Ontario’s long-awaited changes to provide for statutory discharges on the purchase of buy-out annuities are finally in force. The buy-out annuity is a popular risk management mechanism in many jurisdictions, such as the UK and the U.S. This is because the purchase of a buy-out annuity transfers risk to the insurance company for some or all pensions in pay – the insurance company assumes the responsibility to pay the pensions to the affected members. However, in Ontario, prior to the recent changes, the boomerang risk was a significant deterrent to administrators considering this de-risking strategy.
Ontario joins British Columbia, Quebec and Nova Scotia in granting statutory discharges (subject to conditions) to pension plan administrators that have purchased buy-out annuities.
What is a buy-out annuity?
A buy-out annuity is a traditional annuity contract under which benefit liability risks are transferred from the plan sponsor to the insurer. This risk management strategy allows a sponsor to eliminate DB funding risks in respect of the members subject to the buy-out. The administrator purchases an annuity from an insurance company to provide a pension to a member or former member, which annuity is used to pay the same benefits as would have been provided under the pension plan. After the buy-out, the liability associated with paying the pension benefits rests with the insurer.
Ontario’s new regime
Ontario’s new rules provide administrators of single-employer pension plans with a discharge if the administrator complies with specified requirements in purchasing the buy-out annuity. That is, if the administrator satisfies the requirements, the member in respect of whom the annuity is purchased is no longer a member under the Pension Benefits Act (Ontario) (PBA) for any purpose.
The requirements for the statutory discharge are four-fold:
- the benefit purchased must be the same – in amount and form – as the benefit provided under the pension plan;
- the insurance company must be authorized to sell annuities;
- the pension plan must meet the applicable prescribed minimum funding requirements; and
- the annuity contract must contain certain prescribed terms, including that no money payable under the contract will be assigned except in accordance with family law, that the pension payments will be in the form of a joint and survivor pension unless such right was waived, and that death benefits will be administered in accordance with the PBA, among other prescribed terms.
How do I take advantage of the new rules?
The annuity discharge regime may assist administrators in managing risk in their plan. If the annuity purchase satisfies the requirements set out above, the administrator will be discharged upon filing a certificate prepared and signed by an actuary certifying that the administrator has complied with the discharge provisions.
There are additional obligations administrators must fulfill in connection with an annuity purchase and discharge, including:
- filing copies of the annuity purchase contract with the Financial Services Regulatory Authority of Ontario (FSRA);
- provision of notice to affected members in accordance with prescribed requirements; and
- certain recordkeeping requirements.
Pension plan sponsors de-risk for many reasons, such as reducing investment or balance sheet volatility, mitigating liability associated with increased life expectancy, and reducing the need for unexpected additional funding. Aside from purchasing buy-out annuities, plan sponsors may consider other risk management strategies such as plan design change (for example, adopting a shared risk, defined contribution or target benefit model), changes to asset allocation and investment options, buy-in annuities, longevity swaps, or purchasing longevity insurance, among others.