Alongside recent reforms to funding rules for Ontario-registered defined benefit pension plans, the Ontario government also made changes to the pension benefits guarantee fund, including improvements to benefits payable by the PBGF and changes to its annual assessment paid by employers.
Employers should budget for the change in their assessments, effectively beginning with assessments due in 2019. The PBGF provides a guaranteed minimum pension to former members of an Ontario-registered DB pension plan (other than former members covered by federal pension legislation) in the event of the plan’s windup due to the insolvency of the sponsoring employer.
Certain plans are excluded from PBGF coverage, including those that are jointly sponsored, certain multi-employer plans, individual pensions and plans named in regulation 909 in the Ontario Pension Benefits Act.
As well, certain benefits aren’t covered by the PBGF, such as any future cost of living increases and plant closure and permanent layoff benefits for which the former member hasn’t met the age and service eligibility requirements at the time of plan windup.
Ontario is the only jurisdiction in Canada that has a pension benefits guarantee fund. Former plan members who were employed in a province other than Ontario or are subject to federal pension legislation aren’t covered.
Two key improvements to the benefits payable by the PBGF took effect for plans with a windup date on or after May 19, 2017:
- An increase in the maximum pension benefit guaranteed by the PBGF from $1,000 to $1,500 per month.
- The elimination of age and service requirements to qualify for the PBGF coverage that applied to former Ontario plan members who hadn’t yet started their pension at the time of plan windup.
An annual PBGF assessment must be paid by the employer in respect of all DB pension plans with Ontario members, deferred vested members, retirees or surviving spouses of an Ontario member covered by the PBGF, whether or not the plan is registered in Ontario.
Due to the increase in benefits payable by the PBGF and the reforms to the Ontario DB pension funding rules, a number of changes have been made to the calculation of the annual assessment. These changes are effective for assessments due on or after Jan. 1, 2019 and will almost always result in an increase in the amount of the assessment:
1. Basic assessment: Previously, a basic assessment of five dollars per Ontario plan beneficiary was payable. This has been replaced with an assessment calculated as 0.015 per cent of the plan’s solvency liabilities in respect to Ontario plan beneficiaries. It will result in an increase in the basic assessment for plans with an average solvency liability per Ontario plan beneficiary of $33,000 or more.
2. Risk-based assessment: In addition to the basic assessment, this is payable for plans with a solvency deficit. It can be large for significantly underfunded plans.
The risk-based assessment, calculated as a percentage of the plan’s solvency deficit attributable to Ontario plan beneficiaries (the assessment base), is being increased by 50 per cent as follows:
4. Exclusion of plant closure or permanent layoff benefits: The additional assessment payable by employers that elected to exclude all plant closure or permanent layoff benefits from the plan’s solvency liabilities will increase by 50 per cent.
The retail sales tax equal to eight per cent of the PBGF assessment will continue to apply.
Also, consistent with the restrictions on employer contribution holidays applicable under Ontario’s pension funding reforms, additional restrictions now apply to the ability to pay the annual PBGF assessment from pension plan assets.
Changes to the calculation of the annual PBGF assessment will result in an increase for almost all pension plans covered by the PBGF. In some cases, the assessment will increase by 50 per cent or more compared to the amount paid under the prior rules.
Employers affected by these changes should work with their actuary to estimate and budget for the PBGF assessments due in 2019. They should also take the changes to the annual PBGF assessments into account when establishing the financing strategy for their pension plans. For example:
- Discretionary employer contributions in excess of the minimum required for a plan with a solvency deficit will reduce the risk-based PBGF assessment;
- A group annuity purchase in respect of some or all of a plan’s retirees and deferred vested members reduces the likelihood of being required to pay large risk-based PBGF assessments in the future;
- A group annuity purchase combined with a legislative discharge of the Ontario retirees and deferred vested members covered by the purchase will eliminate the requirement to pay future assessments in respect of these former Ontario members.