Bill 120, with the populist title, Securing Pension Benefits Now and for the Future Act, 2010, received first reading in the Ontario legislature on October 19, 2010. The Bill is the next step in Ontario’s pension reform dance.

Phase 1 of Ontario’s pension agenda took the form of Bill 236 which received Royal Assent on May 18, 2010. Bill 236 has not been proclaimed in force. As a result, there are still no effective dates. Please refer to our Pension Pulse dated June 24, 2010 for a description and analysis of Bill 236.  

Phase 2 of Ontario’s pension reform was announced in a backgrounder on August 25, 2010. Our Pension Pulse dated August 26, 2010 provides details of the proposals contained in the backgrounder. The backgrounder explained that a number of the reform measures would be implemented in the form of regulations to be released for public comment prior to being finalized. The regulations have not yet been released.  

Bill 120 can best be described as Phase 1.5 of Ontario’s pension reform. The Bill implements many of the proposals contained in the backgrounder. However, there is a lack of detail, which will need to be dealt with in regulations. Plus, as with Bill 236, there are no effective dates. The main changes introduced in Bill 120 are as follows:  

Funding Measures

  • Pension plan amendments that increase pension benefits will not be permitted if they bring a plan’s funded status below a prescribed level. According to the august backgrounder, the prescribed funding standard will be 85$ on either a solvency or on-going basis.

    In the event a plan sponsor desires to amend a pension plan or agrees to changes in collective bargaining that would bring the funding below this level, cash would have to be injected into the pension fund in order for the amendment to be valid. This will have an impact particularly on collectively bargained pension plans.
     
  • Employer (and employee) contribution holidays will be permitted, subject to conditions to be prescribed in the regulations. The August backgrounder indicated that a funding cushion of 5$ would be required, namely, that a plan’s transfer ratio could not fall below 105$. in addition, contribution holidays will not be permitted if the pension plan documents prohibit them.
     
  • Employers will be entitled to use letters of credit to fund solvency deficiencies. The aggregate value of the letters of credit under a pension plan may not exceed 15% of the plan’s solvency liabilities. A plan sponsor will have to notify the Superintendent of the Financial Services Commission of its intention to fund a plan in this manner. The fees paid to obtain and hold the letter of credit may not be paid from the pension fund. The Bill also specifies that the plan administrator will hold the letter of credit in trust for the pension plan, instead of the plan’s trustee or custodian holding the letter of credit directly.  
     
  • Jointly sponsored pension plans, typically some of the large multi-employer pension plans, will be exempt from funding solvency deficiencies provided such plans are amended.  
     
  • A procedure and time limits are established to provide for the refund of overpayments to employers and for the reimbursement to employers of amounts that should have been paid from a pension fund.  

Surplus Entitlements

  • The Bill confirms that pension plan documents govern the entitlement to surplus assets in a pension plan. If a pension plan does not provide for the withdrawal of surplus assets by the employer either on an on-going basis or on plan wind-up, the plan will be construed to prohibit such withdrawals.  
  • An employer may enter into a written agreement with plan members to provide for the withdrawal of surplus assets. The written agreement will override the plan documents and any trust that exists in favour of plan members. The agreement would have to be with at least two thirds of plan members, or with the union that represents the members. The Bill also provides for binding arbitration in respect of surplus assets. Many details will have to be worked out in respect of these provisions.  

Pension Plan and Pension Fund Expenses

  • A plan sponsor will be entitled to payment for fees and expenses in respect of the pension plan and pension fund unless the plan documents indicate otherwise. Where the plan documents are silent, the fees and expenses may be paid from the pension fund. This creates a presumption that such fees and expenses may be paid from a pension fund. The fees and expenses include those for services rendered not just by third parties but also by the plan sponsor or administrator. This effectively codifies the Kerry decision (see our Labour & Employment in the News dated August 12, 2009).

Actuarial Assumptions

  • The Superintendent will be authorized to place restrictions on the actuarial methods and assumptions that may be used in actuarial valuation reports. The Bill contemplates the making of regulations which may prescribe assumptions and methods either generally or specific to certain events. This is likely in response to the litigation involving improper actuarial assumptions used in respect of the Slater Steel pension plans.  

Pension Benefits Guarantee Fund

  • The only changes in the Bill in respect of the PBGF are to the list of exempt benefits. Pension plans that were established within three years prior to a wind-up and pension plan improvements made within three years prior to a wind-up are not covered by the PBGF. The Bill increases the time period to five years. Also, target benefits and optional benefits (see below) will be exempt from the PBGF.

    The proposed fee increases to the PBGF announced in the August backgrounder will be introduced in the form of draft regulations.

Categories of Pension Benefits

  • The Bill introduces new and expanded categories of pension benefits, including target benefits and optional benefits.  

    Target benefits are those typically in industry-wide multi-employer pension plans in which the contributions to the plan are collectively bargained and the ultimate benefit payable from the plan is targeted based on the contributions. The benefits in such plans may be reduced, except in the province of Quebec. These plans are exempt from the PBGF.  

    Optional benefits are typically ancillary benefits such as enhanced survivor benefits, early retirement benefits and indexed benefits, funded entirely from additional voluntary contributions by plan members.  

Transfers from Ontario Public Sector to Federal Public Sector

  • The Bill introduces a provision specifically targeted at transfer of pension plan members from the Ontario civil service to the federal civil service. The provision deals with the transfer of assets and liabilities from the Ontario government pension plan to the federal government pension plan and the protection of members’ pension benefits.  

Regular Reviews of the Pension Benefits Act

  • The Pension Benefits Act will be required to be reviewed at least every five years. This will not guarantee changes but it might avoid our current circumstances in which the Act has not been substantially amended or updated in over twenty years.  

Repeating what we stated in our August 26, 2010 Pension Pulse, introducing pension reforms in a piecemeal manner and without definite effective dates makes it very difficult for employers to plan their pension strategy and to implement the necessary administrative and HRIS modifications. Hopefully draft regulations will be released shortly to give plan sponsors, plan administrators and plan members a clearer picture of the final state of pension reform. The pieces of the pension reform puzzle are slowly coming together.