After a long summer, the Ontario government has introduced phase two of its two‐stage reform proposal to update and modernize the Ontario Pension Benefits Act. On October 19, 2010, it tabled Bill 120, entitled Securing Pension Benefits now and for the Future.
Together with phase one, these changes represent the biggest overhaul of Ontario’s pension legislation in more than 20 years.
Our article discussing the substance of the first phase of changes (Bill 236), which became law on May 5, 2010, can be found at “Ontario Pension Reform: Time to Amend Your Pension Plan?”
If you are the administrator or the employer sponsor of a pension plan registered in Ontario, or a pension plan with Ontario members, these pension reforms could affect how you administer your plan. The proposed amendments change provisions dealing with contribution holidays, the payment of plan expenses, the use of letters of credit, amendments increasing overall benefits, recovering accidental over‐contributions and the distribution of surplus from an ongoing or woundup plan.
These amendments have only just been introduced. The Bill 120 (phase two) changes are not yet law, and may be changed as they undergo second and third readings in the Ontario legislature. Regulations containing the details of many of the changes have not yet been released.
For non‐unionized employers who do not share plan governance with their employees or other employers, most of the phase two proposed amendments do little to change the status quo. The last few years have seen multiple employerfriendly decisions from the Ontario Court of Appeal and Supreme Court of Canada. Many of the proposed amendments codify the substance of these decisions. The proposed amendments create a sense of certainty as they will allow employers to rely on the provisions of Ontario pension legislation instead of judges’ decisions.
There are also some fresh and welcome proposals. The proposed amendments will permit employers to save cash contributions and use a letter of credit to cover up to 15% of their plan’s solvency deficit in certain circumstances. Additionally, under the proposed amendments, it should be easier for employers to get permission to withdraw accidental over‐contributions from a plan fund and to negotiate surplus sharing deals.
Protecting employers from themselves?
The second phase of pension reform will prohibit any amendments to a plan that would increase the level of deficit beyond a prescribed amount. This proposal will ensure that employers do not make promises for the future that they cannot afford today. However, it may also handcuff employers during employment or labour negotiations as it may be impossible for employers to meet certain employee pensionrelated demands. As pension plans are typically used to sweeten the deal for employees, employers will have to turn to a different source of honey to satisfy their employees.
Similarly, the period for which the provincial Pension Benefits Guarantee Fund will not protect benefits related to new plans or new benefit increases when a pension plan is wound‐up without sufficient assets, will increase from three years to five years. Employers should keep in mind that they will continue to pay dues to the Pension Benefits Guarantee Fund for new plans or new benefits during this waiting period. Deadlines for regulatory filings will become much tighter. The proposed amendments will restrict the Superintendent’s authority to grant extensions for regulatory filings to 60 days, with further increases permitted only under extenuating circumstances. This is a much stricter regime than the current authority provided to the Superintendent to grant extensions for regulatory filings.
Treatment of surplus, a welcome change
The proposed amendments contained in Bill 120 also seek to clarify the surplus rules and provide a binding arbitration process for resolving surplus issues. They provide that surplus can be paid to an employer if the employer obtains the agreement of: (a) each trade union that represents plan members or, if there is no trade union, 2/3 of the plan members; and (b) the number of former members and other persons entitled to payments under the plan that the Superintendent considers appropriate. It is a welcome change that employers will no longer have to prove entitlement under historical plan documents if they can reach a sharing deal. The surplus sharing agreement will prevail over any document that creates and supports the pension plan and pension fund, and any trust that may exist in favour of any person.
Possibly the most interesting part of the new surplus sharing rules is the addition of an entirely new regime of binding arbitration. If the Superintendent of Pensions has not consented to the payment of surplus to an employer, and no surplus agreement is made before the expiry of a prescribed period after the wind up date, certain individuals may propose that arbitration be used to allocate surplus. An arbitration award in these circumstances would also prevail over any document that creates and supports the pension plan and pension fund, and any trust that may exist in favour of any person. Again, until regulations prescribing this process in more detail are made available, it is unclear whether how this new arbitration process will unfold.
It may be some time before plans have surplus and employers even begin to consider calling on these proposed surplus provisions.
What does this really mean?
The long‐awaited phase two amendments to Ontario pension legislation are finally here. But, without more clarification and accompanying regulations, coupled with the fact that the proposed amendments could be further amended before becoming law, we will have to wait and see how administrators and employer sponsors are really affected by these changes.