Some thoughts on the final report of the Ontario Expert Commission on Pensions

The Ontario Expert Commission on Pensions (OECP) final report, A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules recommends some much needed reforms to the rules governing pension funding, plan restructuring, plan failure and risk to benefit security due to bankruptcy or insolvency, and pension plan governance. If adopted, the report’s recommendations would help increase employee understanding of the benefit promise, and help improve benefit security. However, an opportunity was missed. The report does not adequately address the need to create a regulatory environment that encourages the creation of economically-viable new pension plans—or continuation of existing plans—which would increase coverage for the majority of Ontario residents.

Instead, the report focuses on modifying regulations for the three main types of DB plans currently available in Ontario:

• Single employer pension plans (SEPPs);
• Multi-employer pension plans (MEPPs); and
• Jointly-sponsored pension plans (JSPPs)

Pension Plan Funding

The report recommends that SEPPs should fund to a target of 105% of solvency liabilities, amortizing deficits over five or eight years depending on how far short of the target the plan is. Contribution holidays would be permitted if a SEPP’s solvency ratio exceeds 105%, and surplus withdrawals would be permitted in a continuing plan generally when the plan’s funded ratio on a solvency basis exceeds 125%. Surplus entitlement would be determined by the plan documents, with disputes potentially determined by a new Pension Tribunal of Ontario.

The report recommends that letter of credit funding be permitted on a trial basis to secure a “fixed proportion of contributions.” The report also recommends that the government should proclaim provisions of the Pension Benefits Act (PBA) to require inflation indexing in the event of “inflation emergencies.”

Related Link

While the recommendation for use of letters of credit is a welcome addition, a number of other recommendations, such as the prospect of forced inflation indexing, may deter employers from sponsoring pension plans. Plan sponsorship may also be discouraged by the recommendation to increase to the funding target for SEPPs. Many plans have been chronically underfunded, in large part due to uncertainty of entitlement to surplus assets. The recommendation to increase funding will increase the likelihood of surpluses emerging—without fully addressing employers’ concerns regarding surplus ownership.