Skip to content.

New Pension Holiday-Makers May Suffer Hangover

The Ontario Government filed O/Reg 520/20 (the “Regulation”) on September 21, 2020. The Regulation amends the traditional funding framework in the Pension Benefits Act (Ontario) (“PBA”) to allow certain employers a reprieve in making contributions to their defined benefit registered pension plans (“DB Plans”). Namely, each eligible employer who (1) sponsors a defined benefit registered pension plans (“DB Plans”), (2) makes a compliant written election, and (3) adheres to certain requirements in the operation of their business, is allowed to take up to a six month contribution holiday. 

At first blush this appears like an attractive option for any employer with a DB Plan who is struggling with the economic fall-out of Covid-19, but the details include some fairly significant limitations on how employers run their business which likely make this attractive to only those employers who are severely cash-strapped. For those employers, this should prove to be a very welcome relief. 

We review the key details of the arrangement in a general summary below. The provisions of the Regulation are quite detailed and any employer who finds the potential for this relief of interest should contact their McCarthy contact for the fine print.

Who is potentially eligible?

Put succinctly, the target audience is private sector employers sponsoring single-employer DB Plans. Among others, multi-employer plans, JSPPs, public sector plans, designated plans and IPPs are not eligible for the relief. Additionally, employers who have either delinquent contributions or who have undertaken the prohibited activities identified below after September 20, 2020 are also ineligible to claim this relief.

What is the nature of the relief?

The relief available allows for deferral of payments that are due to be remitted to an eligible plan in the months starting October 2020 through March 2021, with the usual timing regime applying in respect of payments due in April 2021 and following. The payments that may be deferred are essentially all of the payments that would be made to a single-employer DB Plan, being: (i) normal cost, (ii) provisions for adverse deviations, and (iii) special payments.

The deferred payments, plus interest nonetheless must be made up fully by the end of March 2022 starting with the October deferred amount (plus interest) half of which must be made up in each of April and May 2021, the November 2020 deferred amount must be made up in June and July 2021 and so on.

What are the administrative requirements?

In order to take advantage of the relief, employers of eligible plans must file an election by the end of the month for which relief will be first sought identifying those months in respect of which it wishes to defer. Accordingly, if one intends to take maximum advantage of the relief being offered, it will be necessary to commence work soon since the election form (which will be available shortly from FSRA, but is not yet available) contains some fairly stringent requirements including a schedule of repayments that needs to be prepared by an actuary. 

Moreover, updates to the schedule are required every three months starting February 2021 (with figures as of the end of the prior month) and at the same time a statutory declaration in a prescribed form (also not yet available) must be provided by the employer certifying compliance with the restrictions set out below and the timely funding of all other amounts payable to the plan.

Unlike other recent funding relief measures in Ontario, no advance notice to or consent by the plan members is required. However, the administrator will need to add a note to the annual or biennial statements it issues in accordance with the PBA to the effect that the election has been made.

What is the quid pro quo?

In addition to having to actually remit the deferred amounts plus interest in accordance with the timing of the new regulations – noting that earlier remittance is, of course, permitted – the Regulation imposes quite a number of restrictions on the operation of the business until the deferred amounts have been fully remitted. The implied purpose of this is to see the savings from the relief deployed to keep struggling businesses afloat and not see the amounts applied for purpose which are presumed not to be part of that goal. 

The specific restrictions imposed on an employer who has sought relief under the Regulation is that the employer may not:

  • Declare or pay any amount, whether as a dividend or a return of capital, on any issued and outstanding share capital of the employer.

  • Buy-back or otherwise purchase or redeem any issued and outstanding share capital of the employer.

  • Pay a bonus, however described, whether non-discretionary or discretionary, and whether in cash or otherwise, to any “executive”[1] of the employer.

  • Increase the compensation of any executive of the employer.

  • Repay the principal amount of any debt or other obligation of the employer in excess of amounts previously scheduled and agreed to before September 21, 2020.

  • Pay or credit any amount as a loan or advance to or for the benefit of,

    • any person or entity that beneficially owns any issued and outstanding share capital 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.

  • Enter into any transaction with a related person or entity in the normal course of business and under terms and conditions that are less favourable to the employer than market terms and conditions.

  • Additionally, administrators are not able to file plan amendments to increase benefits or ancillary benefits, unless the amendment is made to confer a benefit improvement that is required by law or the amendment implements a benefit improvement agreed to in a collective agreement before September 21, 2020.

As noted in our introduction, for many employers, these restrictions will be too stringent to live with despite a potential for some short to medium-term cash savings. For others the relief is a true lifeline and they will gladly live with these restrictions.

In addition to these restrictions on operating the employer’s business, no DB Plan improvements may be made until the deferred contribution amounts are fully paid in to the plan, except where the amendment is required by law or pursuant to a collective agreement that was agreed prior to September 21, 2020.

Of course, the relief ceases to be available immediately in the event that there is a failure in either complying with the restrictions, providing the updated schedules along with a compliant employer statutory declaration, or making the scheduled payments. Indeed, on such a breach all deferred amounts plus interest are immediately payable. This latter fact may be relevant to lenders as, depending on the nature of security provided by the employer, these balloon payments on a breach could constitute “priming liens”, pursuant to the statutory deemed trust provisions of the PBA and the priority status given thereto under the Personal Property Security Act (Ontario).

Other Relief Provided in the Regulation

Above and beyond the main relief providing for the deferral employer pension contributions, the Regulation provides some relief to all DB Plans. This is in the form of a short extension to the normal period by which “make-up” contributions need to be remitted to a plan upon filing a fresh actuarial valuation where the contributions required under the new report are greater than those required under the prior report which continues to be followed until the new report is filed. Most plans have valuations effective on January 1. As the administrator has up to nine months to have the new report prepared and filed, the usual paradigm is to see valuations filed on September 30. There is then a 60-day period by which the “make-up” or “catch-up” contributions must be remitted. The change in the Regulation is that for new valuations filed between September 21, 2020 and April 1, 2021, that 60 day period is now 120 days.

Other Related Measures

It should be noted that O/Reg 521/20 was also filed September 21, 2020 and provides that the CEO of FSRA has the ability to levy administrative penalties in connection with breaches of a broad number of the elements of O/Reg. 520/20.

Key Takeaways

Although not noted in the Regulation or in the FSRA Guidance to date, for employer’s considering taking advantage of the relief provided for in the Regulation, it may be advisable to either formally amend the Form 7 Summary of Contributions filed with the plan’s trustee or other funding agent or at least inform them on a timely basis of the election being made.

Before making the election, employers and plan administrators should review and amend, as required, any funding policy in effect for the plan to see if it permits selecting this relief. Indeed, a review of all relevant plan documents and projected cash flows (including commitments made in respect of the plan’s investments) should be undertaken before making final decisions.

Finally, plan sponsors should not overlook the terms and conditions of any existing financing arrangements that the sponsor may have. Specifically, careful consideration should be given to ensuring that the language in the financing agreement is sufficiently broad to permit the sponsor to avail itself of the proposed contribution holidays without triggering a breach or, worse, an event of default on the financing agreement.

For questions about the new legislation and its potential impact, please contact any member of our National Pensions, Benefits and Executive Compensation Group.

[1] Executive is defined as holding an executive position or an office with an employer. Several titles, such as CEO are expressly named, but the scope of the provision could be quite broad.

Authors