Praise, disappointment for Ontario pension reform

Osler, Hoskin & Harcourt LLP’s blog supports the arguments from Benefits Canada’s coverage on Wednesday, Aug. 25 that while the proposed measures are aimed at strengthening the retirement income system in Ontario, they do little to encourage employers to establish or maintain defined benefit pension plans.

Authors Shaun Miller and Ian McSweeney suggest that a more plan sponsor-friendly way to bolster benefit security would have been through the adoption of a dedicated pension security fund, as suggested by the Alberta/British Columbia Joint Expert Panel on Pension Standards. “This would be a balanced way of addressing sponsor “trapped capital” concerns associated with more aggressive pension plan funding and would encourage better benefit security without jeopardizing member rights,” they say. “Perhaps it is not too late for the Ontario government to consider this as it would go a long way to achieving a better balance between member security and sponsor funding interests.”

In a more pessimistic outlook, Buck Consultants laments that while the announcement is good news for jointly-sponsored pension plans (JSPPs) and multi-employer pension plans (MEPPs), the measures fall short of addressing critical issues. “… it is difficult to find the silver lining for those sponsors of single employer plans who still believe in the defined benefit model,” says the firm in a press release.

Speaking of JSPPs, OMERS is fully behind the proposed reforms and applauds the government’s effort to introduce solvency relief for both MEPPs and JSPPs and recognizing the need to support reform of outdated investment rules.

“Not only has the government introduced solvency relief for jointly-sponsored and multi-employer plans like OMERS, it has restated its commitment to the further reform of outdated investment rules that limit a Canadian pension plan’s desire to make significant private investments in Canada” says Michael Nobrega, OMERS president and CEO. “We understand that reform must come in stages. The steps outlined yesterday are clearly in the right direction. These reforms will foster the expansion of pension coverage in Ontario’s pension system.”

As Benefits Canada’s coverage of the issue has mainly focused on employer contributions to the Pension Benefits Guarantee Fund, here is a summary of the proposed reforms, courtesy of Osler, Hoskin & Harcourt.

1. Strengthening funding contribution rules through smoothing restrictions and limitations on excluded benefits

• The use of smoothing (averaging) methods to value going concern assets would be limited to no more than the last five years.
• Current interest rates, as opposed to the average of solvency interest rates, will have to be used to value plan liabilities.
• The actuarial value of pension assets will be required to be within 20% of market value so that contributions better reflect current market conditions.
• Indexing benefits will continue to be permitted exclusions from solvency liabilities, but will be required to be included in going concern valuations.
• Plans with a funding threshold below 85% (currently 80%) will be obliged to undertake annual valuations to address “solvency concerns.” This matches federal requirements.

2. Employer contribution holidays

• Contribution holidays are to be expressly permitted (subject to prohibitions in plan documents) provided they do not reduce the plan’s transfer ratio below 105%. (What is not addressed, according to Osler, is whether parties can rely on the current plan documents, or whether it will still be necessary to do an analysis of historical plan provisions, to determine whether or not the plan documents prohibit or restrict contribution holidays.)
• Contribution holidays will trigger enhanced member disclosure obligations, as well as the requirement to file annual statements with the regulator.

3. Accelerate the funding of benefit improvements

• Benefit improvements will be required to be funded over no more than eight years on a going concern basis, in contrast to the current 15-year amortization rules.
• Where benefit improvements would result in a plan having a transfer ratio of less than 85% or the plan being less than 85% funded on a going concern basis, two new requirements will be imposed in conjunction with implementing the improvement:

i. A lump sum contribution will be required to prevent a reduction of either the transfer ratio or the going concern funded ratio below 85%; and
ii. Any remaining cost of the improvement must be amortized over no more than five years.