Ontario's Expert Commission on Pensions (the Commission) released its final report, A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules (the Report), on November 20, 2008. The Commission, created back in November 2006, was mandated to examine the rules governing defined benefit (DB) registered pension plans, including funding, use of surplus, and the general security, viability and sustainability of the province's DB pension system. The Report, a weighty 222 pages plus annexes, contains no less than 142 recommendations aimed at solidifying and promoting DB plan coverage.

First and foremost, the Commission ought to be applauded for conducting such a thorough analysis of the highly important and complex pension issues facing Ontario. The Report marks the culmination of two years of intensive research and in-depth consultation with stakeholders; it is an extremely well-written and thoughtful piece of work that markedly elevates the level of pension discourse in Ontario and across the country.

Hitting the target

The Commission also ought to be applauded for thinking beyond the longstanding and increasingly sterile DB vs. DC (i.e. defined contribution) debate to advocate a new type of pension plan, which it calls a Jointly Governed Target Benefit Pension Plan (JGTB Plan). JGTB Plans would impose predictable funding obligations on employers and employees (i.e. a certain percentage of salary), while establishing a targeted as opposed to fixed benefit level, permitting reductions in accrued benefits in order to manage funding deficiencies. Not only could JGTB Plans offer a balance between DB and DC plans, but they might also provide a palatable compromise between the interests of plan members and the interests of plan sponsors in terms of funding risk and plan governance. Indeed, from its title all the way to the final recommendation, the Report strives to balance off the often-contradictory desires of sponsors and members.

One welcome feature of the Report, at least from a plan sponsor perspective, is its recommendation to reverse by legislation the Supreme Court of Canada's 2004 decision in the infamous Monsanto case. Monsanto required distribution of surplus assets on the partial wind-up of a pension plan. Calling it "inappropriate that a partial wind up should precipitate a distribution of surplus", the Report recommends that members who were terminated, whether in a group or individually, and who chose to leave their entitlement to a pension in the plan (i.e. chose to remain a deferred vested member rather than withdraw the commuted value of their pension) should be entitled to share in a surplus distribution to members only if and when the plan terminates in full while in surplus or there is otherwise a surplus distribution to members. Those who chose to exercise a portability option (e.g. transfer of the commuted value to a locked-in RRSP) would have no surplus entitlement.

The Commissioner and his team of experts and advisors are to be congratulated for this willingness to overturn established precedent and to work in a spirit of compromise. Ultimately, though, and with the greatest of respect, we believe the Report will provide little concrete help to those plan sponsors and their advisors who have been holding their collective breath in anticipation of what relief the Commission might suggest for employers confronting those economic and legal issues which have made DB sponsorship an increasingly unattractive proposition.

Timing is everything

Part of this is simply a case of unfortunate timing: the Report was apparently completed before the recent capital markets plunge which has decimated DB plan asset levels, and it makes no reference to that plunge. But while it is important not to let short-term developments overwhelm long-term perspective, the result is that the Report feels in some ways as if it has already been overtaken by events. For instance, on funding of single-employer pension plans (SEPPs), the Commission's suggestion that the current funding rules need only "tweaking, rather than transforming" now comes off as simultaneously naïve and insensitive.

In fact, the Report recommends the introduction of even stricter funding rules for SEPPs. The Report puts forward a funding approach that would not only require full funding, but an additional "security margin" of 5% of solvency liabilities for SEPPs. Indeed, it is difficult to reconcile the Report's stated objective of encouraging the continued vitality of single-employer DB plans with its recommendation that such plans be subject to much stricter funding rules than multi-employer plans or jointly-sponsored plans.

Falling short

Surplus ownership is another area where we believe the Report falls short for sponsors of SEPPs. The Commission recommends that surplus be distributed in accordance with the plan documents, but where those documents are unclear, the sponsor may propose a surplus-sharing scheme to which a minimum percentage of the members or (in unionized contexts) their bargaining agent must agree. It further recommends that where no agreement can be reached, the matter be settled using a new dispute resolution procedure.

This recommendation would effectively take us back to the days before Kent v. TecSyn, a 2000 decision of the Ontario Divisional Court which essentially required employers to demonstrate legal entitlement to surplus under the historical plan documents in order to even share such surplus. But it would not cut the Gordian knot of surplus entitlement.

The Report also offers little to ease the administrative burden or shorten the horrific timeframes often involved in processing plan mergers and asset transfers. It does recommend that where a minimum percentage of the plan members or (in a unionized context) their bargaining agent agree in advance to such plan restructurings, the regulatory approval process would be somewhat expedited. Realistically, though, this expedited procedure would be of no use to sponsors who desire to effect pension asset transfers in the context of corporate acquisitions or divestitures where, presumably, prior employee or union consent is not a feasible option.

Similarly, the Report falls short of proposing the complete abolition of the nebulous partial wind-up concept as many employers would have hoped. Instead, the Report proposes that partial wind-ups be required in limited circumstances, namely when 40% or more of active members are terminated within a 2-year period.

It is difficult to understand the rationale for preserving this watered-down version of partial wind-ups rather than retiring the concept altogether, since the Report would void partial wind-ups of their main substantive effects by recommending, in addition to reversing Monsanto, the institution of immediate vesting and the provision of "grow-in" benefits to anyone who terminates employment involuntarily and meets the specified age and service criteria. We believe that immediate vesting is a member-friendly initiative whose time has come. But the grow-in recommendation, if implemented, could open the door to the necessity of adjudicating whether members' termination of employment was voluntary or involuntary in close cases, i.e. whether they would qualify for grow-in benefits. While this might be a boon for lawyers, it would certainly not promote rapid processing of terminated members' benefit entitlements.

A blast from the past

Another potentially expensive surprise is the Commission's revival of mandatory indexation of pensions, an issue that had lain essentially dormant since the late 1980s. Mandatory indexation was incorporated into Ontario's pension legislation following its recommendation by the 1987-88 Friedland Task Force, but the relevant provisions were never proclaimed into force. The Report urges the government to proclaim those provisions, which would require pensions to be inflation-adjusted according to a prescribed formula, into effect. However, it also recommends that the provisions' application be restricted to "inflation emergencies", which are not defined.

Rearranging the deck chairs

The Report contains several recommendations for an institutional overhaul of the pension regulation and adjudication system, such as the introduction of a new pension agency, a new independent pension regulator, a new pension tribunal and last but not least a "Pension Champion". While these proposals certainly have merit in principle, their implementation would undoubtedly be lengthy, complicated and expensive. Further, one must question what immediate or ultimate effects these changes would have in terms of addressing the serious actuarial, economic, accounting and design problems facing DB plans in Ontario. In our view, focusing efforts and resources on implementing some of the recommended substantive legislative changes, as well as genuine funding relief, would constitute the best place to begin any reform.

Generally, the Report appears to show greater sensitivity to large commingled pension arrangements than to SEPPs; as it points out, the vast majority of DB plan membership is in the former category even if the vast majority of plans by number fall into the latter category. The Report suggests that pension policy and legislation ought to facilitate large-scale pension plans. Further, echoing other recent proposals, it calls for expansion of the Canada Pension Plan or the creation of a similar provincial plan in order to increase pension coverage, control costs and improve portability.

Finally, the Commission promotes a national pensions dialogue by urging the Minister of Finance to call a meeting of provincial and federal ministers responsible for pension issues where they can discuss the Report and similar reports pending in other provinces, address the need for collective action in order to attain desired changes in federal tax and insolvency legislation, and consider the possibility of greater standardization in terms of procedural and technical requirements in pension legislation. Overall, there does not appear to be a great deal in the Report that will prove more than modestly attractive to plan sponsors. Certainly it offers a unique opportunity to jumpstart pension reform in Ontario, but the question is whether there will be sufficient political will to move quickly and effectively.

The government will be entertaining written comments on the Report until February 27, 2009. The Report as well as all other supporting documents and information relating to the Commission's work are available online.