Ontario pension reforms – Where are they now?
The pace of pension reform in Ontario has been fast-moving since the release of the Ontario Budget on March 28, 2018 (the “Budget”). Among other things, the Budget announced continued work on the new funding rules for defined benefit pension plans and related increases to coverage under the Pension Benefits Guarantee Fund (“PBGF”), a consultation on a new funding framework for target benefit multi-employer pension plans (“MEPPs”), consultations regarding new protections for plan members affected by employer insolvencies, and continued work on the new pension and financial services regulator, the Financial Services Regulatory Authority (“FSRA”). Also on the table from prior budgets were long-pending annuity discharge regulations and regulations regarding the payment of variable benefits from defined contribution pension plans.
A number of the reforms announced in the Budget have since been brought into effect, while others were swept off the table with the call of Ontario’s general election and dissolution of the provincial legislature on May 8, 2018. In particular, amendments to the Pension Benefits Act (Ontario) (“PBA”) and its related regulations (“PBA Regulations”) to date have contained no specific reforms regarding new protections for plan members affected by employer insolvencies (other than the PBGF changes discussed below and framework provisions in the PBA (not yet proclaimed in force) regarding disclosure of certain events, which require regulations to define what events qualify as disclosable) and, while a consultation on target benefit MEPPs was released, no proposed regulations have followed. We discuss the status and implications of the other reforms below.
Defined benefit plan funding and increases to PBGF coverage
Status: In force as May 1, 2018 (subject to differing effective dates for various aspects)
Perhaps the most significant of the reforms announced in the Budget are the changes to the PBA and PBA Regulations to implement new funding rules for defined benefit (“DB”) pension plans registered in Ontario. These DB funding reforms have been under discussion for some time. The idea of a new funding framework was first tabled in July 2016, when the Ontario government undertook a comprehensive review of the DB funding rules as they then were, stating that the purpose of the review was to develop a “balanced set of solvency funding reforms that would focus on plan sustainability, affordability and benefit security and take into account the interests of pension stakeholders – including sponsors, unions, members and retirees.” Subsequent budgets have continued the narrative of balancing the competing objectives of improving plan sustainability and strengthening retirement security.
A new DB funding framework was announced in May 2017, and in December 2017 the PBA was amended to enable the regulations required to implement the new funding framework. Regulations supporting the framework were released in April and came into effect on May 1, 2018. These changes will generally apply to single employer DB plans registered in Ontario. They do not apply to specified jointly sponsored pension plans nor to specified Ontario multi-employer pension plans.
Solvency Funding – The headline change under the new rules is to solvency funding. Solvency funding had been blamed by many sponsors and their advisors as perhaps the largest driver of contribution volatility for DB plans – which has led plan sponsors and administrators to de-risk or even close DB pension plans. Prior to the new rules, DB plans had to be 100% funded on a solvency basis. In its 2016 reforms to the Supplemental Pension Plans Act, Quebec opted to remove solvency funding for most purposes and replace it with enhanced going concern funding rules for DB plans. Ontario did not follow Quebec’s lead in largely eliminating solvency funding, instead opting for a “middle ground” of reduced solvency funding targets. Under the new DB funding rules, special payments to fund a solvency deficiency are only required if a pension plan is funded below an 85% threshold. The PBA contains a new definition of a “reduced solvency deficiency” – i.e. a deficiency that falls under the 85% threshold – and requires amortization of any such deficiency over a five-year period, starting one year after the date of the valuation report indicating the reduced solvency deficiency.
Going Concern Funding – The new rules also include changes to the PBA and PBA Regulations to strengthen going concern funding requirements. While sponsors must continue to fund 100% of any going concern deficiency, the amortization period for making special payments to fund on a going concern basis has been shortened from fifteen years to ten years, starting one year after the date of the valuation report indicating the going concern unfunded liability. We note that going concern unfunded liabilities established in valuation reports prepared under the prior rules may continue to be funded over the fifteen-year amortization period. However, going forward going concern unfunded liabilities are consolidated at each successive valuation date.
Provision for Adverse Deviation (PfAD) – The new funding rules introduce the concept of a PfAD into the PBA, basically the creation and funding of a reserve within a DB plan. The object of the PfAD is to provide a buffer against future adverse experience, thereby enhancing retirement income security. The amount of the PfAD will depend on the level of risk in the plan according to criteria specified in the PBA Regulations. Contributions to fund the PfAD will be required in respect of both normal cost and going concern liabilities. The amount of the PfAD for a DB plan will be adjusted (up or down) based on the following three tests:
- Fixed Component - a base percentage based on whether the DB plan is open (4%) or closed (5%) to new members;
- Asset Mix Component - a percentage depending on the target asset allocation of the pension plan (as set out in the plan’s Statement of Investment Policies and Procedures (“SIPP”), determined in accordance with a table in the PBA Regulations); and
- Discount Rate Component - a percentage reflecting the excess of the plan’s going concern discount rate over a benchmark discount rate (also determined by detailed formulas set out in the PBA Regulations).
PBGF – In addition to the measures to strengthen going concern DB funding requirements summarized above, the Government has taken steps to improve benefit security for Ontario DB plan members by making changes to the PBGF. PBGF coverage has been increased from the first $1000 to the first $1,500 of monthly benefits. This increased coverage will apply to plans wound up effective May 19, 2017 or later. Effective January 1, 2019, a new formula will be used to calculate the assessments employers must pay into the PBGF, with the net effect of providing for higher assessments. Employers will continue to be able to pay PBGF assessments from plan surplus, subject to complying with PBA rules on the use of surplus for contribution holidays.
In addition to the foregoing changes to the DB funding rules, the PBA was amended to create further limitations on making benefit improvements and contribution holidays where a DB plan is not fully funded:
Benefit Improvement Restrictions – Restrictions on amendments which would improve benefits under a plan but negatively impact the plan’s funding have been introduced. Under the new rules, the plan must be funded at least to 80% on both a solvency and going concern bases in order for a benefit improvement to be valid, unless the amendment was filed before May 1, 2018 or the amendment implements a benefit improvement that was agreed to in a collective bargaining agreement in place before May 1, 2018. If the plan is not funded to the required thresholds, plan sponsors could still introduce the benefit improvement, provided a lump sum contribution is made that fully funds (on the greater of a solvency and going concern basis) the cost of the benefit improvement, i.e. the plan’s solvency and going concern funded ratios must be no worse after the benefit improvement and lump sum funding are taken into account. The cost of the benefit improvement (less any lump sum payments required to meet the 80% funded ratio requirements) must be amortized over 8 years on a going concern basis.
Contribution Holidays – The new DB funding rules in the PBA further restrict the circumstances in which contribution holidays may be taken by employers and members. The amendments to the PBA introduce the new concept of “available actuarial surplus” and allow contribution holidays only in respect of any available actuarial surplus. Basically, a plan has “available actuarial surplus” to be used for contribution holidays if: (i) no special payments are required; (ii) the plan is fully funded on a going concern basis (including the PfAD); and (iii) the plan’s transfer ratio is not less than 105% (for public sector plans, the solvency ratio must not be less than 105%). Sponsors will be required to file cost certificates if they wish to take a contribution holiday and provide notice to members.
The new DB funding rules also require plan administrators to take certain additional steps to ensure compliance with the PBA and PBA Regulations:
Plan Documents – The pension plan text must be amended within twelve months of the date of the first valuation report filed under the new funding rules to specify the respective obligations to contribute to the PfAD. In addition, if not already included in the SIPP, a plan’s SIPP must now include a target asset allocation for every asset class specified in the PBA Regulations.
Disclosure to Members – Plan administrators are required to include prescribed disclosures to plan members concerning the new funding rules in the first annual or biennial statements issued after a valuation report is prepared under the new funding rules. Going forward, statements will also need to include whether any special payments are required to be made. Effective January 1, 2019, statements will also need to include an estimated transfer ratio of the plan up to the end of the period covered by the statement.
Application to Actuarial Valuations – The new funding rules apply to actuarial valuation reports dated on or after December 31, 2017. Since a plan administrator generally has nine months after the valuation date in which to file a valuation report, the new funding rules apply to valuation reports due to be filed as early as September 2018. The new funding rules give some leeway to the nine-month timeline, and provide that a valuation report dated on or after December 31, 2017 and before March 1, 2018 can be filed as late as November 30, 2018, without penalty.
Status: In effect as of July 1, 2018
A discharge for plan administrators who purchase buy-out annuities has long been on the wish list for Ontario plan administrators. Currently under the PBA, administrators who purchase annuities for plan members (outside of the wind-up context) retain the responsibility to pay the benefits in the case of the failure of the insurer from whom the benefits are purchased. New section 43.1 of the PBA, permitting administrators to take advantage of a discharge of their obligations in the event of such purchases, was introduced in November 2017. In addition, in April, the Ontario Government filed a new regulation, Purchase of Pension Benefits from an Insurance Company (the “Annuity Discharge Regulation”), to support the PBA provisions providing for a discharge. Since the PBA provisions and regulations have already been proclaimed to come into force on July 1, 2018, they were not affected by the recent dissolution of the legislature.
Section 43.1 of the PBA provides for the discharge of the obligation to pay a pension for the administrator of a single-employer pension plan if the administrator complies with specified requirements in respect of the purchase of a pension, deferred pension or ancillary benefits from an insurance company. This also applies to annuities purchased prior to July 1, 2018 (as long as the annuity contract already meets the regulatory requirements or is amended to do so), and the member notice requirements are met.
Purchasing an Annuity – Section 43.1 of the PBA and the Annuity Discharge Regulation provide that, in order to qualify for a discharge, certain requirements must be met. These requirements relate to the benefits purchased, the funded status of the plan following the purchase, notice to members, and required contractual provisions. First, the benefits purchased must be the same as the benefits under the plan. Second, the plan must be fully funded on a solvency basis if the plan was fully funded on a solvency basis in the most recent actuarial valuation report before the purchase of the annuity. If the plan was not fully funded on a solvency basis as of the last valuation report, the plan must be funded to at least 85% on a solvency basis following the purchase. If the plan’s solvency ratio after the purchase does not meet these solvency funding requirements, the employer must make an additional contribution to the plan the raise the solvency ratio to meet these thresholds within 90 days from the date of the purchase. Finally, the annuity contract must contain certain prescribed terms in order for the administrator to qualify for the discharge.
Notice Requirements – The Annuity Discharge Regulation imposes notice requirements in respect of the former and retired members for whom the annuity was purchased. The notice must contain certain prescribed information.
Certification and Filing Requirements – The administrator will be required to file a certificate prepared and signed by an actuary certifying that the administrator has complied with the requirements of the annuity discharge provisions.
Former and Retired Members May Still Share Surplus – If an administrator is discharged under the provisions following the purchase of an annuity, former and retired members for whom an annuity has been purchased will no longer be considered plan members, except for the possible entitlement to share in surplus on plan wind-up. If the former or retired member would have been entitled to surplus under the plan if the plan had been wound up on the date of the annuity purchase, the former or retired member will, on the eventual wind-up of the plan, have the same rights to any remaining surplus as the former and retired members who, as of the date of the wind-up, are entitled to payments under the plan.
Application to Existing Annuity Contracts – Administrators who purchased a buy-out annuity prior to July 1, 2018 may take advantage of the annuity discharge provisions provided that they can meet the requirements of section 43.1 and the Annuity Discharge Regulation applicable to pre-existing annuity purchases. These requirements are similar to those applicable to annuities purchased after July 1, 2018.
Take Away For Plan Administrators – Section 43.1 of the PBA and the Annuity Discharge Regulation create an opportunity for pension plan administrators to minimize their risk with respect to annuity purchases. Importantly, the discharge is not automatic and administrators will need to take steps to ensure that they qualify for the discharge. Administrators who have purchased annuities in the past and those contemplating annuity purchases should consult with their advisors to determine what steps need to be taken to obtain the discharge.
Status: Proposal for regulations released, but no reforms in place
Ontario has finally released a proposal for regulations supporting the as yet unproclaimed variable benefit provisions of the PBA. Such regulations would permit defined contribution pension plans to pay benefits from the plan itself (subject to certain minimum withdrawal amounts required under the Income Tax Act (Canada) and maximum amounts set out under the regulations) rather than requiring the transfer of assets to another vehicle following a member’s retirement. Retired members who elect to receive a variable benefit pension could continue to benefit from the investment option selections made by the plan administrator and, most significantly, from lower fund costs.
Ontario lags behind a number of jurisdictions in permitting variable benefits. Currently, variable benefits are available for federally regulated pension plans, as well as plans registered in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and Nova Scotia. While no regulations will come into place in Ontario prior to the election, the conversation has started.
The description of the proposed variable benefit regulations released in March of this year supports the variable benefits provisions in the PBA which were introduced by Bill 91 in 2015. The description of proposed regulations addresses the requirements and restrictions that the defined contribution component of a pension plan must include to authorize a variable benefits pension, the requirements and restrictions regarding transfers in and out of a variable benefit account, timelines related to the death benefit, the administrator’s disclosure obligations and other miscellaneous items.
Since no regulations were filed before the dissolution of the Ontario legislature on May 8, 2018, the incoming government will have to reconsider this issue and is under no obligation to continue moving the initiative along. However, given the increased regulatory focus on defined contribution plans and the fact that many other jurisdictions permit variable benefits, the hope is that Ontario will not lose momentum on this issue following the election.
Financial services regulatory authority
Status: April 2019 target launch, but dependent on political will
The Ontario government has taken steps to transition to a new pension and financial services regulator, FSRA. FSRA is being billed as a modern and adaptive financial services and pension regulator that will strengthen consumer and pension plan beneficiary protection. While the Budget indicated that FSRA’s target operational date is April 2019, various pieces of FSRA legislation remain to be proclaimed into force by the incoming government.
FSRA was established on the recommendation of an independent expert advisory panel that reviewed the mandates of the Financial Services Commission of Ontario, the Financial Services Tribunal and the Deposit Insurance Corporation of Ontario. Following the panel’s report, the Ontario government announced the transition to a new regulator in 2016. Since then, the government has released several pieces of legislation, including FSRA’s enabling statute, the Financial Services Regulatory Authority of Ontario Act, 2016 (FSRA Act), which established FSRA effective June 2017, legislation continuing the Financial Services Tribunal and amendments to the PBA.
The latest round of amendments to the FSRA Act specified that pension plan sponsors, administrators, agents and fund holders are part of the regulated sector that is subject to the PBA—which ensures that the regulatory net may be cast widely—and requiring the FSRA board of directors to establish an advisory committee to advise the CEO regarding the PBGF. Pending amendments to the PBA include regulatory rule making power for FSRA. At this stage, such rule making power is largely confined to rules regarding setting time periods for filings and other matters currently prescribed by regulations as well as prescribing information to be provided by plan administrators and the content of certain documents. While the rule making power does not have as broad a reach as was originally anticipated, it would, nonetheless, provide FSRA with more flexibility regarding the regulation of the pension sector than FSCO currently has.
Beyond the legislative activity, several operational aspects of FSRA are now in place. Specifically, FSRA currently has a board of directors and a CEO and is working on a transition plan leading up to an April 2019 takeover of FSCO and other regulatory functions.
Notably, a number of components of the FSRA framework have not yet been proclaimed into force. Proclamations of provisions that have received Royal Assent prior to an election may happen after an election, and it will be up to the incoming government to proclaim these provisions into force in order to bring them into effect. That said, an incoming government is not obligated to proclaim legislation into force and could repeal existing legislation. Plan sponsors and administrators should stay tuned.
The Spring of 2018 has been a busy time in the world of pension reform. While some initiatives are off the table for now, the run up to the election led to the implementation of certain significant changes. With discussions continuing and interest in pensions growing, it remains to be seen what a new government will bring.