Ontario Budget: Further Pension Reform, Few Details
April 1, 2011
Generally, the Budget’s proposals for further reform are broadly worded and short on detail. They appear, however, to be on a much more limited scale than the substantial changes brought about by Bills 236 and 120 (enacted on May 18, 2010 and December 8, 2010 respectively). McCarthy Tétrault’s Pensions, Benefits & Executive Compensation lawyers have previously provided analysis of Bill 236 and Bill 120.
As well, this fall’s provincial election calls into question the likelihood that these reforms will see fruition. Nevertheless, the fact that this Budget includes a section on pension issues makes clear that further reform remains among the government’s priorities.
In short, the government’s new proposals are to:
- consider implementing a new type of pension plan for collectively bargained workforces called a "jointly governed target benefit pension plan";
- require that a plan’s "Statement of Investment Policies & Procedures" (SIP&P) be filed with the regulator and that special disclosure be made if the SIP&P addresses environmental, social and governance factors in investment decisions;
- introduce previously announced increases to employer premiums under the Pension Benefits Guarantee Fund effective some time in 2012 (the government had not previously proposed an effective date);
- review options for dealing with unlocated plan members;
- review the process for financial hardship unlocking applications; and
- codify new standards adopted by professional bodies, including specifically International Financial Reporting Standards (IFRS).
This e-alert discusses these and other of the most significant announcements contained in the Budget in order of relative importance for employers.
1. Pension Benefits Guarantee Fund (PBGF)
The Budget confirms the government’s intention to increase employer premiums to the PBGF, which it first announced in a Technical Backgrounder released on August 24, 2010. Although the Budget does not reproduce the amounts of these increases, the Technical Backgrounder indicates the following proposals:
- establishing a minimum assessment level of $250 for each plan covered by the PBGF;
- raising the base fee per plan member from $1 to $5;
- raising the maximum fee per plan member in underfunded plans from $100 to $300; and
- eliminating the overall assessment cap for underfunded plans.
Prior to the Budget, employers were unsure when these new figures would come into effect. Helpfully, the Budget indicates that these increases would come into effect in 2012 rather than the current year. The government also reiterates its support for new regulations to ensure more stable funding of pension plans and benefit improvements to reduce future strain on the PBGF.
2. Pension Plan Investments
For Ontario-registered plans, Ontario has adopted the federal government’s restrictions on permitted investments for federally registered pension plans. Until recently, Ontario had adopted these rules as they read on December 31, 1999, which meant that Ontario’s pension investment rules did not automatically capture subsequent changes to the federal rules made after this date.
On March 25, 2011, the Ontario government amended its legislation to remove reference to the "December 31, 1999" date and to automatically adopt the federal rules as they are amended from time to time. The Budget confirms this recent change. The amendment captures for Ontario-registered plans the following recent and proposed federal reforms:
- the recent removal of most quantitative restrictions on real property and resource property investments, effective July 1, 2010;
- the proposed change to the limit on investing pension fund assets in a single entity or related group from 10% of the book value of the plan’s assets to 10% of the market value; and
- the proposed prohibition on any direct self-investment (including all direct investment in an employer’s shares or debt).
The government did not commit to re-examining the current prohibition on investing pension fund assets in more than 30% of the voting shares of a corporation. A review of this rule had been suggested in the August 24 Technical Backgrounder discussed above, but further reference to it was conspicuously absent in the Budget.
Separately, the Budget proposes that plan administrators would have to file a plan’s SIP&P with the Financial Services Commission of Ontario, and disclose whether the SIP&P addresses environmental, social and governance (ESG) factors in investment decisions. The government did not provide any rationale as to why additional disclosure relating to ESG factors would be necessary if the SIP&P will be filed in any case.
3. Enhanced Canada Pension Plan (CPP)
The Budget confirms Ontario’s commitment to pursue a modest, phased-in and fully funded expansion of the CPP. A joint federal, provincial and territorial report addressing the feasibility of this expansion is due in the summer of 2011.
The Budget also confirms that the government would view such an enhancement in addition to the federal and provincial governments’ new proposal to introduce "pooled registered pension plans" (PRPPs). There are not, however, any specifics in the Budget on how PRPPs may operate in Ontario. McCarthy Tétrault has previously discussed PRPPs more generally here.
4. Target Benefit Pension Plans
The Budget raises the possibility of a new type of pension plan, the "jointly governed target benefit pension plan" (JGTBPP), first proposed in the 2008 Report of Ontario’s Expert Commission on Pensions.
As recommended by the Expert Commission, JGTBPPs would be jointly administered plans available for collectively bargained workforces. They would provide a "target" defined benefit, but would be able to reduce this benefit if the plan were underfunded. In this regard, JGTBPPs would need to be funded only on a going concern basis (in contrast to the additional, often more exacting funding requirements on a solvency basis for most single-employer plans).
Separately, the Budget indicates that Ontario is currently discussing necessary changes to the Income Tax Act (Canada) to facilitate the introduction of "single-employer target benefit plans." This change would dovetail with 2010 amendments to the Pension Benefits Act that expressly provide for such plans. These amendments have not yet been proclaimed in force.
Finally, the government announced a review of the funding requirements for target benefit multi-employer plans (MEPPs) with members outside Ontario to address stakeholder concerns. Although the Budget does not elaborate on these concerns, it is assumed that they relate to the different MEPP funding requirements across jurisdictions, including the effects of employer withdrawal liability under the legislation in some other provinces.
5. Other Announcements
Enacting Outstanding Draft Legislation
The government committed to enacting separate sets of proposed regulations that were published in draft for stakeholder comment earlier this year. These regulations would (i) extend solvency funding exemptions to certain jointly sponsored pension plans; and (ii) supplement 2009 amendments to the Pension Benefits Act (that are not yet in force) to overhaul the rules on division of pensions on marriage breakdown.
Financial Hardship Unlocking
The government also committed to a review of financial hardship unlocking procedures and announced the extension of the current application fee waiver for unlocking requests. The announcement will be welcome for administrators who deal with these applications relatively frequently, although the government’s specific ideas for streamlining the process remain unclear.
The Budget proposals indicate that the government is prepared to explore potential options to address problems that arise in respect of unlocated plan members with a specific view to expediting full and partial wind-ups.
This commitment is one of the Budget’s few new items, but it essentially boils down to the government committing only to further study. The Budget contains nothing like recent reforms for federally regulated plans that, once in force, will allow administrators to pay amounts in respect of unlocated members to a separate third-party financial institution.
Codifying New Professional Standards
Interestingly, the government made a new proposal to codify recent changes to standards issued by professional bodies, for example, the recent adoption of IFRS by Canada’s Accounting Standards Board.
New Multi-Jurisdictional Agreement
Once again, the Budget confirms the government’s commitment to sign the new "Agreement Respecting Multi-Jurisdictional Pension Plans" jointly drafted by Canada’s 10 pension regulators. So far, no Canadian jurisdiction has officially signed on. This agreement would replace the existing, somewhat antiquated multi-jurisdictional agreement drafted in 1968.
Measures for Specific Plans
Finally, the government reiterated its support for legislation to allow members of the Nortel pension plans to elect to transfer, as part of the wind-up of those plans, a lump sum amount equal to their pension benefits to a locked-in life income fund. In the absence of the proposed amendments, the Pension Benefits Act would otherwise require all affected members’ pension benefits to be annuitized. Separately, the government confirmed its intention to provide 10-year funding relief to the AbitibiBowater pension plans as part of that company’s restructuring.
McCarthy Tétrault’s lawyers will continue to monitor the developments that flow from the Budget. In the meantime, if you have any questions about the impact of the Ontario Budget on your business or your pension plan, please contact any member of the Pensions, Benefits & Executive Compensation Group or your regular McCarthy Tétrault lawyer.