The Ontario government has proposed changes to the pension system that will benefit employees but employers will have to wait until the second phase of changes later in 2010 for any substantial benefits, such as funding rule alterations, according to pension experts.
“It really primarily focused on employees at this point in time. Most of the benefits are for employees and, hopefully, the next stage will bring in more to deal with employer issues around funding,” said Scott Clausen, a national partner at Mercer in Toronto.
The legislation, proposed in December, covers defined benefit (DB) pension plans and will increase benefits for laid off employees and require benefits to be vested immediately, instead of waiting two years.
However, the elimination of partial windups and clarification of rules around surplus sharing and plan transfers during reorganizations could benefit plan sponsors because administrative burdens and uncertainty are removed, said Clausen.
The Pension Benefits Amendment Act, 2009, proposes extending grow-in benefits to all terminated members if their age plus years of service total at least 55, starting Jan. 1, 2012. Grow-in benefits mean terminated employees will be eligible for early retirement benefits even if they don’t qualify for them at the time of termination.
For example, take a 45-year-old employee who has 10 years of service and is terminated by an employer that has an early retirement provision where employees who have 15 years of service at age 60 can retire with full benefits as if they were 65. Had the employee not been terminated, by age 60 he would have surpassed the years of service requirement to qualify for the early retirement provision, so under the grow-in rule he would receive that benefit.
The grow-in rule used to only be triggered if a substantial number of employees were terminated and there was a partial windup of a pension plan. Now the rule would apply to any individual termination unless it’s a voluntary quit or for cause, said Paul Timmins, a senior consultant at Watson Wyatt in Toronto.
“That’s going to increase the pension costs associated with terminations,” he said.
Depending on how rich an employer’s early retirement benefits are, the rule could increase the pension payment by about 30 per cent to as much as 100 per cent, he said. This could also result in more litigation.
“It’s going to be more worthwhile for somebody to argue whether they were involuntarily terminated or not,” said Timmins.
Eliminating partial windups
As a trade-off, the amendments would eliminate partial windups as of Dec. 31, 2011. Currently, the pension regulator, the Financial Services Commission of Ontario, can order a partial windup of a pension plan if a company closes part of its business or a significant number of employees are laid off. The company would then have to carve out the pension benefits, and a proportion of any surplus, for the affected employees.
Windups have been controversial because the rules around what triggers them, such as the definition of “significant,” are vague, said David Vincent, a partner at the law firm Ogilvy Renault in Toronto.
While employers would still have to pay out pension benefits to terminated employees because of the new grow-in rules, there would be some savings because employers wouldn’t have to file partial windup valuation reports, distribute surplus to terminated members or purchase life annuities for the benefits of terminated employees, said Vincent.
“The government is trying to satisfy both sides of the fence,” he said.
As for the immediate vesting of pension benefits, this would be more of a nuisance than a real cost, said Kathryn Bush, a partner at the law firm Blakes in Toronto.
“If you have high turnover in your business, there will be very small benefits (to pay out) but it’s just kind of an annoyance,” she said.
If an employer is worried about high turnover, it should structure the plan so employees can’t join for one or two years, she said.
However, most employers that offer DB plans tend to go to great lengths to retain employees for the long term, said Vincent.
“Most companies that offer these types of benefits tend to be the types of companies that have long-term, stable employees,” he said.
The amendments would also give the provincial regulator the power to order a special valuation, outside the every-three-years valuation, for at-risk plans.
Other jurisdictions have always given the regulator the power to order more frequent valuations if there were grounds to do so, said Vincent.
“Three years can be a long time in terms of this financial climate that we’re in now,” he said.
The government also proposed changes to rules around surplus sharing, where employers would now only satisfy one of two requirements instead of both: Either reach an agreement with two-thirds of the membership to share the surplus or prove the employer is entitled to the surplus.
“That seems like a logical fix, especially for newer plans where the language might be very clear,” said Bush.
The amendments clarify the rules around pension transfers during reorganizations, such as when a company sells a portion of the business to another company and the new company wants to assume the pension plan of the acquired employees.
Before there was a lot of confusion about including a proportion of the surplus or liabilities, said Vincent.
“It has become quite messy over the years and quite unattractive for employers to do that,” he said. “Anything that makes the rules more clear and certain in an M&A transaction is an improvement.”
The amendments also call for increased communication between plan sponsors and members, especially providing notice for all changes to the plan, not just negative ones, before they take effect.
More changes still needed
But there were many issues not addressed in the amendments, which could be addressed in the next round of changes, expected sometime in the spring.
While the government introduced temporary solvency relief for insolvent plan sponsors earlier this year — where employers could spread out solvency payments to a maximum of 10 years — many plan sponsors wanted to see more permanent changes, said Timmins.
Bush had also expected to see more changes to the investment rules, such as prohibiting a plan from owning more than 30 per cent of a company and how much Canadian property a plan can own.
“The investment rules are crying out for change,” she said. “They are quite antiquated.”
Clausen at Mercer would also like to see provisions to deal with surpluses, such as the addition of pension security trusts. These trusts would allow an employer to contribute more than the minimum requirement with an understanding the employer has clear access to the surplus.
“If these trusts had existed in the past, plans probably would have been in better shape going into 2008 than they were,” said Clausen.
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