As promised in the 2022 Budget, the Ontario Ministry of Finance has launched consultations on proposed regulations for Ontario’s Pension Benefits Act (PBA) to implement a permanent target benefit framework for pension plans in Ontario. The framework will replace temporary solvency funding regulations for eligible Multi-Employer Pension Plans (MEPPs) that are able to reduce accrued benefits. The temporary regulations, which are set to expire in 2024, were intended to be in place only until a permanent and comprehensive legislative and regulatory framework was developed. The government's consultation on proposed regulations will be of particular interest to eligible MEPPs that have previously obtained or wish to gain access to solvency funding relief.
Objectives of Permanent Target Benefit Framework
As described in the government's consultation document, the objective of the permanent target benefit framework is to promote and enhance retirement security through various regulatory measures, falling under the following three fundamental pillars:
- Governance best practices: Promote best practices through required governance and funding policies.
- Enhanced communications: Enhance communication to members with required disclosures.
- New funding rules: Permanent funding rules to manage risk and support benefits.
The consultation document sets out additional details respecting each of these fundamental pillars, and reviews other significant matters to be addressed by way of regulation, respecting the conversion of eligible MEPP benefits to target benefits, asset transfers, wind-ups, administrative monetary penalties, multi-jurisdictional pension plans and transitional considerations. As touched on below, certain parts of these proposed target benefit regulations might foretell requirements for other pension plans.
Proposed Governance and Funding Policy Requirements and Potential Implications for Other Ontario Pension Plans
As indicated in our blog, Governance and Funding Policies Reintroduced for Ontario Pension Plans, in November 2022 Ontario reintroduced proposed amendments to the PBA to require governance and funding policies both for target benefit as well as other pension plans. Governance and funding policy requirements are, for target benefit plans, to be included in the proposed regulations respecting the permanent target benefit framework. The government's consultation document indicates that the proposed regulations will provide for the following:
Governance policies will be required to address:
- The roles, responsibilities and reporting relationships of the persons involved in the administration of the pension plan and pension fund.
- The operational policies in place to support the administration of the pension plan or pension fund, including any applicable organizational structures.
- The measures in place for carrying out the supervision of the persons involved in the administration of the pension plan or pension fund, including measures to monitor, review and assess their performance, skills and knowledge and to provide them with training to maintain and enhance their qualifications.
- The skills, knowledge, experience and other attributes required of persons involved in the administration of the pension plan or pension fund to enable them to meet their obligations under the PBA and regulations.
- The systems in place to identify, quantify and manage material risks to the pension plan or pension fund.
- The processes in place to assess what changes to the pension plan or the administration of the plan may be appropriate based on the results of the stress testing in filed reports. A requirement to perform a stress test would enhance governance processes for risk management but would not affect funding requirements.
- The processes in place to ensure that persons involved in the administration of the pension plan or pension fund have access to relevant, timely and accurate information.
- The processes in place for the communication of relevant, timely and accurate information to members, former members, retired members and other persons entitled to benefits under the pension plan, to employers participating in the pension plan, to trade unions representing members of the plan and to the CEO of the Financial Services Regulatory Authority of Ontario.
- The code of conduct established for persons involved in the administration of the pension plan or pension fund, including the process for identifying, monitoring and addressing conflicts of interest.
In addition, because accrued benefits can be reduced under a target benefit plan, the government consultation document indicates that funding policies will be critical for establishing and describing how related risk is managed. The proposed regulations would require that a plan’s funding policy address:
- The funding objectives for the pension plan as they relate to:
- the pension benefits provided under the plan and the stability of those benefits;
- the stability of the contributions required under the plan; and
- the equitable treatment of current and future members of the plan.
- The methods for achieving the funding objectives mentioned above, including use of any additional funding margin that may be appropriate.
- The material risks relating to the funding of the pension plan, including the risk of reductions to accrued benefits provided under the plan, and the measures to be taken to quantify and manage those risks.
- The method and process to be applied to reduce benefits, including accrued benefits, under the pension plan, if the circumstances require a reduction of those benefits.
- Circumstances when benefit improvements could be made and how improvements would be funded, including any use of surplus.
- The circumstances that will cause the funding policy to be reviewed and amended.
Notwithstanding the unique structural and regulatory features of pension plans providing target benefits, certain aspects of the governance and policy requirements that are eventually established for target benefit plans could provide clues as to what might be required of other Ontario registered pension plans. This is most likely the case respecting requirements for governance policies. Accordingly, this component of the government's consultation could be of particular interest to administrators of Ontario registered pension plans more generally.
Consultation Period Ends June 30, 2023
The consultation drafts of proposed regulations respecting the permanent target benefit framework will be posted to the Ontario government's regulatory registry in stages. The consultation period is to remain open until June 30, 2023.