Change on the Horizon: Ontario Pension Plan Funding Reform is Coming Soon
Date: September 19, 2017
Earlier this year, the Ontario government announced proposed reforms to pension plan funding that will have a significant impact on employers and plan administrators with plans registered in Ontario. These changes are expected to be part of the government’s Fall agenda, and will be of particular interest to employers who provide single employer defined benefit (DB) pension plans or participate in multi-employer pension plans (MEPPs) in Ontario. Learn more about these pending reforms in this FTR Now.
Background on the Proposals
In 2017, the Ontario government made two key announcements setting out proposed reforms for pension plan funding in Ontario:
- On May 19, 2017, the Ontario government released an outline of the proposed changes to the Ontario DB pension plan funding rules resulting from the review on solvency funding led by David Marshall (the DB Funding Proposals)
- On June 29, 2017, the government announced the proposed funding and governance framework for target benefit MEPPs (the MEPP Proposals).
The government has indicated that its proposals will be implemented through amendments to the Pension Benefits Act (PBA) and PBA Regulations to be released in Fall 2017 (likely in conjunction with the Fall Economic Statement).
We review the changes proposed to date below, and identify important details we are waiting to learn more about when the legislation is introduced this Fall.
Current Rules for Single Employer DB Plan Funding
Under the current PBA funding framework applicable to plans registered in Ontario, employers that sponsor single employer DB pension plans must fund the normal cost of the pension benefits accruing under their DB pension plan each year, as well as any going concern deficiency (amortized over 15 years). In addition, employers are required to fund any solvency deficiency (amortized over five years).
Both going concern and solvency funding are determined on the basis of regular actuarial valuations. The going concern valuation examines the pension plan as if the plan were to continue indefinitely and establishes the funding necessary to satisfy plan liabilities over the long term. On the other hand, the solvency valuation examines the funded status of the pension plan as if the plan were to wind up on the date of the valuation and all liabilities became due.
Especially in an extended low long-term interest environment, the current solvency funding requirements result in volatile and unpredictable cash funding requirements, and have proven particularly onerous for employers. As a result, over the past decade, a large number of exceptions to the solvency funding requirements were created through various temporary solvency funding relief measures and, in some cases, through special regulations for named pension plans.
Proposed DB Plan Funding Rule Changes for Single Employer Plans – What We Know
The DB Funding Proposals are the culmination of an extensive consultation process that the government undertook in 2016. The DB Funding Proposals will apply only to single employer DB pension plans and, while not expressly stated in the announcement, we understand that the DB Funding Proposals are not intended to apply to jointly sponsored pension plans or MEPPs. The DB Funding Proposals modify the solvency and going concern funding rules for single employer DB pension plans in the following ways:
|Type of Funding||Current Rules||New Rules|
|Solvency||Must fund to 100%
Solvency deficits are generally funded over five years (subject to the application of temporary solvency funding relief or a special funding regime established by regulation)
|Must fund to 85%
Solvency deficits under 85% must be funded (up to 85%)
Deficits funded over five years
No solvency funding if funded at or above 85%
|Going Concern||Must fund to 100%
Deficits funded over 15 years
Deficits are not consolidated at each valuation, can have multiple funding schedules
|Must fund Provision of Adverse Deviation (PfAD) (this is presumed to require funding of a cushion in excess of 100% on a going concern basis)
Deficits funded over 10 years
Deficits can be consolidated providing single funding schedule
Based on the 2016 report from the Financial Services Commission of Ontario regarding the funded status of DB pension plans, which indicates that the median solvency ratio for Ontario pension plans is currently 93%, the DB Funding Proposals will result in many Ontario pension plans no longer being required to fund on a solvency basis. The government estimates that only 15% of Ontario-registered DB pension plans will be required to fund on a solvency basis when the new rules become effective (anticipated to be in 2018).
However, to provide some additional benefit security for DB pension plans, the government will require enhanced going concern funding. The going concern amortization period will be shortened and a reserve or cushion (i.e. PfAD) must be funded. When Quebec eliminated solvency funding in 2016, it introduced a new requirement to fund a PfAD based on the balance between a pension plan’s maturity and investment risk profile. It is not known whether the requirement for the establishment of a PfAD will follow the Quebec model. Those details will be released with the proposed legislative and regulatory changes in the Fall of 2017.
The government previously identified in the Consultation Paper that it was examining several complementary reforms that may be made with any changes to the DB pension plan funding rules. The government has now announced four complementary changes:
- Enhanced Pension Benefits Guarantee Fund (PBGF) Coverage: To address the perceived impact the DB Funding Proposals will have on members’ benefit security, due to the loss or reduction of solvency funding, the government has announced that PBGF coverage will be enhanced. The PBGF is a unique insurance scheme covering DB pensions accruing in Ontario in the event a DB pension plan is wound up when it is underfunded and the employer is insolvent and unable to fund the pension deficit. There is no other comparable insurance scheme in Canada. Currently, the PBGF covers up to the first $1,000 per month of an Ontario member’s pension, subject to certain conditions. The government is proposing to increase coverage to the first $1,500 per month. As a result, employers’ PBGF assessments will likely increase.
- Restrictions on Contribution Holidays and Accelerated Benefit Improvement Funding: Consistent with the government’s long stated intentions, the PBA Regulations will be amended to include restrictions on an employer’s ability to take contribution holidays. In addition, there will be a new requirement to accelerate the funding of any benefit improvements that are made when a pension plan is less than fully funded. The specific details for these restrictions will be included in the legislation and regulations that will be released this Fall.
- Administrator Discharge For Buy-Out Annuities: An increasingly popular way to de-risk a pension plan is to purchase annuities for retired member and former member liabilities. This approach is not frequently engaged in Ontario outside of a pension plan wind up because the PBA does not contain a statutory discharge to the pension plan administrator for the annuitized benefits. In order to address this omission in the PBA, the government has announced that the PBA will be amended to provide that an administrator is discharged on the purchase of buy-out annuities. This announcement will address the anomaly in the legislation and pave the way for administrators to proceed with this important de-risking measure, where appropriate.
- Enhanced Member Disclosures: The PBA will be amended to include new requirements for disclosures to members and introduce a requirement for the development of funding and governance policies. The details of these new requirements have not yet been released, but the change is consistent with steps taken in other jurisdictions to enhance transparency for plan members.
In addition to the complementary reforms that were announced, the government also indicated that it is continuing to review the current processes applicable to pension plan wind ups and is studying a proposal to establish an agency that could be responsible for administering pension benefits for wound up plans on an ongoing basis. Currently, when a pension plan is wound up, benefits must be distributed (e.g. annuities are purchased) within a relatively short period of time, which can cause liabilities to increase and have an adverse effect on members’ benefits.
DB Funding Proposals – What We Don’t Know
There are key details that have not yet been released and that will not be known until after the legislative changes are released this Fall:
- The level of the PfAD that will be applicable under the enhanced going concern funding model is not yet known. Therefore, while DB pension plan sponsors may be able to project whether the proposed solvency changes (i.e. the elimination of solvency funding) will provide some funding relief, they do not yet know whether or how the PfAD will increase the going concern funding requirements for their plans.
- The proposed enhancement to the PBGF will likely increase PBGF assessments, which will lead to higher premiums that, in most cases, are borne directly by employers. The actual impact and increased cost of enhanced PBGF is not yet known.
- Apart from interim solvency relief that has been introduced to assist employers with valuation reports coming due before the DB Funding Proposals are passed, the transition rules that will be applicable to DB pension plans, especially those where temporary or employer/sector specific solvency funding relief is currently in place, have not been announced. DB pension plan sponsors will not be in a position to fully plan for their adoption of the new rules until the transition rules have been released.
- The government has not provided any details regarding potential changes to jointly sponsored pension plans, nor has the government conclusively confirmed that there will be no changes to the funding rules applicable to such plans.
Proposed Changes to MEPP Funding Rules – What We Know
Most (but not all) Ontario-registered MEPPs (which are pension plans with employees from many different unrelated employers) have been granted Special Ontario Multi-Employer Pension Plan (SOMEPP) status.
Since 2007, the PBA has exempted SOMEPPs from solvency funding. Unless otherwise exempted pursuant to a special regulation, any MEPPs that do not satisfy the SOMEPP test remain required to fund on a solvency basis under the PBA. The exemption was originally intended to be temporary. However, in the 2016 Consultation Paper, the government indicated that it was reviewing the funding rules applicable to SOMEPPs, particularly those that will be classified as target benefit MEPPs under new provisions of the PBA that have not yet been proclaimed into force. More information regarding the proposed target benefit provisions of the PBA is set out in the consultation paper that the government released in 2015.
Target benefit plans are those pension plans that are funded based on fixed contributions that are set out in collective agreements or trust agreements (and, under the current legislation, apply only to unionized groups). The benefits are, in turn, target benefits rather than guaranteed defined benefits. If the plan’s funded status is insufficient, the target benefits, including accrued benefits, may be reduced. Most MEPPs are already operating within the existing PBA framework with the ability to reduce benefits if the plan’s funded status is poor, but that framework is not robust. It is anticipated that once the new funding framework for target benefit MEPPs is established, the amendments to the PBA that will support target benefit plans will be proclaimed into force along with the necessary supporting regulations and many MEPPs will become registered as target benefit plans.
The government has announced that the new funding framework for target benefit MEPPs will include the following rules:
- Target benefit MEPPs will be permanently exempt from solvency funding.
- Going concern funding will be modified in two ways:
- Going concern unfunded liabilities will be required to be amortized over 15 years, rather than the current 12 years; and
- A PfAD (i.e., cushion) will be required to be funded.
- A new basis for calculating members’ benefits upon termination in a plan or upon wind up of a target benefit MEPP will be introduced.
- New rules pertaining to the reduction of benefits when funding requirements are not met will also be introduced.
In addition to these MEPP Proposals, the government announced that complementary reforms would also be introduced. Similar to the new requirement for DB plans, target benefit MEPPs will be required to develop funding and governance policies. In addition, the MEPP Proposals will include measures that provide opportunities for retirees to participate in plan governance (which is currently not required by the PBA). Finally, the government has indicated that target benefit MEPPs will be required to provide enhanced disclosures to plan beneficiaries regarding the status of their plan.
Proposed Changes to MEPP Funding Rules – What We Don’t Know
As with the DB Funding Proposals, there are important details of the MEPP Proposals that are not yet known and are expected to be announced in conjunction with the introduction of the legislative reforms:
- Again, the level of the PfAD that will apply to target benefit MEPPs has not been identified by the government.
- The details of the new termination calculation that will be applicable to the benefits of members on termination or wind up, as well as the new rules relating to reduction of benefits, have not been released. These changes will likely necessitate changes to many MEPPs and will be of significant interest.
- The government has not released the transition rules applicable to MEPPs, especially those that are not eligible to become target benefit MEPPs and that may be subject to the funding rules for DB pension plans if an alternative is not introduced. The government has indicated that it continues to explore options for a funding framework for non-collectively bargained MEPPs (i.e. those plans that do not qualify as SOMEPPs).
Next Steps for Employers and Plan Administrators
The Ontario legislature resumed on September 11, 2017. As noted above, proposed legislative changes to the PBA and the PBA Regulations are expected to be released during the Fall term, and to be followed by a brief consultation period. If this timetable is maintained, the new funding regime may be effective in early to mid-2018. In the interim, for DB pension plans that are required to file actuarial reports with valuation dates between December 31, 2016 and December 31, 2017, the government has introduced additional temporary solvency relief effective on July 1, 2017 (referred to as “Option 8”). Option 8, as set out in O. Reg. 225/17, permits employers to elect to defer new solvency special payments identified in a new valuation report for up to 24 months from the date of the valuation report. Consent of members is not required in order to make this election, but notice of the solvency relief election must be provided to all members. The government also announced that the temporary solvency exemption for SOMEPPs will be extended to August 2018 (from August 2017, when it was originally set to expire).
A related initiative that we are also monitoring is the consultation commenced by the Canadian Association of Pension Supervisory Authorities (CAPSA) regarding proposed changes to the funding and asset allocation rules that may be applicable under a future agreement between the provinces governing regulation of multi-jurisdictional pension plans. CAPSA is considering changes to the funding and asset allocation rules in light of some provinces continuing to require solvency funding while others are moving to eliminate or reduce solvency funding obligations.
We continue to eagerly await the pending legislative and regulatory changes that are necessary to support the new pension plan funding rules for Ontario plans and we will report any developments as they arise. If you have any questions regarding the impact of the proposed changes on your pension plan, please contact Natasha Monkman or Stephanie Kalinowski.
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