Ontario annuity discharge changes coming July 1

As of July 1, 2018, new provisions under Ontario’s Pension Benefits Act will allow the sponsors of defined benefit pension plans to obtain a discharge from their obligations to former and retired plan members for whom they’ve purchased an annuity.

Under the changes, plan sponsors will need to fulfil certain requirements before they can obtain a discharge, according an advisory note from Willis Towers Watson.

“Plan administrators should review these new annuity discharge rules in order to assess opportunities with respect to future annuity purchases. As well, they should consider a review of any past annuity purchases to determine what steps they can take to obtain a discharge.”

Read: Buy-ins and boomerangs: A look at the trends in Canada’s annuity market

The plan administrator will have to inform affected plan members about the annuity purchase and the annuity will have to provide the same benefits as under the pension plan. In addition, the plan must file a certificate, prepared and signed by an actuary, with the superintendent of financial services that confirms it has acted in compliance with the requirements for discharge under the act.

“The goods news is it allows employers to buy these annuities and end their obligations with respect to any of the liabilities for which an annuity is purchased,” says Kathy Bush, a partner at Blake Cassels & Graydon LLP in Toronto.

“The other side of it is it’s much more technical as to what the annuity must provide and what the notice must provide and the certification that has to go in to the superintendent.”

As well, if a plan purchased an annuity prior to July 1, 2018, it can also discharge its obligation as long as it abides by the above rules. Once discharged, retired or former members will no longer be considered as such, except under the circumstances of a surplus in the plan if it were to wind up. That retroactive option makes the changes to the discharge rules somewhat different from other jurisdictions making similar changes, says Bush.

Read: Actuaries respond to Ontario’s proposed funding rules for DB plans

“If you’ve already bought an annuity, there are ways to say, ‘OK, that annuity would have met these terms and that prior annuity also is a full discharge. If it wouldn’t have met these terms, I can speak to the insurer and get these terms now satisfied and then I get a full discharge,'” she says.

Plan sponsors that have previously purchased annuities can now begin the processes needed to bring them up to speed, notes Andrew Whale, a principal at Mercer.

“They can start taking action immediately to amend annuity contracts and provide member notices as necessary to receive the discharge retrospectively.”

There are accompanying regulations alongside the amendments to the act, including the solvency ratio test. If plan’s solvency ratio was 1.0 under the plan’s most recently filed actuarial valuation report before the purchase of the annuity, then it must be at least that number afterwards. If it was less than 1.0 before the purchase, it must be at least the larger of two figures afterwards, namely a ratio of 0.85 or the solvency ratio in the most recently filed actuarial report. Under those rules, the employer would be responsible to make any additional contributions needed to ensure compliance with those requirements within 90 days of the annuity purchase.

Read: Take advantage of current plan health by de-risking now, sponsors urged

The discharge changes coincide with a market that’s beginning to show signs of volatility relative to recent years, says Whale, noting that annuity buyouts are one of the tools plan sponsors have at their disposal to reduce their risk exposure. ”The recent volatility in the equity markets in the first quarter of 2018 serves as an important reminder that, despite the extended bull market run we have observed in recent periods, equity markets can also move down sharply,” he says.

“Sponsors of closed and frozen defined benefit pension plans need to urgently consider whether their current risk profile makes sense given the strong financial position of pension plans in Canada and the risks looming on the horizon.”

While Whale notes the discharge changes won’t necessarily push more plans to purchase annuities, they may speed up the process for certain organizations. “It may provide a catalyst for the plan sponsors of those frozen DB plans to finally settle the remaining benefits through an annuity purchase and remove all or part of the DB obligation from their balance sheets.”

Read: Year-to-date group annuity purchases rise to $2.5 billion: report