2018 to be a significant year for pension reform in Ontario

While 2017 was a relatively uneventful year in terms of legislative changes affecting pension plans, 2018 promises to be more significant, at least for many defined benefit plan sponsors in Ontario.

The changes to the Ontario Pension Benefits Act scheduled to come into force during the coming year include:

  • Funding and governance policies:

Plan administrators will need to establish and file written governance and funding policies. The requirement for such policies already exists in Alberta and British Columbia’s pension legislation.

Read: From AMPs to SIPPs: Why plan sponsors have a lot on the regulatory plate in 2018

While there will likely be significant lead time for plan administrators to establish and file those policies with the superintendent, once the government releases the relevant regulations, plan sponsors may wish to get a head start by considering how they’ll document their governance structure and processes, as well as how they’ll articulate their funding principles and objectives.

  • Funding reform for defined benefit plans:

Pension funding reform is the single-most important change expected to affect defined benefit plan sponsors in Ontario. While the proposed regulatory amendments are still open for comment, the provincial government intends for the changes to apply to valuation reports dated on or after Dec. 31, 2017.

The new funding framework for single-employer plans includes: shortening the amortization period to 10 from 15 years for funding a going-concern deficiency; consolidating going-concern special payments into a single schedule when a new report is filed; requiring the funding of a reserve within the plan, called a provision for adverse deviations; and requiring employer funding only if the plan’s funded status is less than 85 per cent on a solvency basis.

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

While the impact of the changes is principally actuarial and financial, there will also be an effect on plan documentation and member disclosure. Plan sponsors may need to revisit plan terms regarding funding and the use of surplus, as well as the statements contained in plan booklets and member disclosure. In fact, the amendments to the act include a requirement for plan administrators to disclose in annual member statements, as well as the biennial reports for retired and former members, an explanation that the funding rules have changed. The requirements include a description of the new solvency funding rules and the provision for adverse deviation. Employers should keep those matters in mind when reviewing and updating their member communications in the future.

  • Pension benefits guarantee fund:

The amendments to the act also remove requirements related to age, years of employment and membership that plan members must currently meet in order to access pension benefits guarantee fund coverage for any plan windup that occurs after the amendments take effect. The maximum monthly benefit guaranteed by the fund will increase to $1,500 per month from the current $1,000. Plan sponsors should expect increased assessment costs or other changes in the future to help finance the improvements to the fund.

Read: Liberals show some openness to reform amid calls to protect pensions in insolvencies

On Friday, the Ontario government published its proposed changes to the employer-paid assessment, which would apply as of Jan. 1, 2019. They would amend the assessment formula to:

  • Increase the maximum assessment per member to $600 from $300;
  • Subject to the maximum amount per member, increase the existing risk-based assessment by 50 per cent and add an additional component equal to .015 per cent of a plan’s liabilities related to the fund;
  • Increase the plant closure/permanent layoff benefit assessment by 50 per cent for those employers that had previously elected to exclude all plant closure and permanent layoff benefits in calculating the plan’s solvency liabilities; and
  • Eliminate the basic $5 assessment per Ontario plan beneficiary and the $250 minimum per plan.
  • Target benefits:

The government has also revised the requirements for target-benefit plans, which aren’t yet in force,. Plans won’t be able to provide both defined and target benefits, except as otherwise prescribed. Existing multi-employer pension plans that effectively operate in that manner will have to convert their defined benefits to target benefits through a detailed notice and consultation procedure outlined in the act. That may be a challenging process for many multi-employer plan sponsors.

Read: Can the feds overcome opposition to pass target-benefit pension bill?

  • Annuity discharge:

Plan sponsors that have been considering purchasing annuities to discharge existing defined benefit liabilities under their plans will have an additional incentive to do so once the statutory discharge for the purchase of annuities from an ongoing plan comes into effect. They must meet the necessary conditions on the annuity purchase, and affected plan members will retain any rights to surplus upon plan windup. 

The proposed conditions for the statutory discharge include:

  • Maintaining solvency funding levels at the greater of 100 per cent (or 85 per cent under the proposed new funding rules) or the plan’s existing ratio before the annuity purchase;
  • Providing notice containing the prescribed information to the affected plan members; and
  • Filing a compliance certificate and a copy of the annuity contract with the regulator.

Although the conditions are fairly onerous, the annuity provisions are a welcome development for plan sponsors.

  • Variable benefits:

For defined contribution plan sponsors that want the option to provide variable benefits, the government has introduced new requirements addressing the issue and clarifying the rights of the beneficiaries of retired members who are receiving them.

  • Registry for missing beneficiaries:

Finally, plan administrators will be glad to know that the act will require Ontario’s superintendent to establish and operate an electronic registry relating to missing pension plan beneficiaries. Rather than the current process — which imposes a significant burden on the administrators of wound-up pension plans to locate missing members in order to complete a windup or surplus distribution — plan administrators will be able to notify the superintendent if they can’t locate a beneficiary. However, the mechanism for dealing with the funds of those missing members isn’t clear.   

Read: Ontario makes ‘significant step’ with new bill addressing missing members, discharges