Update on Ontario’s Retirement Reforms and Initiatives
Date: November 15, 2013
On Thursday, November 7, 2013, Ontario’s minority government released its economic outlook and fiscal review, titled Creating Jobs and Growing the Economy (the “Economic Outlook”). The Economic Outlook updates and also expands upon legislative and other reform initiatives that had previously been announced.
In this FTR Now, we review the key retirement-related updates and developments in the Economic Outlook that will be of interest to pension plan administrators and employers.
CANADA PENSION PLAN ENHANCEMENT
The Economic Outlook identifies the Canada Pension Plan (“CPP”) as the “foundation of the nation’s retirement income system,” and reiterates the government’s commitment to secure an agreement to enhance the CPP. The proposed CPP enhancement would increase the amount of retirement income for all workers by increasing contributions by both employers and employees. However, the proposed changes to the CPP require agreement between the federal government and seven out of the ten provinces, representing two-thirds of the population of the provinces, and to date this initiative has not received the support required to move forward. The Economic Outlook indicates that the Ontario government intends to proceed with a “made in Ontario” solution if an agreement to enhance the CPP cannot be reached. Details of this proposed “made in Ontario” solution have not been disclosed, and so it remains to be seen how this Ontario solution might take shape.
PENSION INVESTMENT RULES
Ontario’s pension investment rules, which have been harmonized with the federal framework, prohibit pension plans from owning more than 30 per cent of the voting shares of a single corporation (“30% Rule”). The rules also limit the percentage of plan assets that can be invested in any one person or entity, or group of associated entities or corporations, to 10 per cent (“10% Rule”).
In an effort to modernize these investment rules, the government intends to amend regulations under the Pension Benefits Act (Ontario) (“PBA”) to allow pension plans to invest in certain Ontario public infrastructure projects, without application of the 30% Rule. The government also intends to make regulatory amendments to provide an exemption from the 10% Rule respecting investments in certain government-issued, inflation index securities (e.g. U.S. Treasury Inflation-Protected Securities).
TARGET BENEFIT PENSION PLANS
Target benefit plans are recognized under amendments that were previously made to the PBA. However, these target benefit plan provisions within the PBA have not yet been proclaimed into force. The Economic Outlook provides that the government will proceed with consultations on regulatory changes related to target benefits in eligible Multi-Employer Pension Plans (“MEPPs”). The consultations, which are scheduled to take place in the winter of 2014, are intended to help clarify the rules for MEPPs that provide target benefits.
In Ontario’s 2013 Budget, A Prosperous and Fair Ontario (the “2013 Budget”), which we reviewed in our May 6, 2013 FTR Now (“Budget FTR Now“), the government had previously communicated its intent to establish a framework for single-employer target benefit plans. The Economic Outlook reiterates this intent, but does not set out a timeframe for this initiative.
POOLED REGISTERED PENSION PLANS
Following the coming into force of the federal pooled registered pension plan (“PRPP”) framework on December 14, 2012, a number of provinces have taken steps to introduce PRPP legislation for non-federally regulated employees. Further to the announcement made in the 2013 Budget, the Economic Outlook indicates that the government intends to implement PRPP legislation following consultations in the fall of 2013.
DEFINED CONTRIBUTION PLAN INITIATIVES
Currently, an Ontario member of a defined contribution pension plan is required to transfer the commuted value of their pension benefit to a registered retirement vehicle before a periodic retirement income (a pension) can begin to be paid. The government has announced its intention to develop regulations that would authorize defined contribution pension plans to pay pensions directly from these plans.
DEFINED BENEFIT PLAN INITIATIVES
CONTRIBUTION HOLIDAYS AND FUNDING OF BENEFIT IMPROVEMENTS
To enhance the long-term sustainability of defined benefit plans, the government confirmed previously announced plans to implement certain funding-related changes, including measures to impose limits on contribution holidays and accelerated funding of benefit improvements. The Economic Outlook does not set out a timeframe for the implementation of these proposed measures.
ASSET TRANSFERS AND SPLIT PENSIONS
Regulatory requirements and court decisions have created certain barriers to asset transfers between pension plans in connection with corporate restructurings or government divestments. These asset transfer barriers can cause a plan member to have a “split pension,” whereby two pensions are payable at retirement, respecting employment with the “old” and “new” employers, the aggregate amount of which might be lower than if the pensions had been combined in one plan. The government previously posted draft regulations, which are intended to permit certain plans to consolidate pension benefits of eligible individuals, and to facilitate asset transfers while protecting benefit security. The government intends to consider feedback provided on the draft regulations, and has stated that final regulations are expected to take effect in January 2014.
PUBLIC SECTOR SPECIFIC INITIATIVES
POOLED ASSET MANAGEMENT ENTITY
Further to the 2013 Budget, the government established a technical working group to implement the pooled asset management entity for public sector single-employer pension plans (“SEPPs”) envisaged by Bill Morneau in his report Facilitating Pooled Asset Management for Ontario’s Public-Sector Institutions. Advice from this technical working group is intended to assist the government determine how to move forward with the implementation of the pooled asset management entity in 2014.
SINGLE-EMPLOYER PENSION PLANS
In the 2013 Budget, the government announced its commitment to support the sustainability and affordability of SEPPs in the public sector by (i) encouraging equal cost sharing for ongoing contributions, (ii) considering opportunities supporting joint sponsorship as the model for pension governance and funding, and (iii) developing a framework permitting the transfer of assets from SEPPs to jointly sponsored pension plans (“JSPPs”) and allowing certain SEPPs to merge or convert to JSPPs.
The government intends to provide additional solvency relief for public sector SEPPs that have demonstrated movement towards greater affordability and sustainability. The government also intends to permit letters of credit to be used by eligible SEPP employer-sponsors that are engaged in discussions to convert SEPPs to JSPPs once a framework is in place.
ELECTRICITY SECTOR PENSION PLANS
The government has indicated that steps taken to increase employees’ pension plan contributions within the electricity sector, incrementally over time, will not adequately address current affordability issues, and that more immediate changes are necessary. The Economic Outlook confirms the government’s previously announced commitment to pursue equal cost sharing and governance changes respecting pension plans in the electricity sector.
The Economic Outlook provides an update on a number of previously announced retirement initiatives. We will continue to monitor these initiatives as the government moves forward with its commitment to reform Ontario’s retirement income system.
If you have any questions about this article, please contact any member of our Pension, Benefits and Executive Compensation Practice Group.
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