Should Ontario Finance Minister Dwight Duncan’s proposed pension reforms be signed into law, plan sponsors with members in Ontario will be paying a much higher bill for a benefit guarantee that remains unchanged.
Ontario’s Pension Benefits Guarantee Fund (PBGF) will receive a considerable top-up under the proposed reforms. However, the maximum monthly benefit of $1,000 will not be raised, as was called for by the Expert Commission on Pensions, leaving plan sponsors on the hook for the health of the fund.
Duncan’s plan will require healthy pension plans to contribute a minimum of $5 per member per year, up from $1, while underfunded plans may be hit considerably harder. Already saddled with payments of up to $100 per member per year, their costs could triple to $300 per member, a development that concerns senior actuary Philip Morse with Towers Watson in Toronto.
“What they’re asking is for the remaining plan sponsors to top up their funding,” he says. “The maximum PBGF fee for a plan sponsor with 1000 members—if their plan is underfunded—has gone from $100,000 to $300,000 plus taxes. This is a cost burden for small plan sponsors that are still in the defined benefit space.”
While Morse doesn’t believe it to be a “make-or-break” issue in terms of whether plan sponsors will continue to offer defined benefit (DB) plans, he describes it as yet another potential disincentive to DB sponsorship in Ontario.
Paul Forestell, a Toronto-based principal with Mercer Human Resource Consulting agrees. “It’s another nail in the coffin, and further incentive for companies to get rid of their DB plans if they’re able to.”
Duncan also proposed tightening the rules for valuing pension assets and liabilities, and keeping plan sponsors on the hook for contributions when plans become underfunded. Further, contribution holidays will not be permitted if a plan’s transfer ratio falls below 105%.
Forestell explains that the finance minister appears to have left the door open for whatever comes out of the national discussion on retirement benefits, particularly regarding improving coverage. The next ministers’ meeting is scheduled for the late this fall.
Overall, the likely effect of the proposed reforms seems to be increased costs for plan sponsors and not much else. “This is not likely to change the path for plan sponsors one way or the other,” says Forestell. “I think it’s an opportunity for plan sponsors to re-examine what they’re doing with their pension plans, but unless the increased fees for the PBGF or the tightening of the rules around funding are a major concern for an organization, I think you’re going to see a lot of things continue they way they are.”
