Pensions are politically difficult, said Peggy McCallum, a partner with Fasken Martineau DuMoulin LLP, speaking at the Association of Canadian Pension Management’s spring session, Checking the Pulse of Pension Reform, held on April 25.
But while there have been no significant reforms in Ontario or by the federal government for decades, McCallum reviewed some of the changes from the last three years’ and what plan sponsors need to be mindful of.
Ontario reforms
In 2008, the Expert Commission on Pensions released its report and June 2009 saw temporary solvency funding relief (with retroactive effect) and an expansion of provisions for loans and grants to the pension benefits guarantee fund (PBGF).
In 2010, Bill 236 and Bill 120 were both passed, making amendments to the Pension Benefits Act. Parts of the Expert Commission report have been passed into law but have not come into effect yet, and don’t know when they will she said.
This year, funding relief regulations were made specifically for AbitibiBowater pension plans and deadlines were extended for filing actuarial reports.
The 2011 Ontario budget renewed the commitment to make PBGF sustainable (increase employer premiums), reviewed its options for dealing with unlocated members.
Discussions got under way with Finance Canada for jointly governed target benefits and multi-employer pension plans (MEPPs)
Ontario reforms that are in effect or have an effective date known
- Payment of administrative fees and expenses from pension funds permitted unless plan documents prohibit it (Dec. 8, 2010).
- New surplus sharing regime (Dec. 8, 2010).
- Annuity option not required on termination (July 1, 2011).
- Letters of credit may be used to cover up to 15% of solvency deficiencies (July 1, 2011).
- Grow-in benefits (July 1, 2012): early retirement subsidies and bridge benefits.
- MEPPs and jointly sponsored pension plans (JSPPs) must specify an employer’s withdrawal liability (July 1, 2012).
Ontario reforms that have a future effect (date is yet to be proclaimed)
- Administrators must help to create and maintain member/pension advisory committees. There are rules, McCallum said, in terms of how many representatives of each type are allowed on these committees.
- Advance notice of plan amendments required for all members, former members and pensioners. “This puts former members and pensions in the loop,” she added.
- Elimination of partial windups.
- Improvements to accrued or ancillary benefits will be voided if they reduce the funded ratio below the prescribed level.
- Contribution holidays are allowed unless the plan documents prohibit it.
- In DC plans, pension payments can be made from the pension funds, including variable benefit payments.
- Phased retirement can be permitted in DB plans.
- Recognition of target benefits and optional benefits, with no PBGF coverage.
So, how can Ontario plan sponsors prepare for these reforms?
In the immediate term, employers will need to consider the following:
- immediate vesting;
- whether to continue early retirement subsidies and bridge benefits;
- common law notice requirements;
- eliminating annuity option on termination;
- MEPPs and JSPPs need to consider withdrawal liabilities;
- remember that partial windups are still allowed until legislation is proclaimed in force and the transition period is over;
- payment of administration fees and expensive: keep in mind that statutory permission is not sufficient; ensure that your plan documents permit; and
- DC contribution holidays past or present: ensure that DC assets are held in trust.
Further down the road, plan sponsors will need to consider these items:
- the impact of advisory committees and plan for increased disclosure requirements; and
- obtaining consent and email addresses for electronic communication.
Federal reforms
In 2009, there were solvency funding relief regulations (for example, for the Air Canada and The Canadian Press pension plans).
The Minister of Finance announced pension reform initiatives and consultations. But there are a few with no actions as of yet—there is no legislation for changes in investment rules (i.e., 10% limit in a single investment; prohibition on direct investment in employer stock).
In 2010, Bill C-9 and Bill C-47 were passed and regulatory initiatives were under way with the Office of the Superintendent of Financial Institutions Canada and the Canadian Association of Pension Supervisory Authorities.
Reforms in effect or where the effective date is known (July 12, 2010, unless otherwise stated)
- Surplus threshold for contribution holiday increased from 10% to 25%.
- Strengthened funding requirements: annual valuations required regardless of funded status and solvency funding requirements are to be determined over three-year average.
- Quantitative limits removed for resource and real property investments (this is for large plans in alternative investments).
- Voluntary partial windups not permitted.
- Unlocated members: the administrator may transfer pension benefits credited of any person who can’t be located to an entity to be designated by the minister (Dec. 15, 2010).
- Letters of credits (April 1, 2011).
- Immediate vesting (July 1, 2011).
- Increased disclosure requirements (April 1, 2011).
- Full funding on plan termination (April 1, 2011).
- Void amendments (April 1, 2011): plan amendments will be void if the solvency ratio is or would fall below 85%. There is an exception where the employer pays cost of amendment up front.
- Unlocking of small benefits (Dec. 15, 2010).
- Distressed pension workout scheme (April 1, 2011).
- Restrictions on annuity purchases (Dec. 15, 2010).
Federal reforms with a future effect (date to be proclaimed)
- Electronic communications permitted: recipients must consent and designate an email account.
- DC plans can provide for the pension to be paid from the plan.
- DC safe harbour: details still have to come in regulations.
- Portability for members eligible for early retirement requires spousal/common law partner consent.
What can federally regulated pension plan sponsors do to prepare?
Plan sponsors need to comply with the new funding rules and should also consider letters of credit and prepare for immediate vesting.
They shouldn’t promise benefit improvements without first determining the impact on the solvency ratio and should consider increase in unlocking threshold for small benefits and they revise annual statements to disclose solvency ratio.
Looking ahead, sponsors need to get the consent and email addresses of retirees for electronic communication and consider the portability factor on early retirement or prepared for spousal common law partner consent.