Yesterday, the Honourable Jim Flaherty announced proposed
changes to federal pension laws. The majority of the changes will
only affect registered pension plans that cover employees who fall
within the federal government's jurisdiction (including
employees of airlines, railways, radio broadcasters, banks, ferries
and shiplines). However, there is a proposed increase to the
pension surplus threshold under federal tax legislation that would
impact all pension plans, including those registered in Ontario. In
addition, there is a proposed change to the federal investment
rules which could prompt provincial changes, as Ontario's
pension investment rules (as well as the pension rules in several
other provinces) currently refer to the existing federal investment
Proposed Change to Tax Surplus Limit Canadian
tax laws restrict the amount of surplus that a defined benefit
pension plan is allowed to hold. Once a pension plan reaches the
maximum level of surplus allowed under the tax laws, employer
contributions to the plan must generally be suspended until the
plan's funded level drops to an acceptable level.
The announcement proposed that the current surplus threshold of
10% be increased to 25% and that this increase apply in respect of
employer contributions relating to current service costs for 2010
and subsequent years. This change would allow pension plans to
potentially build more of a funding buffer in the pension fund
during good times, with the aim of minimizing the adverse effects
experienced by pension plans during economic downturns.
Proposed Changes to Pension Investment Rules
The announcement indicated that the pension investment framework
would be modernized and certain changes would be made. The
quantitative limits restricting pension plan investments in respect
of resource and real property investments would be removed, but
pension plans would be prohibited from making any investments in
the sponsoring employer's own debt or shares. In addition, the
current restriction prohibiting a plan from investing more than 10%
of its assets in any one entity would be amended to be based on a
market value test of the assets of the plan (as opposed to the book
Notably, the proposed changes do not include the removal of the
so-called "30% rule", which restricts pension plans from
investing plan monies "in the securities of a corporation to
which are attached more than 30 per cent of the votes that may be
cast to elect the directors of the corporation". This rule has
been criticized for being antiquated and not in touch with current
The current Ontario regulations incorporate the existing federal
regulations. Accordingly, if these proposed changes are implemented
federally, and if Ontario wishes them to apply to pension plans
registered in the province, Ontario would also be required to amend
Other Proposed Changes That would Affect Federally Registered
The announcement indicated significant proposed changes that
would affect only federally registered pension plans, which
Requiring pension benefits to be fully funded in the event that
a pension plan is terminated.
Allowing employers to take contribution holidays only where a
pension plan is more than fully funded by a solvency margin of 5%
of solvency liabilities. Plans in surplus would also be required to
file valuations on an annual basis to ensure that any contribution
holidays taken are based on a recent determination of the
plan's funded status.
Restricting employers from amending a pension plan to provide
benefit enhancements where the pension plan is significantly under
funded or would be following the amendment.
Enhancing certain member disclosure requirements in respect of
the pension plan.
Changing the vesting period from 2 years to immediate vesting
of pension benefits for plan participants.
Adding rules that will apply specifically to defined
contribution pension plans. These rules will provide guidance on
the responsibilities of the various stakeholders and will take into
account the Guidelines for Capital Accumulation Plans released by
the Canadian Association of Pension Supervisory Authorities. They
will also eliminate the requirement for such plans to have a
Statement of Investment Policies and Procedures.
Adding rules that may help facilitate dealing with plan
specific near-term funding issues. These rules would allow plan
specific funding arrangements to be negotiated in respect of
distressed pension plans.
Draft legislation in respect of these proposed changes has not
been provided at this time and no guidance has been given as to
when such draft legislation may be available.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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