The Ontario government’s new funding framework for target-benefit plans that will provide more flexibility for plan administrators and boards, says Domenic Barbiero, principal at Eckler Ltd.
The proposed framework requires trustees to establish a number of policies, including funding, benefits, communications and overall governance. “This proposal is the second iteration of a proposal from the Ministry of Finance regarding target-benefit plans,” he notes. “The initial proposal came out in the spring and went through the consultation process so this is a revised proposal. The key change in this revision is with respect to the provision for adverse deviation.”
In the original consultation, there was a proposal that plans would be required to fund the provision for adverse deviation based on a specific formula, he says, adding that testing the formula showed it to be quite high and volatile.
“With the revised consultation, what’s been proposed is no longer a legislated formula-driven PfAD. Now it’s going to be up to the discretion of each board of trustees to determine the level of PfAD they’ll be incorporating in their funding. So I’m sure plan administrators and boards of trustees will be happy with this change, as [the original] could have been problematic.”
The proposal also permanently removes the requirement to fund a target-benefit plan on a solvency basis. Although this requirement has been temporarily gone since 2007, Barbiero notes it’s reassuring the government made it a permanent feature of the funding framework.
The communication policy requirement in the framework focuses on full transparency with plan members to understand the structure of these plans and that a reduction of benefits is a possibility, he adds.
“Within the policy, I think what the ministry is looking for is more touch points with the members. Members need to understand their benefits and how they’re structured. But at the same time, providing information that members won’t understand has the ability to create confusion and raise questions. So it needs to be that fine line between providing them all the information they need to understand their pensions versus giving very technical information that could raise more questions than provide answers.”
Barbiero notes one feature of the framework that raises concerns is the restrictions around benefit adjustments, whether it’s benefit reductions or improvements. “There are restrictions that limit how plan administrators and boards of trustees can implement changes to their plans, which tend to restrict the ability of the trustees to manage their plan according to their specific circumstances. It’s a one-size-fits-all criteria that doesn’t take into account the different [considerations] each individual plan may have when making benefit adjustments.”
He adds members of the pension industry are hoping there will be an additional discussion with the ministry to get a better understanding and provide more clarity around the restrictions.