Ontario’s government will amend the Pension Benefits Act (PBA) to allow the relief regulations to apply to the next valuation filed by a plan on or after Sept. 30, 2008, although it is not known when the regulations will be introduced.
Existing solvency payment schedules will be consolidated into a new five-year payment schedule, and a deferral will be provided for one year from the valuation date for the start of new going-concern and solvency special payments identified in the valuation report. Also, a ten-year amortization payment schedule will be available for new solvency deficiencies, subject to consent.
While none of these changes comes as a surprise, conspicuously absent is any reference to letters of credit, which figured in previous discussions on solvency relief. Ian Markham, director of pension innovation with Watson Wyatt Worldwide in Toronto, is puzzled by the omission of letters of credit from the dialogue. “I’m surprised to find that we don’t have that ability,” he says. “It could be due to tight credit markets, but why take something away from people just because they might have difficulty getting it?”
The budget dealt with the issue of member consent with a plan to move to a 10-year solvency amortization schedule, as long as no more than one-third of the aggregate of all active, deferred and retired plan members indicate (before the start of payments) that they object. However, this does not apply for multi-employer and jointly sponsored pension plans.
Collective bargaining agents may object only for the proportionate share of active members they represent. It is unclear whether a union or other representative could object on behalf of retirees.
Combining the active, deferred and retired plan members into an aggregate vote is a practical move that prevents minority groups from wielding disproportionate influence, according to Markham.
2009 Ontario Budget: Coverage |
If a solvency excess is identified in subsequent valuation reports, it can be used to reduce or eliminate solvency special payments identified in the initial report. Plans that obtain consent for 10-year solvency amortization can have up to 10 years of going-concern special payments taken into account in determining the net solvency deficiency.
The budget states that future benefit enhancements must be funded over a maximum of five years on both a solvency and a going-concern basis if solvency amortization schedules are consolidated or extended. However, the extended 10-year amortization schedule will not apply to enhancements.
The issue of contribution holidays was also addressed. They will only be permitted in fiscal years ending in 2010 to 2012 if an actuarial cost certificate is filed annually with the Financial Services Commission of Ontario (FSCO) confirming that the plan was in a surplus at the start of the fiscal year. Designated plans under the Income Tax Act are exempt from this condition.
Watson Wyatt’s analysis points out that once the relief regulation is passed, the Canadian Institute of Actuaries’ revised Standard of Practice for Pension Commuted Values (New CV Standard) could be used for the purpose of solvency valuations as of Dec. 12, 2008.
But according to Watson Wyatt’s InfoFlash Canada report, the budget is silent on the change to the PBA regulations required to adopt the New CV Standard for use in individual terminations. This is problematic, according to the report, as the New CV Standard is intended to apply to individual terminations on or after Apr. 1, 2009.
The PBA will be amended to stipulate that the Pension Benefits Guaranty Fund (PBGF) is a self-sustaining fund, independent of government. The amendments will stipulate that while the government can make grants to the PBGF, it is not required to do so.
However, Markham says more should be revealed on what constitutes a grant. “Is a grant a freebie?” he asks. “What amounts are involved? Is it going to be used politically to cover the entire deficit on a major claim from one of the major companies now in bankruptcy protection?”
As a result of the Ontario Expert Commission on Pensions (OECP) and stakeholder consultations, the government plans to establish a Pension Reform Advisory Council to “provide practical feedback on specific pension reform proposals”. The budget states that pension reform will be guided by the “principles of transparency, clarity, flexibility and competitiveness, with a goal of balancing benefit security and plan affordability and expanding pension coverage for Ontarians.”