On Feb.10, 2011, Ontario released details on Proposed 2011 Solvency Relief, measures that would provide temporary solvency funding relief for eligible public sector and broader public sector pension plans. Since the introduction of 2009 solvency relief by the Ontario government—which were temporary relief measures applicable to DB plans, the government has been approached by universities and other public sector plan sponsors seeking additional relief from their solvency funding requirements.
The draft regulations that have now been released are intended to assist eligible public sector single employer DB or hybrid pension plans by providing solvency relief options in two distinct stages. Eligible plans would have to meet certain criteria to qualify for each stage of relief. A requirement that distinguishes the Proposed 2011 Solvency Relief from the 2009 Solvency Relief is the requirement that plan sponsors develop and implement measures designed to improve the sustainability of their plan.
Eligible public sector plans
In order for a public or broader public sector plan to be eligible for the Proposed 2011 Solvency Relief, it must meet all of the following conditions:
- the plan must be a “public sector pension plan” in respect of a list of entities, including Crown agencies or corporations, district school boards, Ontario universities and municipalities;
- the plan must provide defined benefits and be sponsored by a single employer⎯multi-employer and jointly-sponsored plans are not eligible;
- the plan must have sufficient active members who are continuing to accrue benefits⎯the plan may not be closed or be primarily comprised of retired members;
- at the first valuation following the date the regulation is brought into force (stage 1 valuation), the plan must have a ratio of market value of plan assets to going concern liabilities below 90% or a ratio of solvency assets to solvency liabilities less that 90%; and
- the plan sponsor must submit, in respect of the plan, a funding plan to the Ministry of Finance indicating possible steps to make the plan more sustainable and estimated savings targets. Examples include changes to the benefit formula, changes to employee/employer cost sharing, linking elements of the plan to investment performance or transition to a jointly sponsored governance model.
Stage 1 solvency relief
If the Ministry accepts the plan into stage 1 of solvency relief, the plan sponsor has three years from the date of the stage 1 valuation to achieve sufficient progress towards achieving sustainability, as set out in the funding plan.
During this period, the plan would not be required to file annual valuations, regardless of its current solvency funded status, and the contribution requirements for each year would be determined as the normal actuarial cost, plus the largest of the following:
- the going concern amortization payments, noting that going concern amortization payments revealed in the stage 1 valuation would be deferred for one year, while previous amortization payments would continue as scheduled;
- interest on the solvency deficiency (ignoring solvency asset adjustments or solvency liability adjustments, if any); or
- 50% of the solvency amortization payments that would be required at the stage 1 valuation, if any, over a four-year period to bring the solvency assets up to 80% of the solvency liability.
During stage 1 solvency relief, there are limits on contribution holidays and accelerated funding for benefit improvements. As with the 2009 Solvency Relief, there are increased disclosure requirements to members and former members of the plan.
Following the three year period, plan sponsors need to submit a plan valuation (stage 1 progress report), which must demonstrate progress towards achieving the savings targets. The Ministry has published initial guidance and a series of complex formulae to assist it in assessing plan progress and in determining whether a plan should be permitted to enter the next phase of solvency relief.
Stage 2 solvency relief
If a plan is judged by the ministry to have made substantial progress towards the savings targets, the plan may enter stage 2 of solvency relief. Generally, stage 2 solvency relief is comparable to the 2009 Solvency Relief for plans that elected all of the available options, except that the requirement to obtain Ministry approval for progress towards meeting savings targets has replaced the requirement to obtain member consent (lack of dissent).
As such, the commencement of new going concern and solvency deficits can be delayed by 12 months, and the solvency deficit can be amortized over 10 years instead of five. The only significant variation is that should the plan reveal new solvency deficiencies during the 10-year period, the incremental solvency deficiencies could be amortized over the longer of five years or the end of the original 10-year period.
Any plan changes identified during the initial three years must be fully implemented within five years of the stage 1 progress report. Thus, sponsoring employers have a total of eight years to identify and put in place their sustainability changes. While this may seem like ample time, many of these plans are collectively bargained, so there are limited opportunities to effect change.
Failure to attain stage 2 solvency relief
If the Ministry determines that a plan did not make sufficient progress towards the savings targets, the plan must resume funding in accordance with the standard provisions of Ontario’s Pension Benefits Act, including five-year funding for solvency deficiencies.