Pension Reform Measures in Ontario have Arrived
Date: July 27, 2012
Until recent years, the statutory framework governing occupational pension plans for Ontario employees had remained largely unchanged for 20 years. Then, in 2010 the Ontario government passed two significant pension reform Bills: Bill 236 and Bill 120. There have been four subsequent Bills which made further changes to the Pension Benefits Act (“PBA”).
On July 1, 2012 many of the reform measures set out in Bill 236 were proclaimed into force. Companion regulations (O. Reg. 178/12, O. Reg. 179/12, O. Reg. 180/12, O. Reg. 181/12, O. Reg. 182/12 and O. Reg. 183/12, collectively the “New Regulations”) were filed on June 26, 2012. Thus, after years of pending Ontario reform, employers must take immediate action to bring their administrative practices, pension plans and communications into compliance with new Ontario rules. The July 1, 2012 changes come on the heels of the January 1, 2012 introduction of a new regime governing the valuation and division of pension benefits on marriage breakdown for people who reside in Ontario. Immediate action must also be taken in respect of these new marriage breakdown rules.
This FTR Now provides an overview of the PBA changes that became effective on July 1, 2012 and January 1, 2012 and summarizes the changes that are still forthcoming. In this FTR Now, we focus primarily on those changes that will affect single-employer pension plans.
CHANGES AFFECTING ONGOING MEMBER BENEFIT ENTITLEMENT AND RIGHTS
We start off by providing you with an overview of the changes to individual member rights and entitlements that became effective July 1, 2012.
1. EXPANDED GROW-IN RIGHTS
Statutory “grow-in rights” give eligible members of a defined benefit (“DB”) pension plan an entitlement to early retirement benefits (as set out in the terms of the plan) to which they are not otherwise entitled under the terms of the plan. Prior to July 1, 2012, statutory grow-in rights were provided to eligible Ontario members only in connection with a full or partial wind up of their pension plan. To be eligible, an Ontario member must have 55 or more age and service “points” on the applicable date.
In conjunction with the elimination of partial wind ups, the PBA has been amended to provide that grow-in rights will be triggered in a broader set of circumstances defined as an “activating event”. Full wind ups will continue to trigger grow-in rights under the new rules. Involuntary employer initiated terminations will also generally trigger grow-in rights. The New Regulations provide that an activating event includes a situation where a member resigns any time after receiving notice of termination of employment by the employer. 
A termination for “wilful misconduct, disobedience or wilful neglect of duty by the member that is not trivial and has not been condoned by the employer” is not an activating event. The New Regulations provide that the following situations are also not an activating event:
- the member who is placed on a temporary lay-off, as defined in subsection 56(2) of the Employment Standards Act, 2000 (the “ESA”); or
- the termination of a member who is a “construction employee”, as defined in O. Reg. 285/01 under the ESA. 
Multi-employer pension plans (“MEPP”) and jointly-sponsored pension plans (“JSPP”) may opt-out of the new grow-in rights regime. An opt-out process is set out in the New Regulations.
2. IMMEDIATE VESTING AND LOCKING-IN
All pension benefits accrued by Ontario members who terminate employment on or after July 1, 2012 are now immediately vested and locked-in. This is likely the most pervasive change that will affect the majority of pension plans with Ontario members (including those registered in other provinces).
3. NEW THRESHOLDS FOR THE UNLOCKING OF SMALL BENEFITS
In conjunction with the introduction of immediate vesting and locking-in, the PBA has been amended to increase the small benefit threshold to enable the pay-out of small benefits upon termination and retirement. A plan may provide for the settlement of the member’s benefit by way of a cash payment or unlocked transfer if: (i) the annual pension is less than 4% of the Year’s Maximum Pensionable Earnings (“YMPE”) in the year of termination of employment or (ii) the commuted value of the former member’s pension is less than 20% of the YMPE in the year of termination of employment. The PBA now also extends small benefit unlocking to survivor benefits.
Small benefit cash out provisions are optional. The terms of the pension plan must provide for the commutation. An employer will need to consider whether the current wording of its pension plan is drafted to incorporate the new statutory threshold or whether plan amendments are required before the higher commutation limits or extension of unlocking to survivor benefits can be applied.
4. DEATH BENEFITS FOR PRE-1987 SERVICE
The PBA previously provided entitlement to pre-retirement death benefits in respect of post-1986 service only. The PBA has been amended to provide that the surviving spouse, designated beneficiary or estate of a member who is entitled to a benefit in respect of post-1986 service is also entitled to receive the member’s contributions made in respect of pre-1987 service, plus interest.
5. COMMUTED VALUE TRANSFERS
Effective July 1, 2012, the New Regulations updated the actuarial standard to be applied when calculating commuted values for pension plan members who terminate employment on or after July 1, 2012.
6. RULES REGARDING THE TRANSFER OF NON-LOCKED-IN BENEFITS
The PBA now provides that members, former members, retirees and spouses must be given transfer options in respect of lump sum amounts payable from a plan. For example, members must be given the right to transfer small benefit payments and excess contributions to an RRSP on RRIF in lieu of a cash lump sum payment.
These above-noted changes require updates and revisions to administrative practices, plan texts, forms and communications, including plan booklets and online resources. Administrators must ensure that the administration of their pension plans is consistent with new, mandatory provisions of the PBA, regardless of whether the employer has amended the plan text or updated communications yet. Similarly, employers should assess whether they wish to amend their pension plans to reflect the optional provisions of the PBA, such as the higher small benefits thresholds.
The New Regulations include new disclosure requirements in annual statements and termination statements (on termination, retirement and death) that relate to the above-noted PBA changes. For example, the New Regulations now prescribe additional information relating to grow-in rights, vesting, locking-in and transfer options that must be included in termination statements.
The Ontario pension regulator, the Financial Services Commission of Ontario (“FSCO”) has indicated that the requirements of the New Regulations must be included in annual statements which cover any period on or after July 1, 2012. Termination, death and retirement statements must comply with
the new rules in respect of any termination, death or retirement occurring on or after July 1, 2012.
OTHER PLAN LEVEL CHANGES
The following “plan level changes” became effective on July 1, 2012.
7. SUPERINTENDENT POWER TO WIND UP A CLOSED PLAN CLARIFIED
The circumstances in which the Superintendent of Financial Services (the “Superintendent”) can order a plan wind up have been expanded in the New Regulations to include:
- where a plan has no active members (i.e. it has only deferred vested members, retired members and non-member beneficiaries); or
- if members of a pension plan no longer accrue pension benefits or ancillary benefits under the plan and the plan is closed to new members.
Employers will want to pay special attention to these new provisions when considering the closure of a DB pension plan and/or the suspension of future pension accruals. Employers may also want to consider whether steps can be taken with respect to legacy plans to avoid triggering these new wind up provisions.
8. REGULATIONS SUPPORTING THE NEW SURPLUS WITHDRAWAL REGIME
New surplus rules were introduced under the PBA effective December 8, 2010. Under the new regime, an employer can access surplus in one of three ways: (i) if the documents that support and create a plan provide for payment of surplus to the employer; (ii) if a written agreement between the employer and at least two-thirds (2/3) of members and an appropriate percentage of former members, retired members and other persons entitled to payments under the plan provide for payment of surplus to the employer; or (iii) through an arbitration award.
In support of the new surplus withdrawal regime, the New Regulations include new requirements regarding information that must be included in wind up notices and notices of a surplus withdrawal application.
In conjunction with the release of the New Regulations, FSCO has posted new policies regarding the new surplus withdrawal process on their website.
9. USE OF ELECTRONIC COMMUNICATIONS
The PBA now expressly authorizes the use of electronic communications by employers and administrators where they have the plan members’ permission to do so and the electronic means complies with the Electronic Commerce Act.
10. ACCESS TO PLAN INFORMATION
The PBA and the New Regulations expand the list of records that must be made available to members, former members, retirees, and others. The means by which records may be accessed has also been expanded; eligible persons may now make written requests to access prescribed records either electronically or by mail, for a fee.
11. INDIVIDUAL PENSION PLANS
Individual pension plans (“IPPs”) are now identified as a distinct type of plan under the PBA and the New Regulations include changes intended to harmonize the funding rules with recent changes made to the Income Tax Regulations. The rules governing the funding of IPPs are similar to the rules previously governing “designated plans”.
NEW ONTARIO MARRIAGE BREAKDOWN REGIME
Effective January 1, 2012 new provisions of the PBA came into force altering the regime governing the division of a member’s pension benefits upon his or her marriage breakdown.
Very generally, under the new regime, plan administrators are required, upon request, to prepare valuations of the pension benefits accrued by members during their marriages in accordance with the prescribed rules. The resulting calculations must be provided to both the member and the spouse in a prescribed statement. Administrators cannot refuse to provide the statement, but can charge a fee for preparation of the statement, subject to prescribed maximums. The new PBA marriage breakdown regime includes detailed and prescriptive rules and a myriad of forms to be used throughout the process.
Previously, the division of pensions in Ontario as a result of a marriage breakdown could not occur until the member was terminated or retired. Under the new regime, spouses are entitled to immediately receive either a lump sum transfer of their interest (if the marriage breakdown occurs before the member’s retirement) or a division of the pension in pay (if the member retired prior to the marriage breakdown), as specified in a court order, separation agreement or arbitration award.
Administrators should already be complying with the new marriage breakdown rules in respect of relationship breakdowns where the parties have created or obtained a court order, separation agreement or arbitration award made on or after January 1, 2012. If administrators have not already done so, their pension plans and administrative practices should be reviewed and updated to reflect the new marriage breakdown regime as part of the entire review of their pension plans resulting from the coming into force of the pension reforms in July 2012. FSCO has posted extensive “Questions & Answers” on its website to assist plan administrators in complying with the new regime and has indicated that it will continue to update the guidance from time to time.
STILL TO COME …
While the amended PBA and the New Regulations have brought about sweeping reforms that now impact the day-to-day administration of pension plans in Ontario and any multi-jurisdictional pension plans with Ontario members, pension reform is not yet complete. Many additional provisions of reform legislation that has passed since 2010 have yet to be proclaimed into effect. The following provides a summary of some of the key additional changes that are anticipated to become effective in the fall of 2012 or in 2013.
- 2012 Solvency Funding Relief. In the 2012 Ontario Budget the government committed to extending the temporary solvency funding relief first offered to Ontario pension plans in 2009. The 2009 relief program allowed pension plans the option to elect to: (i) defer special payments in respect of new deficiencies up to one year from the valuation date; (ii) consolidate existing payment schedules over a new five year amortization period; and (iii) extend the amortization period for new deficiencies from five to ten years. In the 2012 Budget, the government also indicated that it would make the ability to defer special payments for up to one year from the date of a new actuarial valuation a permanent funding rule. Regulations are anticipated to be made in the fall of 2012 to provide this additional solvency funding relief.
- Changes to the actuarial methods and assumptions. In recent years the government also announced that new restrictions would be introduced on the actuarial methods and assumptions used in the preparation of reports on pension plans or pension funds. Additional regulations to prescribe requirements and restrictions applicable to the actuarial methods and assumptions to be used in reports are still outstanding.
- Letters of Credit. In Bill 120, the PBA was amended to allow the use of letters of credit in lieu of cash contributions to fund DB pension plan deficits up to 15% of a plan’s solvency liabilities. The government reaffirmed its commitment to providing employers with additional flexibility in the funding of their pension plans in the 2012 Budget, but the necessary regulatory details have yet to be introduced.
- New notice requirements. Once the new notice requirements of the PBA are proclaimed into force, an administrator will be required to provide members, former members and retirees advance notice of plan amendments, unless specifically exempted. Regulations are still required to provide the details regarding the content of advance notices and those circumstances that may be exempted. Administrators will also be required to provide annual statements to both former members and retirees, in addition to the annual statements currently provided to active members. Again, the content and details of such annual statements have yet to be prescribed.
- Asset transfers. Several pieces of reform legislation have significantly altered and simplified the plan to plan asset transfer rules in Ontario. Once in effect, the PBA will open up a window within which pension plans affected by a past restructuring may enter into an asset transfer agreement to facilitate such consolidation.
- New plan designs. Bill 120 introduced the concepts of “target benefit plans” (in the unionized context), “optional benefits” (i.e. employee funded additional benefits), as well as the ability to pay benefits from defined contribution (“DC”) plans. Again, companion regulations have not yet been released.
- Phased retirement. Phased retirement rules have been introduced but, again, are not yet effective. Companion regulations are required.
- Filing of the SIP&P. Pension plan administrators will be required to file their SIP&P with FSCO, and disclose whether or not the SIP&P addresses environmental, social or governance factors. Regulatory details regarding the filing requirement (e.g., deadlines) and the expectation for the content of SIP&Ps have not yet been released.
- Options for “Unlocated Beneficiaries”. The government has proposed to explore options with respect to the benefits of unlocated members of plans that have been wound up, in whole or in part. Currently, no formal process exists to handle these benefits, delaying the completion of wind ups. The timeframe for the establishment of such a process is unknown.
- Contribution holidays. Bill 120 also amended the PBA to provide additional guidelines regarding the use of contribution holidays by employers. Once these provisions are in effect, employers will only be permitted to take contribution holidays where not prohibited by the plan documents and only if the plan has surplus. Additional prescribed conditions (including disclosure requirements) are expected to be identified but the government previously announced its intention in August 2010 that contribution holidays will not be permitted unless plans have transfer ratios at or above 105%.
- Records retention. New PBA provisions regarding legislative retention rules are not yet in force. FSCO has previously released a policy that administrators are expected to comply with, but it is anticipated that the supporting regulations will provide additional prescribed details that administrators will be required to follow.
We will continue to monitor, and report on, these additional Ontario pension reforms when they are proclaimed into force.
The review in this FTR Now is limited to only those reforms underway in Ontario. Reform is afoot in other jurisdictions. In recent months British Columbia, Saskatchewan, New Brunswick, Nova Scotia and Prince Edward Island have announced, introduced or passed legislation amending their pension legislation. Certain trends across Canada are clear, such as a move toward immediate vesting in most provinces, but in other cases, there remain significant differences between the legislation in place from one province to the next. Employers with multi-jurisdictional plans may want to consider adopting common changes now (e.g., immediate vesting) to avoid piecemeal implementation. We will continue to monitor the reform initiatives at work across Canada and provide additional periodic updates.
As you review your pension plans and administrative practices with respect to the implementation of the reforms, if you have any questions regarding the impact of the recent reforms on your pension plan or workplace generally, please contact any member of our Pension & Benefits Practice Group.
 The draft regulations released for comment in April 2012 (the “Draft Regulations”) allowed a member who has received notice of termination of employment by the employer to end the employment relationship early without forfeiting his or her grow-in benefits, if the member resigned within 60 days of the intended termination date. The final New Regulations have been revised to remove reference to the 60 day limitation.
 The Draft Regulations provided that the termination of a member who is an employee who was hired either for a fixed term or to complete a specific task upon completion of the task was not an activating event. This was excluded from the final New Regulations.
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