A Permanent Framework for Target Benefits in Ontario
Introduction
On March 14th, the Ontario Ministry of Finance published a consultation document on the implementation of a permanent legislative framework for Target Benefit pension plans. This regulation will replace the temporary funding measures currently in place for Specified Ontario Multi-Employer Pension Plans (SOMEPPs) and will allow them to be converted into Target Benefit Plans (TBP). The consultation document supplements the elements of the conversion process provided for in Section 81.0.2 of the Pension Benefits Act (PBA) and addresses transition measures. It is important to note that only Multi-Employer Pension Plans established under a collective bargaining agreement or a trust agreement will be allowed to offer the conversion to a Target Benefit Plan. In addition, this regulation will not allow the implementation of a single-employer TBP.
According to the consultation document, these new regulations aim to promote better governance practices, improve communication and information provided to members of a Target Benefit Plan and introduce new funding requirements.
Governance
Going forward, this legislation will require TBPs to establish and maintain both a governance policy and a funding policy. The governance policy is a document that aims to frame the roles and responsibilities of people who administer the plan so that they can carry out their duties in an accountable, transparent and efficient manner in compliance with applicable legislation. The funding policy would notably aim to frame the funding objectives of the plan, its risk management mechanisms, as well as the method and process to be applied to reduce benefits if circumstances require. This last policy will be a key plan document since the elements it will contain necessarily have a long-term impact on the benefits that can be credited in the plan.
Communications
Communications associated with a Target Benefit Plan are an important consideration for members to understand the various issues that are specific to this type of pension plan. The consultation document proposes to increase the disclosures required on annual statements and whenever plan amendments occur. Furthermore, additional information will have to be provided to new members so they can understand both the plan’s benefits and the risks associated with them.
Funding Requirements
The consultation document provides specific provisions for TBP funding. The main measures are described in the following paragraphs.
As is currently the case for SOMEPPs, solvency funding will not be required for TBPs, although disclosure of the financial position on a solvency basis will remain necessary in actuarial valuations. Funding will be on a going concern basis with the addition of a Provision for Adverse Deviations (PfAD). The legislator proposes a different method for setting the PfAD from that applicable to defined benefit plans.
The proposed framework is based on two factors: one relates to the proportion of non-fixed income assets provided for in the plan's investment policy and the other relates to the discount rate used in the actuarial valuation. The objective set out in the consultation document is to reflect the plan’s risk level in the required level of PfAD. This proposed two-factor PfAD runs opposite to the recent change that took place in British Columbia and will likely also be adopted in Alberta later this year. Both these provinces favor a simpler and less volatile formula following problems experienced with the formula proposed in the consultation.
When an actuarial valuation is carried out for the plan, a contribution sufficiency test must be performed. If contributions prove to be insufficient, the plan will have to either increase contributions or reduce the target benefit. The consultation document does not require the adjustment mechanism to be applied in these situations to be included in the plan text’s provisions. Rather, the funding policy will have to provide a framework for this process to make it more transparent, fair and predictable in order to assist plan administrators to make their decisions more rapidly.
The consultation document proposes using the going-concern basis to calculate commuted values upon transfer, in accordance with the standards of practice of the Canadian Institute of Actuaries. Plans would not be permitted to adjust the value payable according to the plan’s funding ratio.
While the use of the going-concern basis is consistent with other Canadian provinces (except Quebec), the requirement to pay 100% of the value regardless of the financial position of the plan is unusual for this type of plan. Using a different payment basis for Ontario members could create inequity in plans with members in multiple provinces.
Finally, one of the important elements of this consultation is the prohibition of using surpluses to fund all or part of the current service costs, including the additional cost related to the PfAD. For some SOMEPPs, the fixed contribution rates currently in place may not be high enough to meet the contribution sufficiency test and a benefit reduction would therefore be required. To give plans wishing to convert time to adapt to the requirements of the new funding framework, the legislator proposes a 5-year transition period in its consultation document.
Conversion
SOMEPPs that do not wish to convert to a TBP will become subject to the general funding rules that currently apply to defined benefit Multi-Employer Pension Plans. For those who will want to convert to a TBP, the conversion mechanism will be provided for by legislation. The process provides that a notice of conversion must be sent to all plan members, beneficiaries, participating employers and unions representing plan members. A notice of application for consent to convert will need to be submitted to FSRA’ s CEO. In addition to including the conversion notices distributed, the application must include a declaration attesting that the administrator has consulted any union concerned as well as a declaration attesting to the satisfaction of the eligibility criteria set out in the PBA. The consultation document does not specify whether the administrator must obtain the consent of the unions concerned to allow the conversion during the consultation of the latter. This element may be specified in the regulations.
Conclusion
Significant changes are coming for SOMEPP members as well as for those considering implementing TBPs in Ontario. Some of the proposed changes raise certain questions, notably on the fact that TBPs would not be permitted for single employers or for a relatively small number of employers, on the proposed formula for calculating the PfAD and on the fact that commuted values cannot be adjusted based on the financial position of the plan when a transfers occur.
The Ministry of Finance invites interested parties to submit their comments by June 30, 2023.
