The Ontario government announced today that it will introduce legislation next Spring to provide temporary solvency funding relief to pension plans, primarily through an extension of the solvency amortization period from five to 10 years with member or union consent. The relief, if passed, would be retroactive to September 30, 2008. However, the Ontario government’s announcement was thin on details, so Ontario plan sponsors will need to wait for further announcements or the actual legislation to fully appreciate the extent and impact of the proposed measures. Unfortunately, the proposed measures may be too little, too late given the delay in implementation and the complexities and uncertainties plan sponsors will likely face when attempting to obtain member consent.
Solvency Funding Relief
The primary component of the relief will be an extension of solvency amortization periods from five to 10 years, with the consent of active plan members, or their collective bargaining agent, and retired members. While the announcement did not give specifics on the consent required, we anticipate that the threshold for consent will be two-thirds consent from both members and retirees, as is currently the case for member consent to surplus withdrawals. A requirement to obtain consent from both classes, whose interests may not be fully aligned, may make obtaining such consent difficult for plan sponsors. In addition, plan sponsors may have to meet certain (possibly time consuming) notice and disclosure requirements in order to demonstrate that such consents are informed and valid. Interestingly, unlike other jurisdictions, the announcement did not mention using letters of credit as an alternate way to secure 10-year amortization periods absent member consent.
Other Measures to Balance Interests
There are a number of other aspects of the proposed funding relief that may be of benefit to employers (and which would appear to operate independent of the amortization period extension).
- The consolidation of previous funding schedules. Presumably this would only apply to previously disclosed solvency funding deficiencies, as was the case with past federal funding relief.
- One year deferral of the start of catch-up payments required on the filing of valuation reports until the beginning of the next fiscal year, in the same manner as jointly sponsored pension plans. Whether such a payment would be required to be in the form of a single lump sum or spread out over time is not clear from the announcement.
- Permitting greater flexibility in the use of actuarial gains to reduce annual cash payments by plan sponsors.
- The adoption of the revised Canadian Institute of Actuaries’ Standard of Practice for Pension Commuted Values for solvency valuations. We understand that this change would reduce solvency liabilities somewhat.
The remaining proposals appear to be aimed at ensuring benefit security and encouraging transparency of pension funding:
- Enhanced notice to active and retired plan members. Presumably this applies to the financial health of the pension plan.
- Accelerated funding of benefit improvements. It is not known whether this would only apply to plans which avail themselves of the extended solvency amortization period.
- Temporary limitations going-forward on certain contribution holidays where the plan actuary indicates that the plan is no longer in surplus position.
Given the limited information provided, the delay in implementation until the spring of 2009, and the likely complexities of the consent requirements it is questionable whether these proposals go far enough and will be implemented in sufficient time to effectively provide the funding relief many employers are urgently seeking.