Ontario offers conditional deferral of defined benefit employer contributions
On September 21, 2020, the Ontario government filed O. Reg. 520/20, amending Ontario Regulation 909 under the Pension Benefits Act. The new regulation permits Ontario employers to defer their defined benefit (DB) pension contributions due from October 1, 2020, to March 31, 2021, to be made up with interest from April 2021 to March 2022. Employers who make this election will be subject to a number of prohibitions and restrictions until the deferred contributions are made to the pension fund.
The Financial Services Regulatory Authority of Ontario (FSRA) has updated its guidance document to include a number of questions and answers clarifying the application of O. Reg. 520/20 and the new contribution deferral scheme.
An employer wishing to defer contributions is required to file an election and payment schedule with FSRA specifying which payments will be deferred. FSRA will be providing an electronic filing form shortly. The election and schedule must be filed no later than the date the contributions for the first deferred month are due.
FSRA cautions that actuaries should take care in creating their payment schedules since, once filed, they cannot be amended unless a new valuation report dated before March 31, 2021 is filed.
The plan administrator must file updates including prescribed information throughout the deferral period. The first update must be prepared by the plan actuary as of the last day of the third month following the first deferred payment. The updated must be provided to FSRA within 30 days after the end of the third month. Updates must continue be made every three months thereafter.
Plan administrators may stop filing updates once they have informed FSRA that all the deferred payments have been repaid with interest.
An update must also include a statutory declaration made by an officer of the employer in the prescribed form. FSRA has drafted a template for the required statutory declaration as an appendix to Information No. PE0206INF. FSRA asks that administrators or employers contact it before filing the declaration if they need to deviate from the template or wish to propose alternative wording. Employers are required to provide the statutory declaration to the pension plan administrator at least 15 days before the update is due to be filed.
Prohibition on compensation increases
In order to ensure that the funds made available as a result of contribution deferrals are used to facilitate the continuation of the employer’s business during a time of financial stress, employers that elect to defer contributions are prohibited from doing any the following:
- Declaring or paying any amount on a capital share, whether as a dividend or a return of capital;
- Buying-back or otherwise purchasing or redeeming any issued and outstanding shares;
- Paying a bonus, whether non-discretionary or discretionary, in cash or otherwise, to any executive;
- Increasing the compensation of any executive;
- Repaying the principal amount of any debt or other obligation in excess of amounts previously scheduled and agreed to before September 21, 2020;
- Paying or crediting any amount as a loan or advance to or for the benefit of,
- Any person or entity that owns a beneficial interest in any issued and outstanding capital share of the employer or of any related person or entity of the beneficial owner, or
- Any executive of the employer and any related person or entity of the executive.
- Entering into any transaction with a related person or entity in the normal course of business under terms and conditions that are less favourable to the employer than market terms and conditions would dictate.
FSRA provides an example stating that companies should not pay any short-term incentives, award long-term incentives (such as stock options) or increase benefits to executives during the deferral period.
Employers are also restricted from making pension plan amendments to increase benefits or ancillary benefits, unless the amendment confers a benefit improvement that is required by law or the amendment implements an improvement that was agreed to in a collective agreement before September 21, 2020.
Early repayment of deferred contributions
A deferred payment schedule cannot be amended once an election is made and a payment schedule has been filed with FSRA, except upon the filing of a new valuation dated before March 31, 2021. Upon such a filing, the contributions set out in the new valuation report become the plan’s new required contributions. An employer may also repay the full amount of any outstanding deferred payments with interest at any time. Employers should update FSRA once they have repaid the full amount owing.
Annual and biennial statements
If an employer elects to defer contributions, the annual and biennial statements to active, former and retired members must include a statement that the employer has elected to defer the payment of certain contributions and the date by which all the deferred payments will be made by the employer. This wording must continue to be included on statements until all deferred contributions are repaid.
The Regulation also makes a temporary change to the rules for catch-up contributions when an actuarial report is filed after September 21, 2020 and on or before April 1, 2021. The usual 60-day deadline for making catch-up contributions has been extended to 120 days. This extension applies to all valuation reports filed between September 21, 2020, and April 1, 2021.
The deferral of DB contributions will be of interest to certain DB employers in Ontario who need to conserve funds for their business in late 2020 and early 2021. Given the conditions and requirements, it is likely that most Ontario DB plan sponsors will not take advantage of the deferral.
The extended time frame for making catch-up contributions will be helpful to Ontario DB employers filing valuation reports from September 21, 2020, to April 1, 2021.