PENSION REFORMS UNDERWAY
The Ontario government stated its intention to:
- Review the Ontario Court of Appeal's recent ruling regarding spousal entitlements in the case of Carrigan v. Carrigan Estate, propose amendments to the Pension Benefits Act (PBA) and, if necessary, amend the regulations under the PBA. The Carrigan case overturned the commonly understood interpretation of the pre-retirement death benefit provisions under the PBA where the member has both a married spouse, with whom the member is no longer living but where a divorce has not been finalized, and a common law spouse. We will have to see how the government proposes to amend the PBA and whether both the plan administrator and the recipient of the payment will be fully protected from any challenge. We will be discussing this issue at our Seminar later this month.
- Implement rules that would clarify and simplify the requirements for asset and liability transfers when corporate pension plans are restructured in the future. Hopefully these changes will eliminate the difficulties that arose from various court decisions including Transamerica Life Canada Inc. and Aegon Canada Inc. v. ING Canada.
- Implement "split pension" regulations (these would permit certain public-sector plans to negotiate agreements to give eligible employees an opportunity to consolidate their pension benefits that relate to past government-initiated restructurings).
- Amend the regulations under the PBA and, if necessary, propose amendments to the PBA that would permit assets to be transferred from employer-sponsored, single-employer pension plans to jointly sponsored pension plans (JSPPs) and allow employer-sponsored, single-employer pension plans to be converted to JSPPs, if specified conditions are met.
- Implement a new "funding concerns" test that would determine when plans that are not obliged to satisfy solvency funding requirements are required to file annual valuations. Currently, the PBA regulations require most plans to file an annual valuation if the solvency ratio is below 85%. It is anticipated that the new rule will apply to a small set of plans (including some specific JSPPs and MEPPS) that are currently exempt from the solvency ratio test until June 30, 2013.
- Implement a framework for contribution holidays that specifies eligibility conditions and ensures affected pension parties are appropriately informed. This follows the proposal announced in 2012 that contribution holidays will be permitted unless prohibited by the plan documents, provided that the transfer ratio remains at a specified level.
- Update regulatory requirements to reflect appropriate changes to standards issued by professional bodies, such as the Canadian Institute of Actuaries and the International Accounting Standards Board.
- Prescribe content for plan documents and statements for former and retired members.
Pooled Asset Management
The 2012 Budget announced the government's intention to introduce a pooled asset management framework to oversee investments on behalf of Ontario's public-sector pension funds as well as some non-pension investment funds. The government appointed Bill Morneau as Pension Investment Advisor to consult with interested parties and develop recommendations for consideration. Mr. Morneau's Report was released in the fall of 2012. The 2013 Budget indicates that the government continues to consult on Mr. Morneau's findings. Acknowledging the complexity of this undertaking, the 2013 Budget announces that the government intends to establish a technical working group to advise on the design, governance and transition issues associated with the implementation of a new pooled asset management entity. The working group would report back to the Minister of Finance later this year with a detailed implementation plan. There are significant implementation issues that must be properly considered.
Target Benefit Plans
As we noted previously, Bill 120 defined a Target Benefit Plan as a plan where the employer contributes a fixed amount to the pension fund as specified in one or more collective agreements and all benefits, including accrued benefits, can be reduced if the funding levels are not sufficient. The 2013 Budget confirms that Ontario is moving ahead on regulatory changes related to target benefits in eligible multi-employer pension plans. The government further stated that assuming outstanding federal tax issues will be resolved and, in consultation with interested parties, it will also develop a framework for single-employer, target-benefit plans, including funding rules, plan governance, the timing of necessary benefit reductions, permitted benefit improvements, and notice to members and retired members.
Pooled Registered Pension Plans (PRPPs)
Ontario offered new support for PRPPs as it announced that they will be consulting with interested parties to determine how PRPPs should be implemented, before introducing legislation. It will be important to ensure, for example, that members are adequately protected and low-cost objectives are met.
Canada Pension Plan (CPP) Enhancement
The 2013 Budget materials note that Ontario continues "to advocate for a modest enhancement to the CPP". No details are provided.
GOVERNMENT ACTIONS TAKEN TO REDUCE PENSION COSTSJointly Sponsored Pension Plans (JSPPs)
After extensive consultations with each of the four JSPPs consolidated in the Province's financial statements, the sponsors have signed agreements with the government that meet its policy objectives. These agreements freeze contribution rates until the deficit is eliminated in 2017-18 and eliminate the need for legislation.
The agreements require reductions in future benefits to address new funding shortfalls. Any reductions in future benefits will help mitigate associated growth in pension expense and allow the government to continue to direct funds towards public services for people who rely on them and to eliminate the deficit.
Single-Employer Pension Plans (SEPPs) – Particularly University and Electricity Sectors Universities. In May 2011, the government provided temporary solvency funding relief to public-sector SEPPs. In exchange for this relief, these SEPPs were expected to negotiate plan changes that would improve sustainability and affordability over the long term. Unless SEPPs can demonstrate progress toward this objective, additional solvency funding relief would be denied.
The 2013 Budget papers state that the government's temporary solvency funding relief regime has been successful. Since the announcement of the regime, 17 plans have been granted relief – 15 of them in the university sector.
The 2012 Budget announced that the government would consider additional tools to enhance the sustainability and affordability of public-sector SEPPs, including measures to encourage equal cost- and risk-sharing between employers and plan members.
The 2013 Budget states that the government remains committed to ensuring these SEPPs move to equal cost-sharing for ongoing contributions within five years and exploring opportunities to support joint sponsorship as the model for pension plan governance and funding in Ontario's public sector. To help realize efficiencies in plan administration and support joint sponsorship in the public sector, the government also intends to develop a framework that would, if specified conditions are met, permit the transfer of assets from SEPPs to JSPPs and allow SEPPs to be converted to JSPPs.
The government will also consider regulatory amendments that provide additional relief from solvency funding obligations, for public-sector SEPPs that have taken action to put their plan on a sustainable track, including movement to equal cost-sharing for ongoing contributions.
Electricity Sector. As announced in the 2012 Budget, the government is moving forward with proposed legislative amendments to eliminate barriers to the creation of new JSPPs in the electricity sector.
The government remains committed to engaging with both employer and labour representatives on the challenges facing electricity-sector plans. To that end, the government intends to establish and chair a working group composed of employer and employee representatives to promote a common understanding of the pension challenges in the electricity sector and move towards a more sustainable framework.
The government will also explore whether further legislative amendments may be necessary to transform these plans.