After many years of political inaction, a number of jurisdictions have taken up the pension reform banner. Very recent changes affect employers sponsoring pension plans in Ontario and those operating within the federal jurisdiction.
The first major pension reform legislation to affect Ontario in decades received royal assent this spring. On May 18, 2010, Bill 236, the Pension Benefits Amendment Act, 2010, became law1 and, while some provisions were immediately effective, all plan sponsors in the province will be affected when many of the provisions come into force at a later date, to be proclaimed by regulation. Sponsors of registered pension plans in Ontario should acquaint themselves with the various changes to the Pension Benefits Act ahead of time.
Moreover, on August 24, 2010, the Hon. Dwight Duncan, Minister of Finance for the Province of Ontario, announced the main pillars of his second round of pension reform. Following our review of Bill 236, we review the upcoming changes that will form part of the new pension environment.
While the Ontario government was busy reforming the Pension Benefits Act, the Federal government, as part of the budget implementation process, introduced substantial changes to the Pension Benefits Standards Act, 1985 and to the Income Tax Act (Canada) by adopting an omnibus bill, Bill C-9. These federal changes are reviewed last.
The reform makes a distinction between a pensioner (i.e., a retired member under the Pension Benefits Act) and a former member, and the rights of each to participate in pension advisory committees is clarified. Also, each group will have a right to obtain specified information about the pension plan.
While pension advisory committees can currently be established, they are still rare except in the public sector or unionized contexts. These will now be easier to establish, thereby giving active plan members and retired members a method to monitor plans, with the cooperation of the plan administrators.
This greater access to information requires plan administrators to supply all members, including retired members, specific information about the funded status of the plan.
In this same vein, both plan administrators and the regulator will need, on written request, to supply copies of certain documents, by mail or electronically.
All plan amendments (subject to some exceptions) will require advance notice to active members, retired members, and former members prior to registration. This regime replaces the current adverse amendment rules, under which plan administrators only inform affected members if an amendment would reduce future pension accruals or otherwise adversely affect their pension entitlements.
To prepare for this set of changes, plan administrators will want, at a minimum, to ensure they have adequate procedures to respond to requests from members and retirees with respect to pension advisory committees. They will also need to provide statements containing plan-related information to former members and retirees. These new rules are not yet in force.
Probably the most significant change for all pension plans is the introduction of immediate vesting for all accrued pension benefits (past and future). The existing two-year maximum eligibility for membership requirement, however, has not been removed.
Sponsors wishing to avoid having to administer pensions for highly mobile workers may wish to amend their pension plans to introduce a waiting period (if none currently exists), so as to delay the automatic vesting for employees who, under a two-year vesting rule, might not have qualified for a deferred pension.
This change remains to be brought into force.
Effective on July 1, 2012, the current Rule of 55 grow-in benefits (i.e., the right to grow into eligibility for early retirement benefits provided under the pension plan on wind-up) are extended to all eligible members whose employment is terminated by the employer (other than for just cause).2 Grow-in benefits will continue to be available when a plan is fully wound up.3
Employers who wind up their pension plans in part (prior to January 1, 2012) or in full will now have the option of accessing surplus by either establishing legal entitlement to the surplus or by entering into a surplus sharing agreement with members, former members and other plan beneficiaries, regardless of whether they have entitlement under historical plan documentation. Where a surplus sharing agreement is used, the key will be to ensure appropriate member consents are obtained alongside other requirements. Until regulations are passed to clarify the requirements to use surplus sharing agreements under the new regime, some uncertainty remains whether the current surplus rules continue to apply. The Financial Services Commission of Ontario has recently taken the position that, until further legislative and regulatory changes occur, it will process applications based on entitlement alone only if the employer secures two–thirds consent of members and former members, while applications solely based on a written agreement will be accepted only if all members and former members agree. It also conceded that, in light of stated governmental intentions to modify the surplus sharing regime (as part of the second phase of pension reform described below), a plan sponsor would be allowed to put a surplus application on hold pending further legislative changes.
All partial wind-ups, effective on or after January 1, 2012, are to be eliminated. Those declared prior to that date are grandfathered and will continue to be processed.
While plan-to-plan transfers will no longer require the replication of exporting plan benefits in the receiving plan, the new rules will not permit the commuted value of members' benefit entitlements to decline. As is currently the case, asset transfers will require prior approval of the Superintendent. Plan administrators may agree to give individual plan members the option of transferring, or not transferring, their pension benefit to a successor plan. Bargaining agents will be given the authority to exercise this option for union members. A portion of any surplus related to the assets being transferred (calculated using prescribed rules) from the previous employer's plan would be transferred to the successor plan.
Until July 1, 2013, pension plans affected by past restructurings can enter into agreements to give current individual plan members an opportunity to consolidate their pension benefits in a single plan through an asset transfer.4 Consolidation gives members whose pensions are currently split between two plans a chance to enhance their total retirement income. However, significant costs may be incurred for the plan in which benefits are consolidated. This amendment seems to answer the call for reform of plan members in the broader public sector who were placed into new plans when their employers were privatized.
Since the new legislation is broader in scope than the amendments discussed above, and given that most of the new Pension Benefits Act remains to be brought into force, we will continue to monitor the reform initiatives in the coming months.
Under the August 24, 2010, announcement, Ontario proposes to tighten funding rules for defined benefit plans and to restrict the use of contribution holidays while accelerating the funding of benefit improvements. On the thorny issue of surplus ownership, the legislation would provide for a binding arbitration process where the parties cannot achieve a surplus sharing deal (or where the employer cannot demonstrate clear legal entitlement to surplus) and would require surplus-sharing agreements in instances of asset transfers between plans where plan provisions differ.
Recognizing the peculiarities of multi-employer pension plans and jointly-sponsored pension plans, the new pension regime would remove the need for solvency funding and substitute a number of restrictions on plan amendments to allow for more rapid funding of benefit enhancements.5
Outside of pension plan regulation, the Ontario government is also looking at ways of putting the Pension Benefits Guarantee Fund on a more sustainable path. To achieve this, a minimum assessment level of $250 per plan covered by the PBGF will be levied and the base fee per plan member will rise from $1 to $5. The maximum per member in underfunded plans will increase from $100 to $300, and the previous $4 million assessment cap for underfunded plan will be eliminated. Moreover, collecting under the PBGF will be more difficult since the exclusion period for coverage of newly established plans and benefit improvements will increase from three years to five years. These adjustments will not translate into an increase in the maximum guaranteed monthly payment of $1000, which will remain unchanged.
Finally, in the broader public sector, pension plans will be given the ability to amortize solvency deficiency payments over longer schedules so long as steps are taken to make the plans more sustainable. To benefit from this solvency relief, public plans would have to be less than 90 percent funded and propose a plan with changes such as increased member contributions, conversion to joint sponsorship for future service and prospective benefit adjustments. After three years, an assessment (based on technical criteria presumably spelt out in future regulations) would be made to determine whether the plan can enter a second stage of solvency relief in which the plan would have ten years to liquidate the solvency deficits resulting from the plan amendments. Failure to enter phase two would translate into a return to normal solvency rules. While benefitting from solvency relief, contribution holidays and benefit improvements would be limited.
Sponsors of federally-regulated pension plans should prepare for the amendments to the Pension Benefits Standards Act, 1985 brought about by the passage of Bill C-9 on July 12, 2010. While the overwhelming majority of the substantive changes that will impact plans have yet to be proclaimed into force by Order-in-Council, some provisions are already in effect.
Of particular interest to sponsors of defined contribution plan sponsors is the removal of the requirement to seek the Superintendent's approval when DC assets are transferred to another money purchase provision – a change that became effective on July 12, 2010. Other immediate legislative changes include:
As for legislative changes that have yet to come into force, the following list summarizes some of the most important ones:
All registered pension plans in Canada must comply with the rules found in the Income Tax Act (Canada) and its regulations. Bill C-9 has increased the amount of surplus that can accumulate in a defined benefit provision of a plan for contributions made in respect of post-2009 service from 10 percent to 25 percent of actuarial liabilities without triggering adverse tax consequences.19 While few plans can at present benefit from this change, as economic conditions improve, this amendment should put less pressure on pension plan sponsors to deal with surplus management issues.