce the contributions that would otherwise be required to be made over the short term.
To the extent that the solvency special payments made between the valuation date in a previous valuation and the filing date for the Solvency Relief Report exceed the payments that would have been required under the Solvency Relief Report as a result of the consolidation, the excess can be used to reduce subsequent contributions up to the date on which the next valuation report is filed.
As in the case of Option 1, the administrator of the plan who selects this option must provide an election notice to all eligible members and former members which meets various prescribed requirements. Similar to Option 1, no further disclosure is required in connection with this option and member consent is not required.
Option 3: 10-Year Amortization of New Solvency Deficiency
The Regulation will allow a plan sponsor to amortize the new solvency deficiency established in the Solvency Relief Report over a 10-year period provided various consent and notice requirements are met. This option can be used in conjunction with other options including Option 1 (deferring catch-up payments required under the Solvency Relief Report). Jointly sponsored pension plans are exempt from the consent requirement.
In order to take advantage of this option, the plan administrator must first deliver an information statement and a "notice of objection form" to eligible members and eligible former members and, where applicable, to the collective bargaining agent. The terms "eligible member" and "eligible former member" are defined in the Regulation. It appears, for example, that individuals who are eligible members or eligible former members on the date of the Solvency Relief Report but who die or transfer out their entire entitlement under the plan before the date the information form is distributed need not be included in the consent group.
The information statement provided to the eligible members and eligible former members must include information prescribed in the new Regulation including a description of the option selected, the plan's transfer ratio disclosed in the Solvency Relief Report and an explanation as to how the relief sought could affect benefit security. Importantly, the statement must also explain that the extension of the amortization period to 10 years will only be available if no more than one-third of the eligible members and one-third of the eligible former members object within a specified time period (essentially 45 days after the date the statement is mailed).
The Regulation contains several provisions which deal with the ability of a collective bargaining agent to object on behalf of the eligible members that it represents. The information statement to be provided to an eligible member must include a statement indicating, where applicable, whether the member is represented by a bargaining agent (in which case the bargaining agent can deal with the objection on behalf of a member) or whether the member can personally exercise the right to object. The Regulation provides that the bargaining agent may object on behalf of eligible members that it represents as well as members who retire from the bargaining unit between the valuation date under the Solvency Relief Report and the date the information statement is distributed.
It is interesting to note that the Regulation requires that the notice of objection itself and the process for dealing with objections must be developed in such a way so that the plan administrator is not able to determine the identity of any eligible member or eligible former member who objects.
Unlike Options 1 and 2, under Option 3 there is a continuing disclosure obligation on the plan administrator. Specifically, an administrator who elects Option 3 must also provide the form of election notice similar to that required in connection with Options 1 and 2, which must also confirm that the consent process has been successfully completed. In addition, the administrator is required under the Regulation to provide an annual progress report to eligible members, eligible former members and any collective bargaining agent that represents eligible members when the notice is sent within six months of the end of each fiscal year until the new solvency deficiency is liquidated. The requirements for the progress report are set out in the Regulation and include information concerning transfer ratios, estimated annual normal cost and special payment contributions.
In order to elect one or more of the relief options, the administrator must file a written election with the Superintendent of Financial Services (the Superintendent). The election can only be made once, cannot be rescinded and must be filed with the Solvency Relief Report. Minimum required contributions for the period preceding the valuation date in the Solvency Relief Report must be up to date.
Although the election itself cannot be rescinded, if the solvency deficiencies of the plan are eliminated more quickly than scheduled, the plan administrator will be relieved of a number of the ongoing requirements that would otherwise have been applicable.
OTHER SOLVENCY FUNDING RELIEF MEASURES
A number of other measures are contained in the Regulation including:
- One-month extension for valuation reports with a valuation date on or after September 30, 2008 and before November 1, 2008;
- Ability to use solvency excess that emerges after the Solvency Relief Report to reduce solvency payments established in the Solvency Relief Report;
- Retroactive implementation of the Final Standard of Practice for Pension Commuted Values from the Canadian Institute of Actuaries (effective April 1, 2009) for solvency valuations with valuation dates after December 11, 2008.
NEW FUNDING RESTRICTIONS
As indicated in the March 26, 2009 Ontario Provincial Budget, the new measures on temporary funding relief are accompanied by what effectively amount to a series of additional funding restrictions, including restrictions on plan improvements, restrictions on contribution holidays and permanent measures to address declining transfer ratios.
Pension plans that implement Option 2 or 3 or both are subject to restrictions on funding for plan improvements. In brief, any going concern unfunded liability created as a result of a benefit improvement implemented on or after the date of the Solvency Relief Report must be liquidated over five rather than 15 years.
The Regulation also implements potential restrictions on contribution holidays relating to employer normal costs for years ending in the last six months of 2010, 2011 and 2012. A plan sponsor that wishes to take a contribution holiday must file an actuarial cost certificate within the first 90 days of the fiscal year of the plan indicating that the lesser of a going concern surplus and solvency surplus sufficient to cover the amount of the holiday continues to exist at the beginning of the financial year to which the holiday is applicable. The Regulation provides that estimated liabilities are acceptable for this purpose but the actual determination must be based on assumptions that would be appropriate at the effective date of the actual cost certificate.
It is important to note that the new restrictions relating to contribution holidays apply to most defined benefit plans registered in Ontario and apply regardless of whether or not the plan administrator has applied for solvency funding relief under the Regulation.
Finally, the Ontario PBA Regulation relating to payment of commuted values where there has been a decline in a pension plan's transfer ratio have been amended. Under the amended regulation (section 19 of the Ontario PBA Regulation), the Superintendent's approval will now be required where the plan administrator knows (or ought to know) that the transfer ratio has dropped by 10% or more, based on the most recently determined transfer ratio. The new approval requirement makes it clear that a decline in the transfer ratio from, for example, .85 to .78, triggers the approval requirement.
Plan administrators who are required to file actuarial valuation reports under the PBA in the near future will need to review the relief options available to them as soon as possible in order to identify the appropriate course of action. Where a plan sponsor or administrator wants to take advantage of Option 3, it will need to carefully consider the consent requirements and the ongoing operation and disclosure requirements that follow from the selection of that option. Regardless of whether a plan sponsor or administrator wants to take advantage of the new forms of temporary solvency funding relief, all administrators of defined benefit plans registered in Ontario should be aware of the new restrictions relating to contribution holidays and the new requirements relating to transfer of commuted values.
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.