From its title all the way to the final recommendation, the Ontario Expert Commission on Pensions’ report strives to balance off the often-contradictory desires of defined benefit (DB) pension plan sponsors and members. Commissioner Harry Arthurs and his team of experts and advisors are to be congratulated for a willingness to think outside the box with proposals like jointly governed target benefit plans, overturn established precedent (e.g., the Supreme Court of Canada’s 2004 Monsanto decision on partial windup surplus), and work in a spirit of compromise.

The Commission ought to be applauded for producing such a well-written and thoughtful report that markedly elevates the level of pension discourse in Ontario and across the country. Ultimately, though, and with the greatest of respect, I believe the report will provide little concrete help to those plan sponsors and their advisors who have been holding their collective breath in anticipation of what relief the commission might suggest for employers confronting those economic and legal issues which have made DB plan sponsorship an increasingly unattractive proposition.

Part of this is simply a case of unfortunate timing: the report was apparently completed before the recent capital markets plunge which has decimated DB plan asset levels, and it makes no reference to that plunge. But while it is important not to let short-term developments overwhelm long-term perspective, the result is that the report feels in some ways as if it has already been overtaken by events. For instance, on funding of single-employer pension plans, the Arthurs Commission’s suggestion that the current funding rules need only “tweaking, rather than transforming” now comes off as simultaneously naïve and insensitive.

In fact, the report recommends the introduction of even stricter funding rules for single-employer plans. The report puts forward a funding approach that would not only require full funding, but an additional “security margin” of 5% of solvency liabilities for such plans, which are concentrated primarily in the corporate sector. Indeed, it is difficult to reconcile the report’s stated objective of encouraging the continued vitality of single-employer DB plans with its recommendation that such plans be subject to much stricter funding rules than multi-employer plans or jointly sponsored plans.

Surplus ownership is another area where I believe the report falls short for sponsors of SEPPs. The commission recommends that surplus be distributed in accordance with the plan documents, but where those documents are unclear, the sponsor may propose a surplus-sharing scheme to which a minimum percentage of the members or (in unionized contexts) their bargaining agent must agree. It further recommends that where no agreement can be reached, the matter be settled using a new dispute resolution procedure.
This recommendation would effectively take us back to the days before Kent v. TecSyn, a 2000 decision of the Ontario Divisional Court which essentially required employers to demonstrate legal entitlement to surplus under the historical plan documents in order to even share such surplus. But it would not cut the Gordian knot of surplus entitlement.

The report also offers little to ease the administrative burden or shorten the horrific timeframes often involved in processing plan mergers and asset transfers. It does recommend that where a minimum percentage of the plan members or (in a unionized context) their bargaining agent agree in advance to such plan restructurings, the regulatory approval process would be somewhat expedited. Realistically, though, this expedited procedure would be of no use to sponsors who desire to effect pension asset transfers in the context of corporate acquisitions or divestitures where, presumably, prior employee or union consent is not a feasible option.

Another potentially expensive surprise is the Commission’s revival of mandatory indexation of pensions, an issue that had lain essentially dormant since the late 1980s. Mandatory indexation was incorporated into Ontario’s pension legislation following its recommendation by the 1987/88 Friedland Task Force, but the relevant provisions were never proclaimed into force. The Report urges the government to proclaim those provisions, which would require pensions to be inflation-adjusted according to a prescribed formula, into effect. However, it also recommends that the provisions’ application be restricted to “inflation emergencies,” which are not defined.

The report contains several recommendations for an institutional overhaul of the pension regulation and adjudication system, such as the introduction of a new pension agency, a new independent pension regulator, a new pension tribunal and last but not least a “pension champion.” While these proposals certainly have merit in principle, their implementation would undoubtedly be lengthy, complicated and expensive. Further, one must question what immediate or ultimate effects these changes would have in terms of addressing the serious actuarial, economic, accounting and design problems facing DB plans in Ontario. In my view, focusing efforts and resources on implementing some of the recommended substantive legislative changes, as well as genuine funding relief, would constitute the best place to begin any reform.

Overall, there does not appear to be a great deal in the report that will prove more than modestly attractive to DB plan sponsors. Certainly it offers a unique opportunity to jumpstart pension reform in Ontario, but the question is whether there will be sufficient political will to move quickly and effectively.

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