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Ontario: Consultation on target benefit plans

On July 24, 2015, the Ontario government released its consultation paper titled Regulatory Reform for Target Benefit Multi-Employer Pension Plans (“consultation paper”). The consultation paper requests input from interested parties on numerous policy issues associated with the development of a new target benefit framework for Multi-Employer Pension Plans (MEPPs) in Ontario. The consultation paper focuses on creating a target benefit MEPP (TB MEPP) framework for specified Ontario multiemployer pension plans (SOMEPPs). To that end, it uses the current regulations for SOMEPPS as the basis for the proposed framework and proposes to implement recommendations from A Fine Balance, the 2008 report of the Expert Commission on Pensions.

Although the consultation paper deals with many of the same broad issues raised in last year’s federal consultation paper, such as funding, governance and disclosure, it goes on to identify a number of questions dealing with multi-jurisdictional concerns in implementing the framework, which cannot be addressed by Ontario alone. Like its federal predecessor, the consultation paper introduces considerations for developing a target benefit framework for single employer target benefit plans (TB SEPPs) and for MEPPs in general. Unfortunately, the questions dealing with transition do not explore important issues in converting defined benefits to target benefits, given that SOMEPPs are already permitted to reduce accrued benefits.

Some of the highlights from the consultation paper are:

  • Reserve: The consultation paper reflects the goals of providing SOMEPPs with a permanent exemption from solvency funding requirements while minimizing the risk of benefit reductions. To achieve this exemption the consultation paper requests input on proposed strengthening of the going concern funding requirements, especially in establishing a funding reserve or provision for adverse deviations (PfAD). The PfAD is a buffer to be funded before any action can be taken that would weaken the plan’s funded position, such as improving benefits. The amount of PfAD required will likely depend on the plan’s asset mix, benefit formula, demographic make-up and interest rate assumption.
  • Termination payments: In contrast to the federal consultation framework, Ontario’s consultation paper raises the question of whether a method other than the CIA Transfer Value for determining the value of benefits on wind up or termination of membership may be needed as a result of the solvency funding exemption. Ontario’s consultation paper suggests using the member’s value on the going concern assumptions basis as an alternative, possibly adjusted to reflect the funded position of the plan, which may require more frequent (quarterly) updates of the funded status.
  • Governance: The governance section includes a focus on member representation on the plan’s board of trustees, recognizing that former members, retired members and current members may have distinct interests. Independent trustees are considered as a mechanism to ensure the interests of all plan participants are taken into account, and as a method to reduce the possibility of deadlock.
  • Policies: It is proposed to introduce new standards for policies on plan governance, investment and funding as a method to reduce the risk of benefit reductions, and to provide transparency regarding the operation of the plan.
  • Regulatory oversight: The consultation paper is based on the premise that the TB MEPP framework should provide plan administrators and participants with the flexibility to make decisions that are in the best interests of a particular plan and its participants. However, it acknowledges that there may be situations, not currently contemplated, in which regulatory oversight measures may be required under the TB MEPP framework. Many of the proposed oversight measures and capabilities proposed already exist to some degree in current legislation.
  • Transition: The consultation paper contemplates the need for a transition period, possibly of three years, for eligible MEPPs to adopt the final TB MEPP framework. This transition period will provide plans with the time to adjust to new funding rules, establish governance procedures, develop required plan policies, and update existing administrative practices to reflect new disclosure requirements.
  • Tax rules: Finally, specific to TB SEPPs, the consultation paper highlights that the Income Tax Act (ITA) does not currently support TB SEPPs, meaning these plans would continue to be treated as defined benefit plans for ITA purposes. Members of TB SEPPs could be disadvantaged because of this. One example is that pension adjustments are based on the plan’s target benefit but cannot be adjusted if the plan’s target benefit (or part of the ancillary benefits) may later be reduced. The consultation paper notes that the federal government has acknowledged this issue and that it is considering changes to the ITA to accommodate TB SEPPs.

Other provinces

Although last year’s federal consultation process is referenced above, it is important to remember that certain provinces have already worked through many issues being raised – New Brunswick, Alberta and British Columbia have target benefit legislation and regulations in place. It is hoped that the framework Ontario develops will be compatible with structures already in existence and will allow plans covering employees in different provinces; otherwise the desired expansion of pension coverage via soundly designed target benefit plans may not be realized.

To that point, it is noteworthy that an approach used in other jurisdictions (New Brunswick in particular) provides for benefits with different levels of guarantees – usually a core benefit with more, but not absolute, guarantees, and optional benefits that are more flexible in delivery (i.e. with less stringent guarantees) to provide greater stability and security to the core promise– whereas the consultation paper uses a “DB-like” framework for all “benefits”. It will be interesting to see if this consultation will bring a flexible target benefit framework that recognizes the need to have levers to sensibly manage the volatility that will arise in the future.


Conclusion

With the release of this consultation paper, Ontario has taken the first step in the process of developing rules for target benefit plans. It is encouraging that the discussion is not limited solely to SOMEPPs, but raises some of the concerns that will be encountered in extending target benefits to MEPPs in general and eventually single employers.


Comments on the consultation paper are due by September 25, 2015.