Ontario Ministry of Finance Releases Revised Consultation Paper on Target Benefit Plans

September 14, 2023

Anthony Guindon

Overview

On September 1, 2023, the Ontario Ministry of Finance released a revised consultation paper on proposed amendments to the Pension Benefits Act (the “PBA”) and the regulations under the PBA to implement a permanent regulatory framework governing target benefit plans.  The revised consultation paper, entitled “A Permanent Framework for Target Benefits: Revised Proposals,” reflects comments received from stakeholders following the release of their initial consultation draft, released on March 14, 2023.

We provided a full summary of the prior consultation paper in our March 16, 2023 blog.  Below we provide a summary of significant items that are either new or have changed from the March 2023 consultation paper.

Significant Changes under the Revised Proposal

Provision for Adverse Deviation (PfAD)

The most significant and favourable improvement in the new consultation paper is related to the requirement for target benefit plans to satisfy a provision for adverse deviation (“PfAD”) funding requirement.  In the earlier consultation paper, the government had proposed that a plan’s PfAD be funded in respect of the plan’s normal cost as well as any increase in a plan’s going concern liabilities due to benefit improvements, based on two factors: 1) a non-fixed income, including 50% of the value of a plan’s alternative investments, such as real estate and infrastructure (“NFI”) portion, and a benchmark discount rate (“BDR”) portion, tied to the federal government’s long-term bond rate, plus a risk premium based on the plan’s target asset mix.

Under the new approach, plan administrators would have the discretion to establish their plan’s PfAD, as set out in the plan’s funding and benefits policy.  This policy will have to be filed with FSRA, along with any subsequent amendments thereto.  At the request of FSRA, plan administrators will be required to provide evidence that the funding and benefits policy (as well as the plan’s governance policy) has been reviewed on a triennial basis.

Changes to Proposed Funding Policy

In addition to revising the name of the proposed “funding policy” to a “funding and benefits policy” and the requirement to specify how the plan’s PfAD will be determined, the revised proposal has added the following elements which will be required to be included in the policy:

• An explanation of how the proposed PfAD, and other actuarial methods and assumptions, supports the funding and benefits objectives and mitigates material risks; and
• The process that the plan administrator will use to assess whether the funding and benefits objectives have been achieved over the short and long terms, and how this process will be used to assess if changes to funding or benefits are needed.

Use of Surplus to Fund Normal Cost

An additional change in the revised proposal is in relation to the use of surplus to fund a plan’s normal cost and PfAD.  Under the prior proposal, this would have been prohibited.  Under the revised proposal, going concern surplus could be used in evaluating a plan’s contribution sufficiency test, subject to the following conditions:

• the plan assets available to be used to offset requirements in the contribution sufficiency test would be, at most, one third or the lesser of:
  • The plan’s assets in excess of 105% of the plan’s going concern liabilities; and
  • The plan assets in excess of 100% plus its PfAD percentage of the going concern liabilities of the plan;
• annual valuation reports would be required if surplus is used to offset required funding;
• the use of surplus would be prohibited in the first valuation report after a new collective agreement affecting contributions to the plan has been implemented; and
• use of surplus would be prohibited if the plan’s contributions are not fixed in a collective agreement.

Benefit Reductions

On the issue of benefit reductions, the previous proposal indicated that the proposed regulation would set out rules for the equitable application of benefit reductions.  Under the revised proposal, the regulations would specify:

• that liabilities for former members could not be reduced by a greater percentage than for active members;
• that the percentage benefit reduction for one former member could not be more than twice the percentage benefit reduction of any other former member; and
• benefit reductions could not be made purely due to plan membership termination or death (though plans would still be permitted to reduce commuted values by the plan’s going concern funded ratio).

Benefit Improvements

Under the prior proposal, plans would be permitted to increase benefits regardless of the plan’s funded level, provided that any increase in going concern liabilities and PfAD associated with the improvement would have to be funded over ten years.  However, plans would be required to prioritize the restoration of previously reduced benefits over new benefit improvements.

Under the revised proposal, the regulations would require the restoration of reductions made to the accrued benefits for former members before accrued benefits for active members could be improved beyond a restoration of previously reduced benefits.  However, there would be no restrictions on improvements to future benefit accruals or improvement to pensions in pay.

The foregoing would be accomplished by implementing regulations that specify that benefit improvements could not increase liabilities for active members by a greater percentage than for former members.

Finally, the regulations would specify that the percentage benefit increase for one former member could not be more than twice the percentage benefit increase for any other former member.

Stress Testing

The revised proposal specifies that each filed valuation report would be required to include results of stress testing; more specifically, each risk identified in the plan’s funding and benefits policy would be subject to a stress test to show the possible impact on the plan’s funded position and plan benefits due to the risk if plan experience is adverse.  However, plan administrators would be able to select their stress testing methodology based on their plan characteristics.

Asset Transfers

The prior proposal indicated that the regulations implementing the proposal would address asset transfers, plan wind-ups, and administrative monetary penalties; however, details regarding these measures were not provided.

Under the revised proposal, the following outline of asset transfer measures has been provided:

• assets related to target benefits under the original plan that are transferred would have to be used to provide target benefits in the successor plan;
• the amount of transferred accrued benefits (excluding ancillary benefits) under the successor plan could not be less than the amount of accrued benefits in the original plan;
• after the transfer, the going concern funded ratio of the successor plan could not be less than the going concern funded ratio of the original plan. However, there would be an exception if the original plan’s assets fully fund the original plan’s going concern liabilities and PfAD.  In such a case, the going concern funded ratio of the successor plan need only be at least 100% plus the PfAD of the original plan, meaning any surplus in the original plan in excess of the PfAD would be ignored for the purposes of the test;
• the going concern funded ratio of the successor plan after the transfer could not be less than its going concern funded ratio before the transfer, except that the going concern funded ratio of the successor plan could be reduced if, after the transfer, the going concern funded ratio is at least 100% plus the PfAD of the successor plan.

On the issue of plan windup, the rules would be similar to the existing framework applicable to MEPPs that can reduce benefits.

Conversion Process

The new proposal also addresses an additional significant problem with the prior proposal, associated with the conversion process.  Under the earlier proposal, plans intending to qualify as target benefit plans would be required to provide a notice of conversion to beneficiaries of same, and specifically including a statement that benefits may be reduced.  A copy of this notice would be required to be included in the application filed with the CEO of FSRA.  This proposed requirement would apply to existing Specified Ontario Multi-Employer Pension Plans, notwithstanding the fact that the nature of members’ benefits, and the ability to reduce accrued benefits, would remain effectively unchanged following the conversion.

In light of comments received from stakeholders, the government has revised the proposed conversion process, such that plan administrators would be relieved of the obligation to provide notices of the proposed conversion to its members.  Instead, plan administrators would be required to engage in good faith consultations with participating trade unions and associations prior to applying for consent to convert.  Following the conversion, notice of same will be required to be provided to participating trade unions, associations and employers.

            Communications Policy      

A new requirement under the revised proposal involves the establishment of a communications policy.  The policy would have to be filed with FSRA one year after the conversion of the plan to a target benefit plan, and the policy would have to be reviewed on a triennial basis.  Amendments to the policy would be required to be filed with FSRA.

Conclusions

In many respects, the revised proposal is an improvement on the earlier proposal.  Granting plan administrators the discretion to determine an appropriate PfAD based on their individual plan’s characteristics and funding policy should serve to avoid much of the undesirable volatility that would have flowed from a PfAD tied to long-term bond rates.  Similarly, the simplified conversion of existing SOMEPs to target benefit plans, and in particular the related reporting requirements will avoid much of the confusion among members concerning the nature and security of benefits under a newly converted target benefit plan.

On the other hand, some of the new proposals may be overly prescriptive, burdensome and/or unworkable, including the following:

• the proposed limits applicable to benefit reductions and increases are arguably unnecessary, particularly in light of the fiduciary obligations already owed by boards of trustees to members and retirees;
• the proposal to prohibit the use of surplus in the first valuation report after a new collective agreement affecting contributions to the plan has been implemented makes it likely that many, if not most, multi-employer plans will never be in a position to use surplus to satisfy funding obligations, given the various collective agreement cycles for various employer associations and participating employers; and
• the requirement to restore previously reduced accrued benefits is likely to cause significant fiduciary issues and administrative difficulties, particularly in relation to deceased or unlocatable former plan members.

The government has invited further comments from interested stakeholders, which are due by October 17, 2023.  Comments may be submitted to:

A Permanent Framework for Target Benefits
Pension Policy Branch
Ministry of Finance
5th Floor, Frost Building South
7 Queen’s Park Crescent East
Toronto, ON
M7A 1Y7

or

Contact Email: Pension.Feedback@ontario.ca

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