On Tuesday October 27, 2009, the federal Finance Minister, Jim Flaherty, unveiled a proposal to reform federally regulated pension plans by implementing "a balanced package of measures for the benefit of pension plan sponsors, plan members and retirees." While Ottawa's proposed changes are primarily aimed at federally regulated industries and their private pension plans, two of the changes (the increase to the Income Tax Act surplus threshold and the changes to the investment rules) will affect provincially regulated pension plans. The reform proposal outlined five key objectives.

1. Enhanced Protections For Plan Members

  • Plan sponsors will be required to fully fund pension benefits on plan termination
  • Contribution holidays will be permitted only if the pension plan is more than fully funded by a solvency margin, which will be set at a level of 5 percent of solvency liabilities
  • Benefit improvements would not be permitted for a plan that has or would have a solvency ratio of 0.85 or less
  • Sponsor declared partial terminations will be eliminated from the Act
  • There will be immediate vesting of benefits
  • The requirement for locking-in of vested pensions would remain at two years of plan membership
  • Disclosure requirements will be enhanced by expanding the information that must be provided in annual member reports and by expanding the types of statements
  • Electronic provision of disclosure will also be permitted on a positive consent basis

2. Reducing Funding Volatility For Defined Benefit Plan Sponsors

  • Solvency funding will be based on the average of the solvency ratio over three years
  • Annual valuations will be required
  • Letters of credit will be allowed to satisfy solvency payments up to a limit of 15 percent of plan assets
  • The surplus threshold in the Income Tax Act will be increased to 25 percent, after which the employer contributions must generally be suspended (this change will apply to provincially regulated plans as well)

3. Resolution Of Plan-Specific Problems

  • A workout scheme for distressed pension plans will be established to help facilitate the resolution of plan-specific problems that arise
  • Member and retiree consent would be required when negotiating changes to pension arrangements
  • Negotiated workout arrangements would also be subject to Ministerial approval

4. Framework For Defined Contribution And Negotiated Contribution Defined Benefit Plans

  • The Act and the Regulations will be revised to clarify the responsibilities and accountabilities of parties involved with defined contribution plans
  • Defined contribution pension plans will have the option to permit members to receive Life Income Fund (LIF) style retirement benefit payments directly from the pension fund
  • Employer contributions to negotiated contribution defined benefit plans would be limited to the level negotiated in collectively bargained agreements, and Boards of Trustees will be able to reduce accrued benefits despite any plan terms to the contrary

5. Modernization Of Pension Fund Investment Rules

  • Removal of the quantitative limits in respect of resource and real property investments
  • The 10 percent concentration limit will be based on market value, with an exception for pooled investments over which the employer does not exercise direct control
  • Prohibition of direct self investment

These changes will apply to provincially regulated plans that have adopted the federal investment rules in force from time to time.

In addition to the above mentioned reforms, other changes, such as directing benefits of unlocated members of a terminated plan to a central repository, will also be implemented to further improve the pension plan framework.

In response to Ottawa's proposals, Ontario's Finance Minister, Dwight Duncan, announced that Ontario would be introducing new provincial measures in November. These new provincial reforms are aimed at enhancing protection for pension plans by creating a more harmonized system of pension regulation across the country.

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