Ontario Government Releases Final Regulations Governing Target Benefit Pension Plans

October 23, 2024

Anthony Guindon

On October 16, 2024, the Government of Ontario filed the final regulations to implement its long-awaited framework for target benefit pension plans in Ontario.  The release of these regulations follows a long process of consultation, and is being implemented through the enactment of amendments to existing regulations, as well as new regulations governing target benefit plans.

As we noted in our March 16, 2023 blog post, since 2007, multi-employer pension plans that satisfied prescribed criteria were entitled to elect to be treated as specified Ontario multi-employer pension plans (“SOMEPPs”), and so be exempt from solvency funding requirements.  Since that time, many in the multi-employer pension industry, including lawyers at Koskie Minsky, have been advocating for the development of a permanent framework that would govern target benefit plans, and secure a permanent exemption from solvency funding.

While the final framework does pose certain challenges and will, as is set out below, require current SOMEPPs to undertake a review of existing policies (or the development of new policies, if not currently in place) and seek regulatory approval to qualify as a target benefit plan, many of the more problematic aspects that were previously proposed by the Ontario government, including overly prescriptive PfAD requirements and burdensome rules governing benefit reductions, do not form part of the final framework, which is welcome.

Below, we provide a general review of each component regulations that have been passed to implement the final framework.

The Target Benefits Regulations

The Target Benefits Regulations set out the general characteristics and rules applicable to target benefit plans.  Key aspects of the regulations include the following:

• In order to qualify as a target benefit plan, the plan may not be a jointly sponsored pension plan, no more than 95% of the plan members could have been employed by the same employer within the last three fiscal years, and during at least one of the last three fiscal years, at least 15 employers must have made contributions to the plan, or at least 10% of the members of the plan must have been employed by two or more employers;
• If a target benefit plan also provides members with defined contribution benefits, the market value of assets related to the defined contribution portion may not exceed 5% of the total market value of all plan assets in respect of target benefits;
• Assets relating to target benefits may not be used to pay defined contribution normal cost contributions;
• Assets relating to target benefits may not be used to pay expenses related to defined contribution benefits;
• Accrued benefits may not be reduced solely because of the termination of a member or the death of a former or retired member;
• In the case of multi-jurisdictional target benefit plans, no more than 10% of members may be subject to the pension legislation of a jurisdiction that does not permit the reduction of accrued benefits;
• The regulations prescribe deadlines for the remittance of contributions to the plan;
• The regulations impose additional requirements on actuarial valuations of target benefit plans, including the obligation to perform tests to demonstrate the sufficiency of contributions, and where contributions are not sufficient, propose options available that are consistent with the plan’s funding and benefits policy, include an option to reduce reductions, and will have the result that required contributions will be sufficient to provide benefits under the plan (determined on a going concern basis)
• The regulations set out schedules for the liquidation of unfunded liability obligations arising prior to a plan’s conversion, as well as the normal period over which new unfunded liabilities must be liquidated (namely, 12 years for general unfunded liabilities, and 10 years for unfunded liabilities arising as a result of a plan amendment);
• If a target benefit plan has a going concern excess, amounts of such going concern excess above the greater of 5% of the plan’s going concern liabilities and the plan’s PfAD, plus the present value of special payments owing which arose prior to a plan’s conversion to a target benefit plan, may be applied to liquidate any going concern special payments required to be made to a plan;
• A target benefit plan’s PfAD is determined by the administrator and set out in the plan’s funding and benefits policy;
• Commuted values are to be determined in accordance with the CIA’s standards of practice, set out at section 3500 thereunder (and includes specific rules applicable to target benefit plans which permit a reduction of a commuted value based on the plan’s funded ratio);
• Surplus in a target benefit plan is limited to assets in excess of the sum of the plan’s going concern liabilities and the plan’s PfAD, 105% of the plan’s going concern liabilities determined using the benefit allocation method, and the plan’s going concern liabilities determined under the actuarial cost method used by the plan.

The Written Policies Regulations

Target benefit plans will be required to establish, and file with the regulator within one year of the effective date of a plan’s conversion, a funding and benefits policy, a governance policy, and a communications policy, each of which are required to contain prescribed information.  Plan administrators are encouraged to contact their plan advisors, or a pension lawyer at Koskie Minsky, for further details regarding the development of these policies.

The Conversion Regulations

The Conversion Regulations set out the criteria that apply to target benefit plans, as well as the process that must be followed in order for an existing pension plan to convert to a target benefit plan.

In order for a plan to convert to a target benefit plan:

• If the existing plan provides both defined benefit and defined contribution benefits, the total market value of defined contribution assets does not exceed 5% of the total market value of the assets in respect of benefits that are to be converted to target benefits;
• At the end of the previous year, no more than 95% of the members of the plan were employed by one employer;
• During the previous year, either at least 15 employers contributed to the plan, or at least 10% of the members of the plan were employed by two or more employers;
• The plan is not a jointly-sponsored pension plan;
• Member contributions do not exceed employer contributions.

Subsection 81.02(2)1.2 of the Pension Benefits Act (the “PBA”) specifies that existing pension benefits can only be converted to benefits that are determined in part with reference to the value of assets in the pension fund, except as otherwise prescribed.  The Conversion Regulations specify that, in the case of multi-jurisdictional plans, the value of benefits in jurisdictions which do not permit the reduction of accrued benefits need not be determined with reference to the value of the assets of the pension fund.  The Conversion Regulations also effectively prohibit the conversion of a multi-jurisdictional plan if, at the end of the plan’s last fiscal year, 10% or more of the members of the plan are subject to the legislation of a jurisdiction which prohibits the reduction of accrued benefits.

The PBA specifies that a plan may not convert to a target benefit plan unless the CEO of FSRA has granted consent prior to the conversion.  The Conversion Regulations specify that this application for regulatory consent must include 1) a copy of the proposed amendments relating to the conversions; 2) if applicable, certification that the administrator has consulted with any union or other association representing members of the plan; 3) a certification by the administrator that the regulatory criteria required to convert the plan to a target benefit plan have been met; and, 4) a certification by the administrator that all benefits in the plan that are not defined contribution benefits are being converted to target benefits.  The effective date of the conversion must be a date after the CEO has granted consent, but no more than 12 months following the granting of this consent.

In addition to the application for regulatory consent, an actuarial valuation report must be filed with the CEO effective as of the date of the plan’s conversion.

If consent to the conversion is granted, s. 7 of the Conversion Regulations provides that existing solvency payments will be cancelled.

The General Regulations

The General Regulations amend provisions of O.Reg. 909 under the PBA, to accommodate the implementation of the target benefit framework.  In light of the upcoming expiry of the existing rules governing specified multi-employer pension plans (“SOMEPPs”), the regulations are amended to require that the administrator provide written notice to active, former and retired plan members that the plan will no longer be a SOMEPP, and an explanation of how this could impact member benefits.

The General Regulations also add additional reporting requirements applicable to actuarial valuations performed in respect of target benefit plans.  These include new requirements to:

• Set out the plan’s transfer on a solvency basis;
• An explanation of how the plan’s PfAD was developed in accordance with the plan’s funding and benefits policy;
• Information related to the plan’s stress testing, the plan’s going concern funded ratio, the plan’s market value ratio;

Plan members who become eligible to participate in a target benefit plan will be required to be provided with prescribed information regarding the plan, including an explanation of how the plan is funded and the fact that accrued benefits may be reduced, a summary of the plan’s funding and benefits policy, and a statement that benefits are not guaranteed by the Ontario Pension Benefits Guarantee Fund.

Where a target benefit plan proposes to reduce benefits prospectively, the notice of such amendment required to be provided under the PBA will have to include prescribed information, including information regarding the plan’s going concern funded ratio.

Finally, the prescribed information required to be provided to members, former members and retired members in annual or biennial statements, as applicable, has been expanded to include additional disclosures related to the nature of the plan.

Family Law Regulations

The Family Law Regulations amend existing regulations governing pension matters in marriage breakdown to accommodate the new target benefit framework.  Key aspects of these regulations are as follows:

• Where the family law valuation date in a marriage breakdown occurs prior to January 1, 2025, the commuted value of benefits must be determined in a manner consistent with s. 3500 of the CIA Standards of Practice (i.e. as opposed to s. 3750 of the CIA Standards of Practice applicable to target benefit arrangements, and, among other things, permit commuted values to be determined with reference to the funded status of the plan);
• The preliminary value of a member’s benefits in a plan will be determined separate, where the member is entitled to both target benefits and defined contribution benefits under the plan;
• The imputed value of a member’s benefits in a plan will be determined separately, where the member is entitled to both target benefits and defined contribution benefits under a plan;
• A plan administrator may charge up to $800 in relation to a family law valuation, where the member is entitled to both target benefits and defined contribution benefits;
• Prescribed information that must be provided to a member and the member’s former spouse in the context of a marriage breakdown.

Asset Transfer Regulations

The Asset Transfer Regulations amend the existing regulations governing asset transfers under ss. 80 and 81 of the PBA, and set out rules that apply in the context of asset transfers between target benefit plans.  Key features of these regulations include the following:

• The regulations specify the minimum assets that must be transferred from the original plan to the successor plan in the context of an asset transfer;
• The regulations specify that the going concern funded ratio of the successor plan following the asset transfer cannot be less than either the going concern funded ratio of the successor plan prior to the transfer, and the sum of 1 and the PfAD of the successor plan prior to the transfer;
• They also specify that the going concern funded ratio of the successor plan may not be less than the lesser of 95 percent of the going concern funded ratio of the original plan before the transfer, and the sum of 1 and the PfAD of the original plan prior to the transfer;
• The accrued benefits of transferred members under the successor plan following the transfer cannot be less than the member’s accrued benefits under the original plan prior to the transfer; and
• Member notice requirements are prescribed.

AMP Regulations

The AMP Regulations amend the existing regulations under the PBA governing administrative penalties, by adding a number of statutory and regulatory provisions governing target benefit plans, the violation of which could give rise to the imposition of administrative penalties.

Variable Benefits Regulations

The Variable Benefits Regulations amend the existing regulation governing variable benefit accounts, in order to ensure that members of target benefit plans that have a defined contribution component have the option, should the plan so provide, to receive payment of variable benefits under a target benefit plan.

Benefit Plan Regulations

The Benefit Plan Regulations amend the existing regulations under Ontario’s Employment Standards Act governing employment minimum standards related to benefit plans, including pension plans, to ensure that the provisions of this regulation apply equally to target benefit plans.

Conclusion

In light of the need for existing SOMEPPs to convert to target benefit plans in order to continue to benefit from an exemption from solvency funding requirements, plan administrators should start giving thought to steps that will be required to be taken to convert.  Aside from required plan amendments and regulatory application requirements, plan administrators should begin to review (if applicable) their existing funding, governance and communications policies, in order to determine what changes may be required to comply with the new target benefits framework.  If such policies are not currently in place, administrators should begin working with their advisors on developing policies which will comply with the new framework.

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