Québec and Ontario 2011-2012 Budgets: Pension Reform Continues
June 2, 2011
Two significant reforms were announced in the Québec Budget and its accompanying paper, "A Stronger Retirement Income System," tabled March 17. The first is a proposed new retirement savings vehicle called a voluntary retirement savings plan (VRSP) to give effect to the federal and provincial governments’ PRPP framework in Québec (see our previous summary of this framework.) The second reform involves gradual changes to employer and employee contribution rates and individual benefit levels under the Québec Pension Plan (QPP). These changes are to respond to increased funding pressures resulting from the population’s aging and improved longevity — a trend common across Canada.
1. Proposed VRSP
The Québec government will enact legislation to allow for the creation of VRSPs on a province-wide basis. In line with the federal-provincial PRPP framework, Québec’s VRSPs would be large, pooled defined contribution plans administered by third parties, currently proposed to include certain financial institutions. Third-party administration would relieve employers from many of the administrative duties that arise with single-employer pension plans. Additionally, VRSPs would cover employment with a number of employers, making them potentially better suited to the fact that (unlike in the past), many employees now change employers throughout their careers.
Participation in a VRSP would be available to all employees, self-employed individuals, and other "savers." In the case of employees, employers who do not already offer a pension plan would have to choose a VRSP product to which their employees would contribute. Employers would have the option of also contributing. As well, employers would have to automatically enroll their employees in the VRSP, although employees would be able to take proactive steps to opt out. Regarding coverage for self-employed individuals and other "savers," the Budget is not clear either about how they may choose to participate in VRSPs or how they would be able to contribute to VRSPs under existing income tax rules.
The Québec Budget has paved the way for a provincial public consultation process touching on VRSP issues, such as choice of investments, the fiduciary role of VRSP administrators, default contribution rates and portability. These consultations were slated to follow the federal-provincial consultations on PRPPs, which concluded in March.
2. Changes to the QPP
Separately, the Québec Budget announced the government’s intention to amend the QPP by gradually increasing the contribution rate from 9.9 per cent to 10.8 per cent by 0.15 per cent a year over six years. These changes are estimated to increase employer and employee contributions by $85 million each in 2012.
To reflect demographic pressures on the QPP, beginning on January 1, 2013, the monthly reduction rate for pensions commenced prior to reaching age 65 would be gradually increased. Beginning on January 1, 2014, QPP benefits would be enhanced for individuals commencing QPP pensions after age 65 and before age 70. The combined effect of these measures is to discourage early retirement and to incentivize postponed retirement, up to a maximum enhancement of 42 per cent (compared to the current 30 per cent) for those retiring at age 70.
Finally, the Québec Budget proposes an automatic QPP contribution rate adjustment mechanism beginning in 2018 if the QPP’s triennial actuarial report discloses that existing contribution rates are insufficient.
Ontario’s Budget, "Turning the Corner to a Better Tomorrow," tabled March 29, addresses both future and recently enacted pension reforms, but makes few truly new proposals. Furthermore, the new proposals that are described are short on detail, although they certainly appear to be on a much more limited scale than the substantial pension reforms brought about by Bills 236 and 120, enacted on May 18, 2010 and December 8, 2010 respectively (see our previous articles discussing this: "The State of Ontario Pension Reform" and "The State of Ontario Pension Reform - Part II.")
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 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;
- review options for administrators in 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).
We discuss these and other of the more significant announcements contained in the Ontario Budget in order of relative importance for employers.
1. Pension Benefits Guarantee Fund (PBGF)
As it announced in August 2010, the Ontario government will increase employer premiums to the PBGF. There will be a minimum assessment level of $250 for each plan covered by the PBGF, the base fee per plan member will be raised from $1 to $5, the maximum fee per plan member in underfunded plans will be raised from $100 to $300, and the overall assessment cap for underfunded plans will be eliminated. These new figures would come into effect in 2012.
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 June 17, 2010;
- the proposed change to the limit on investing pension fund assets in a single entity or related group from 10 per cent of the book value of the plan’s assets to 10 per cent of the market value; and
- the proposed prohibition on any direct self-investment (including all direct investment in an employer’s shares or debt).
There was no mention of re-examining the current prohibition on investing pension fund assets in more than 30 per cent of the voting shares of a corporation. The absence was conspicuous, since the government had previously committed to evaluating the continued need for this restriction in a public announcement made in August 2010.
Separately, 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 factors in investment decisions.
3. Target Benefit Pension Plans
The government announced that it would consider the introduction of a new type of pension plan: the jointly governed target benefit pension plan (JGTBPP), which was first proposed in the 2008 Report of Ontario’s Expert Commission on Pensions. 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 province 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 (but have not yet been proclaimed in force).
4. Other Announcements
Enacting Outstanding Draft Legislation
The government committed to enacting two 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 in the broader public sector, provided they meet certain conditions; 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 frequently deal with these applications, although the government’s specific ideas for streamlining the process remain unclear.
The Ontario Budget indicates 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 Ontario Budget’s few new items, but it essentially boils down to the government committing only to further study. This budget contains nothing like the recently enacted amendments for federally regulated plans that will allow administrators to pay amounts in respect of unlocated members to a third-party financial institution designated by the federal pension regulator.
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
The Ontario Budget confirms the government’s commitment to sign the new "Agreement Respecting Multi-Jurisdictional Pension Plans" jointly drafted by Canada’s 10 pension regulators.
Ontario acted on this commitment and, along with Québec, signed this agreement in May 2011. It is presumed that the other Canadian jurisdictions will follow shortly.
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 both the Québec and Ontario Budgets, and will provide timely updates as warranted. In the meantime, if you have any questions about the impacts of the Québec and/or Ontario Budgets on your business or your pension plan, please contact any member of the Pensions, Benefits & Executive Compensation Group or your regular McCarthy Tétrault lawyer.
Pensions, Benefits & Executive Compensation