Ontario rolls out several parts of new DB framework

Several of the regulations under Ontario’s new framework for defined benefit pension plans are coming into effect today.

“It’s the most comprehensive we’ve seen certainly in my pension lifetime,” says Linda Byron, senior partner at Aon, of Ontario’s suite of pension reforms.

As of May 1, 2018, the amortization period for funding a going-concern shortfall in a plan will be 10 years, as opposed to the former 15-year time frame. As well, plans must now consolidate going-concern special payment requirements into a single schedule when filing a new report.

At the same time, funds must now fund a reserve, called a provision for adverse deviation, based in part on their mix of fixed- and non-fixed income investments in their portfolios. As well, plans must meet solvency funding requirements if they’re below the 85 per cent mark. The new rules provide for phasing in any contribution increases that result from the new framework.

Read: Ontario’s proposed DB funding rules lack solvency reserve accounts: PIAC

The new rules mean contribution rates will be a lot less volatile, says Marco Dickner, retirement risk management leader for Canada at Willis Towers Watson. “With the new funding rules, which are more relaxed, it will allow plan sponsors to weather difficult market situations in the future,” he says, adding that plan sponsors should remember that the costs of their plans will ultimately remain the same despite the new flexibility.

Byron notes that while contribution levels may be slightly higher in some cases, the amounts required in certain worst-case scenarios will be much lower. “A lot of plan sponsors may end up paying a little bit higher in the expected case, but they have far less volatility . . . and their worst-case downside scenarios in those one-in-20-years, post-financial crisis [scenarios] . . . are reduced. So it’s a trade-off,” she says.

In addition, new regulations aimed at increasing transparency by ensuring pension beneficiaries get updated information on their plan’s status are now in place. As part of the new rules, plan sponsors must include an explanation of how the funding rules have changed, including the reduction in solvency requirements to 85 per cent and the provision for adverse deviation.

Read: Ontario annuity discharge changes coming July 1

Correction: A previous version of this article incorrectly stated that under the new regulations, the amount used to take a contribution holiday for a year can’t exceed 20 per cent of a plan’s available actuarial surplus. In fact, the current regulation states that for private sector plans, all available surplus in a given year can go towards a contribution holiday, as long as the transfer ratio is at least 1.05 afterwards.