Ontario budget introduces major pension changes

Ontario’s minority government released its budget for the 2012/13 fiscal year on March 27.

The budget announces a number of measures that are expected to have a significant effect on pension plans and retirement saving—particularly in the public sector—if the budget is passed by the Ontario legislature.

Public sector pensions
The budget states that public sector pensions are “one of the fastest-growing expenses” of the Ontario government and proposes a number of measures to make these pensions “more affordable for taxpayers and sustainable for pension plan members.” The announced measures, which would affect both jointly sponsored pension plans (JSPPs) and single-employer pension plans (SEPPs) in the public sector, are as follows:

• All JSPPs—plans in which members and employers share funding risk—in which member contributions are currently less than employer contributions would be required to move to a fifty-fifty funding formula.

• Plans in deficit would be required to reduce “future benefits or ancillary benefits” before increasing employer contributions. Accrued benefits of active and retired members would not be affected, and increased member contributions would be an option for addressing deficits for plans in which member contributions are less than employer contributions. For “exceptional circumstances,” the budget states that there would be a limit on benefit reductions required before contributions could be increased.

• Public sector SEPPs in which employers are solely responsible for deficits would be expected to convert to JSPPs with a fifty-fifty cost-sharing formula within a five-year transition period, with conversion to be facilitated by new temporary solvency relief measures.

• Noting that approximately 50 public sector pension plans currently hold assets of less than $1 billion each, the budget states that in the fall of 2012, the Ontario government will introduce new legislation to facilitate the pooling of pension fund assets for smaller public sector DB plans, in order to reduce investment management costs and improve investment returns. The budget also states that the Ontario government will appoint an advisor to “lead the implementation process” for pooling pension fund assets.

Ongoing pension reform

New regulations to be released
The budget announces that new regulations to the Pension Benefits Act (PBA) will be introduced this year to give effect to legislative amendments to the PBA made by Bill 236, the Pension Benefits Amendment Act, 2010, and Bill 120, the Securing Pension Benefits Now and for the Future Act, 2010.

  • In the spring of 2012, draft regulations will be released that clarify pension surplus rules, implement new PBA rules for pension asset transfers and implement new PBA rules addressing retired pension plan members’ rights and responsibilities.
  • Other regulations, to be released “later in 2012,” would provide for a “funding concerns” test for plans not required to fund on a solvency basis, to establish eligibility conditions for contribution holidays and to provide for accelerated funding of benefit improvements.

Effective date for PBA amendments
Bill 236 introduced a number of changes to the PBA not yet in effect because they have not been proclaimed. The budget announces that these provisions of Bill 236 will be proclaimed on July 1, 2012. These changes include the following:

  • the elimination of partial plan windups;
  • immediate vesting of pension benefits;
  • the extension of grow-in benefits to all pension plan members terminated without cause; and
  • the option for multi-employer pension plans and JSPPs to elect not to provide grow-in benefits.

Financial hardship unlocking
The budget announces that new regulations will be released to streamline the application process for unlocking pension benefits that have been transferred from a pension plan to a personal locked-in vehicle. Rather than making an unlocking application to the pension regulator, account holders will be able to be apply directly to financial institutions.

Solvency funding relief and letters of credit
The budget proposes to extend solvency funding relief measures first announced in 2009. For the first actuarial valuation report with a valuation date on or after Sept. 30, 2011, plan administrators would be permitted to consolidate existing solvency schedules into a new five-year schedule and/or extend the solvency payment schedule for any new solvency deficiency disclosed in the report to a maximum of 10 years—subject to the consent of plan beneficiaries.

The budget also announces that the amortization period for special payments in respect of going-concern and solvency deficiencies will be permitted to begin one year after a plan valuation date. In addition, new regulations will be “put into place” in the spring of 2012 to allow employers to use irrevocable letters of credit to secure up to 15% of a pension plan’s solvency liabilities.

New program for unclaimed property
The budget announces the Ontario government intends to establish an Unclaimed Intangible Property Program to administer unclaimed insurance policies, securities, bank deposits, unpaid wages and unclaimed pension benefits.

Future pension reforms
The budget contains a number of statements that provide insight into the Ontario government’s views on future pension reforms and increasing pension coverage, stating that the government is committed to a “two-track strategy,” which includes the following elements:

  • a “modest, fully funded enhancement” to benefits provided by the Canada Pension Plan (CPP); and
  • “pension innovation” to expand coverage and promote “lower-cost savings options.”

Regarding CPP expansion, the budget states that full implementation of enhanced benefits would be expected to occur over a 40-year period, with a seven-year phase-in period for increased contributions. The budget does not present any specific new proposals relating to “pension innovation,” but it does express significant concerns regarding the federal government’s proposed legislation to implement pooled registered pension plans (PRPPs), suggesting that the PRPP framework may not be able to provide pension saving at low cost, may not result in any net increase in pension saving, may not adequately protect the interests of plan members and may not be sufficiently flexible to allow contribution rates to be adjusted to respond to “life events” such as divorce or financial hardship.

The budget’s announcements clearly reflect some of the recommendations in the February 2012 report of the Commission on the Reform of Ontario’s Public Services relating to the funding and administration of public sector pension benefits but leave some questions unanswered. For example, it is not clear whether the fifty-fifty cost-sharing formula proposed for public sector SEPPs converted to JSPPs would apply to benefits earned after the date of conversion or to all benefits (i.e., including benefits accrued before conversion). In addition, there is no indication as to the kind of circumstances in which contribution increases for JSPPs in deficit would be permissible in lieu of benefit reductions.

The announcement of a new Unclaimed Intangible Property Program will be welcomed by pension plan sponsors unable to locate former employees with pension entitlements. The program would be expected to be of considerable help in settling benefits for such members.