More pension reform anticipated for Ontario

Changes could increase employer burden with more fees, restrictive funding rules

Ontario employers hoping for significant pension reform will be disappointed by the province’s latest round of proposed changes to the Pension Benefits Act, according to Scott Claussen, a partner at consulting firm Mercer.

“There’s almost nothing in the proposals to encourage private sector employers either to create new (defined benefit) plans or even to maintain the ones they have,” said Claussen, who’s based in Toronto.

The proposed changes to provincially regulated defined benefit (DB) pension plans are a followup to changes announced last fall that included increased benefits for laid-off employees and the elimination of partial windups.

The latest changes include shoring up the province’s pension benefits guarantee fund through increased premiums, allowing employers to use irrevocable letters of credit to fund up to 15 per cent of a plan’s solvency liabilities, implementing stronger funding rules and clarifying pension surplus rules so employers can access a surplus if two-thirds of members agree.

“These proposed changes continue the process of modernizing Ontario’s employment pension system, which had been largely unchanged for more than two decades,” said Ontario’s Minister of Finance Dwight Duncan.

The government has focused its efforts on enhancing security for people who are currently in DB plans rather than giving plan sponsors more flexibility, said Fred Vettese, chief actuary at Morneau Sobeco in Toronto.

“There’s been this long-term migration away from defined benefit to defined contribution (plans). These rules will not slow down that migration at all,” said Vettese.

There had been talk of introducing target benefit plans for single employer plans, said Vettese, and he’s still hopeful that might happen. These plans are similar to DB plans but if the plan develops a deficit, the plan sponsor can reduce benefits instead of having to fund the deficit, he said.

This would help to address the surplus asymmetry, where employers are responsible for deficits but rarely have access to surplus, which discourages many employers from creating a DB plan, said Vettese.

Access to pension plan surplus has been a major issue for plan sponsors. Instead of introducing binding arbitration to deal with surplus disputes or allowing a member vote to decide who has access to the surplus, Claussen would have liked the government to allow pension security funds.

These funds allow an employer to contribute more than the minimum requirement to the pension plan with an understanding the employer has clear access to the surplus, he said.

“Instead, we essentially continue to have rules that discourage companies from funding more than the bare minimum,” said Claussen.

The proposed changes will increase the burden on private sector employers through additional fees for the pension benefits guarantee fund and an additional layer of restrictive funding rules, said Mark Newton, a partner at Heenan Blaikie and chair of the law firm’s national pensions and benefits practice in Toronto.

Plan sponsors can currently use an average of interest rates and returns to smooth out the ups and downs of the market and make pension funding more predictable year over year, said Newton.

The government’s proposal significantly limits the availability of such smoothing methodology, he said.

The changes would eliminate the averaging of solvency interest rates, require the use of current interest rates to value plan liabilities, limit smoothing of going-concern assets to no more than the last five years and limit the actuarial value of going-concern and solvency assets to within 20 per cent of market value.

These changes are needed to ensure employees receive the benefits they were promised, said Duncan.

“Over the last few years, I have had many difficult conversations with individuals who thought their pension was more secure than it turned out to be,” he said.

The proposed changes would accelerate the timing of required contributions and might increase employer costs in the short term, but the changes are moderate compared to other jurisdictions such as Quebec, said Duncan.

“Allowing letters of credit and deferring the start of amortization periods will also help employers,” he said. “In addition, a number of the proposed reforms would be phased in to provide adequate time for employer sponsors and other stakeholders to adjust to the changes.”

However, multi-employer pension plans (MEPPs) and jointly sponsored pension plans (JSPPs) that meet certain criteria would be exempt from solvency funding requirements.

This shows the government is trying to encourage the creation of more of these plans, where either employers and employees share the responsibility for deficits and surpluses (JSPPs) or employers can reduce benefits in the face of deficits (MEPPs), said David Vincent, a senior partner at law firm Ogilvy Renault in Toronto.

Employers in these funds have argued they shouldn’t have to fund a plan on a solvency or windup basis because, with multiple employers, the likelihood of a windup is remote, said Vincent.

“This announcement accepts that. It’s a big win for them,” he said.

While doubling the premiums for the pension benefits guarantee fund isn’t a huge cost for employers since the initial premiums were so low, it just goes to show the fund can’t be self-funding, said Claussen at Mercer.

If any one of the large employers that are part of the fund goes bankrupt, the fund wouldn’t be able to meet its obligations and the government would have to bail it out, said Claussen.

And the fund only gives DB plans benefit security while the majority of employees with pensions have a DC plan, said Newton.

“To have a guarantee fund seems a bit one-sided,” he said.

The fact the Pension Benefits Act has never had a specific regime for DC plans has been a “glaring deficiency in the legislation,” said Newton.

The government is inviting comments on the proposed changes from employers, employees and unions before drafting legislation, said Vincent. So it’s important for employers to become aware of these changes, he said.

“There’s a window of opportunity for employers who are going to be affected by these proposals to comment on them,” said Vincent. That window will probably close sometime in October, he added.

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