In my last article, I alluded to the story of the mythological princess Cassandra. Ontario’s new rules governing target benefit plans (TBPs) remind me of another mythological figure, the king Tantalus, whom the gods cursed to spend eternity standing in a pool of water underneath a fruit tree. Whenever Tantalus bent down to drink the water, it would recede just out of reach, and whenever he reached toward the branches of the fruit tree, they would waft away. What at first appeared to be eternal sustenance was, in reality, eternal thirst and hunger.
In 2010, Ontario amended the Pension Benefits Act (PBA) to introduce new rules for TBPs as a more flexible alternative to traditional DB arrangements. The rules, which are not yet in force, are subject to unnecessary conditions that, for many employers, risk turning them into Tantalus’s pool and tree—close but forever unreachable.
Currently, TBPs in Ontario take the form of jointly trusteed multi-employer pension plans (MEPPs) established pursuant to a collective agreement or trust agreement. Under these arrangements, employer (and, if applicable, member) contributions are fixed. The plans typically contain a target DB formula. It’s a target because the administrator is empowered to reduce benefits, including accrued benefits, if the plan’s funding levels will not support them. There are other possible models for TBPs, such as New Brunswick’s new shared-risk plans, but in Ontario, jointly trusteed MEPPs have been the predominant target arrangement to date.
Experts, including the Canadian Institute of Actuaries and the Multi-Employer Benefit Plan Council of Canada, have long maintained that jointly trusteed MEPPs should be exempt from solvency funding requirements. They give several reasons. For example, contributions to these plans are fixed. Additionally, it’s unlikely that multiple unaffiliated contributing employers would fail financially at the same time. Finally, at least 50% of the trustees of such plans must represent members, which ensures member input into decisions to reduce benefits. For these reasons and others, experts—including the Ontario Expert Commission on Pensions—have also held out jointly trusteed MEPPs as a potential solution to declining pension coverage in the private sector.
Ontario’s 2010 amendments accept the importance of what the PBA now calls target benefit provisions as a more flexible and sustainable way to provide a DB level of retirement income. The new rules accept that reductions of accrued benefits and exemptions from solvency funding are appropriate. They even contemplate single-employer TBPs. At first glance, the amendments hold out the promise of satisfying the thirst and hunger for more sustainable pension plans and wider pension coverage.
Unfortunately, due to the wording of the amendments, Ontario’s target benefit provisions may be no more accessible for many employers than Tantalus’s water and fruit. The amendments currently require the contributions to each target benefit provision to be “fixed…in one or more collective agreements.” The requirement is misguided and may actually hinder the expansion of pension coverage.
Whether or not contributions to a plan are fixed by a collective agreement (or some other means) has no bearing on these plans’ governance or sustainability. Experts agree that it’s governance, not collective agreements, that is the surest way to ensure proper plan administration, sustainability and retirement income adequacy.
Leaving aside the potential for single-employer TBPs and focusing on the target arrangements we now have—jointly trusteed MEPPs—a collective agreement requirement does not ensure a contribution rate sufficient to support a particular level of benefit. Nor does a collective agreement determine how liabilities are to be funded or what assumptions or methods are to be adopted in valuing liabilities. Finally, a collective agreement gives no greater rights to enforce the pension promise. It simply has no bearing on governance.
The government’s policy rationale for tying target benefit status to a collective agreement is also unclear. It’s unlikely that the goal is to promote trade unionism, since, at law, a collective agreement can exist even in the absence of a certified trade union. Many are not aware of this point.
It’s also unlikely that the goal is to ensure member representation in plan governance, including in decisions to reduce benefits if a plan’s funded status requires it. The PBA already mandates that at least 50% of the trustees of MEPPs established pursuant to a collective agreement or trust agreement represent members. This requirement applies whether or not contributions are governed by a collective agreement and could be extended to single-employer TBPs if rules to accommodate them are introduced in the future. Even if a collective agreement is in place, it’s unlikely to address how member representatives are elected or appointed to a MEPP’s board of trustees, nor does it by itself ensure (or require) union oversight of pension plan governance.
In the worst case, the collective agreement requirement is contrary to Ontario’s stated policy goal of broadening pension plan coverage. Not only Ontario, but also British Columbia, Alberta and Nova Scotia have recently passed legislative amendments to facilitate TBPs in order to provide new ways to reverse declining pension plan participation. However, while British Columbia and Alberta have declined to tie target benefit status to collective agreements, Ontario risks making the cure worse than the disease. (As a side note, Nova Scotia risks making the same mistake, as its legislation is based on Ontario’s.)
It appears unlikely that employers would collectively bargain with their employees where they have not before simply to access the target benefit rules. This is especially the case when, in the alternative, they could offer a DC or other capital accumulation plan (or, as they are permitted to do, no retirement plan at all). Moreover, existing jointly trusteed MEPPs for which a collective agreement is not in place may simply get out of the pension business altogether rather than grapple with expensive and unpredictable solvency funding requirements that no longer apply to their collectively bargained counterparts. The rules are not even helpful for union-sponsored MEPPs, since the collective agreement requirement could prevent them from extending membership to non-collectively bargained individuals (such as salaried employees at a unionized facility) or non-collectively bargained staff employed by the union itself.
While Ontario’s rules have already been passed, it’s still not too late to eliminate the collective agreement requirement. The amendments are not in force, and supporting regulations governing target benefits have not yet been released. Sponsors and administrators of jointly trusteed MEPPs, other employers considering transitioning to a target benefit arrangement and unions can take action: contact your MPP and voice your concerns about the collective agreement requirement to the Ministry of Finance. The alternative may doom the wider adoption of target benefit provisions in Ontario before the rules even come into force.