Ontario has published a description of its new funding framework for defined benefit pension plans, including details on how the provision for adverse deviations will work under new going-concern rules.
Under the proposed new funding framework, the provision for adverse deviation — a percentage used to determine additional contributions in respect of the normal cost and going-concern liabilities of the plan — would depend on whether the plan is open or closed to new members. A plan’s provision for adverse deviations would also depend on the proportion of non-fixed-income assets in the targeted asset mix set out in its statement of investment policies and procedures on the valuation date.
“And there’s a third component that’s going to look new to people,” says Andrew Hamilton, Ontario retirement practice leader at Aon Hewitt. “It’s quite different, different than what we’ve seen in Quebec. It’s really a provision which is intended to provide a further PfAD if the plan is using what might be viewed as a more aggressive discount rate,” he says.
“If you look at the way our PfAD is determined, the rules are a little simpler than what was seen in Quebec,” he adds. “The PfADs will be slightly lower than we’re seeing in Quebec, but Quebec dispensed with minimum solvency funding. So while they dispensed with minimum solvency funding and have a slightly higher PfAD . . . we might have a slightly lower PfAD but we still have that 85 per cent solvency requirement.”
The proposed framework, initially announced in May 2017, includes shortening the amortization period to 10 years from 15 years for funding a going-concern shortfall in the plan; requiring the funding on a solvency basis if needed to improve the plan’s funded status to 85 per cent; increasing the guarantee provided by the pension benefits guarantee fund to $1,500 a month; and providing funding rules for benefit improvements and restricting contribution holidays to improve benefit security.
“Proposals regarding certain aspects of the new framework for DB pension plans, including providing a discharge of liabilities when annuities are purchased for retirees or deferred plan members, requirements for funding policies and governance policies and two changes to the [Pension Benefits Guarantee Fund] under the new $1,500 per month guarantee, will be posted for consultation in the near future,” the government noted.
The plan is to apply the proposed changes to valuation reports dated on or after Dec. 31, 2017, and filed after the new framework comes into force. The government is encouraging interested stakeholders to provide feedback on the proposals to Ontario’s Ministry of Finance by Jan. 29, 2018.
“I think they’ve tried to find a good balance between the simplicity and complexity,” says Hamilton. “It’s not too simple that it doesn’t reflect the mechanics or the hydraulics of the plans and it’s not too complex that it will be a real challenge to understand and apply.”
Ontario’s requirements for provisions for adverse deviation:
Percent of non-fixed income assets
PfAD for closed plans
PfAD for open plans