Ontario proposes rules for target benefits in multi-employer plans

The Ontario government has published proposed regulations relating to the funding framework for certain multi-employer pension plans seeking to convert defined benefits to target benefits.

Under the proposed regulations, which were first announced in June 2017, eligible multi-employer pension plans wouldn’t be required to fund on a solvency basis. However, they would still be required to provide solvency valuations determined on a defined benefit basis, at least triennially. As well, plans would need to disclose their transfer ratio to plan beneficiaries.

Read: Ontario sets out plans for target-benefit multi-employer pensions

Further, Ontario is proposing raising the amortization period for funding a plan’s going-concern deficiency from 12 to 15 years. The proposals also include allowing plan administrators a one-time opportunity to consolidate existing going-concern special payments established in previous valuation reports into a new 15-year payment schedule, essentially providing a fresh start.

The framework also includes introducing a provision for adverse deviation to determine additional contributions to the plan. The provision would be calculated based on three components: a fixed aspect of four per cent to help reduce the risk of future benefit reductions should plan experience prove troublesome; an aspect based on the plan’s asset mix that’s reflective of its inherent risk levels; and an aspect based on the plan’s going-concern discount rate, which only comes into the calculation should the discount rate exceed a benchmark.

As to the asset mix component, the provision would be higher the more non-fixed income investments the plan holds. In these regulations, the Ontario government defines non-fixed income in the same way as in its proposed defined benefit framework, including equities, employer-issued bonds and credit, as well as 50 per cent of alternative assets.

Read: Ontario releases more details on funding cushion in new DB framework

The framework also outlines a new contribution sufficiency test that recognizes the provision for adverse deviation. The test would require minimum contributions from the pension plan to be no less than the total of the normal cost of the plan, the provision for adverse deviation in respect of normal cost, going-concern special payments set out in previous valuation reports that remain payable and going-concern special payments determined in the most recent valuation report.

As related to member benefits, the framework proposes that eligible multi-employer pension plans can only make improvements to benefits if the plan is fully funded on a going-concern basis and that the provision for adverse deviation is also fully funded.

The proposal also noted that in making the transition to target benefits from defined benefits, there may be some issues around collective bargaining agreements as they operate on three-year cycles, making it difficult for plans to make significant changes in benefit rates and contributions with multiple employers immediately upon conversion.

Read: A primer on multi-employer pension plans

As such, the framework suggests that if the total contribution requirement under the new framework is greater than under the current specified Ontario multi-employer pension plan or defined benefit multi-employer pension plan funding rules, the transitional rules would let the contribution increase be phased in over a three-year period following the transition.

Ontario’s Ministry of Finance is encouraging interested stakeholders to provide feedback on the framework until May 4, 2018.