After five years of piecemeal changes, Ontario’s pension system now requires substantial reform in order to resolve serious issues such as the scarcity of workplace pension plans in the private sector.
This is according to a new report published by the C.D. Howe Institute, Ontario Pension Policy 2013: Key Challenges Ahead.
Ontario’s pension standards have been updated many times in the past five years. “But the most significant issues now lie ahead,” says Barry Gros, author of the report and associate partner at Aon Hewitt. “Without action to address these issues, the whole reform process will fall short of its goals and leave Ontarians with major flaws in their pension system.”
One major flaw is the low participation rate of private sector employees in employer-sponsored plans. To fix this, Ontario should enact the federal legislative framework for pooled registered pension plans, says Gros. However, the framework should be revised to require Ontario employers beyond a certain size to offer a pension plan and to auto-enrol employees who would have the option to opt out, Gros explains.
Another major issue Ontario needs to tackle is the lack of legislative flexibility in the design of jointly sponsored public sector pension plans, which prevents the effective management of the benefit/funding equation and fails to keep costs manageable, according to the report. One solution to this is moving toward a shared-risk model where the post-retirement indexing of future benefits depends on a plan’s financial position, Gros says.
Some provinces either have introduced this model already or are considering it. For example, under New Brunswick’s shared-risk rules, plans can be converted retroactively to a shared-risk situation, which means that previously guaranteed cost-of-living indexing can be replaced with ad hoc indexing.
Yet another major problem of Ontario’s pension system is the inadequate funding levels in traditional single-employer DB plans, the study notes. The province’s two-part funding pension system, consisting of both going concern and solvency funding rules, is not efficient, according to the study. “Current rules have not prevented plans from being insufficiently funded for long periods of time, and they certainly haven’t prevented plans from terminating with deficits,” the report says.
The current solvency funding rules require additional contributions in rough economic times, which creates the potential for trapped surpluses when the economy improves. This is because the current regulations make accessing surplus funds virtually impossible.
That is why the combined going concern and solvency valuation model should be replaced with a new single going concern valuation model and a new margin reserve account, Gros says. “This would prevent overpayments made by employers during poor financial times to turn into trapped surpluses when times improve,” he explains.
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