A Permanent Framework for Target Benefits

The Ministry of Finance of Ontario recently published a consultation document on proposed regulations for implementing a permanent target benefit framework in Ontario. Since 2007, over 50 Multi-Employer Pension Plans (MEPPs) that can reduce accrued benefits have been eligible for a temporary exemption from solvency funding requirements until 2024. These plans are also known as Specified Ontario MEPPs (SOMEPPs). The new proposed regulations will be implemented with the objective of continuing this exemption for SOMEPPs, while ensuring proper governance and funding of these plans and increasing member transparency and equity.

As a reminder, under the Pension Benefits Act (PBA), specific criteria must be met for MEPPs to be eligible to convert existing benefits to target benefits, including (but not limited to) having:

• Employer contributions fixed in collective agreements or plan documents;
• The right to reduce benefits both on an ongoing and windup basis;
• No more than 95% of members employed by one employer;
• At least 15 employers making contributions to the plan or at least 10% of members being employed by two or more employers.

The proposed framework is based on three fundamental pillars. The first pillar aims to strengthen governance through minimum standards in policies. Proposed regulations would require that funding and governance policies address certain specific elements.

The second pillar aims to enhance communication to members. Proposed regulations would require additional disclosures for new members, on annual statements and when preparing plan amendments. Members must have sufficient information to understand their benefit entitlements, including the risk of potential benefit reductions.

The third and most detailed pillar aims to enhance funding requirements. The proposed regulations would provide for the following main requirements:

• No solvency funding requirement;
• Introduction of a provision for adverse deviation (PfAD) requirement on a going-concern basis composed of a non fixed-income portion and a benchmark discount rate portion;
• Annual valuation cycle for plans less than 85% funded on a going-concern basis, or a triennial valuation cycle;
• Commuted values determined based on going-concern assumptions since accrued benefits may be reduced;
• Amortization of going-concern unfunded liabilities over 12 years with a 12-month deferral period, without consolidation at each valuation (i.e., previous amortization schedules may only be shortened and not otherwise adjusted);
• A test to ensure contribution sufficiency, hence determining whether plan sponsors are required to take action or not (e.g., increase in contributions or reduction in benefits);
• Benefit improvements permitted regardless of funding status, to be funded over a 10 year period; and
• Prohibition of use of surplus to fund normal cost.

Plan administrators would have five years from the effective date of the proposed framework to apply to the Financial Services Regulatory Authority (FSRA) for its consent to convert benefits. The effective conversion date would then be required to be within 12 months  of FSRA’s consent.

An actuarial valuation report under target benefit funding rules as at the conversion date would thereafter have to be filed within nine months of that date. A five-year funding transition period would apply should target benefit contributions be greater than contributions that would have been required without a conversion. Furthermore, governance and funding policies would also have to be filed with FSRA within 60 days of the effective conversion date.

SOMEPPs that do not convert to target benefits by the pension plan’s first valuation after January 1, 2024, would be subject to the general funding rules applicable to MEPPs.

Before the Ministry of Finance begins implementing these new regulations, they seek any views or comments on the proposed framework before June 30, 2023, to help ensure that they meet the objectives of strengthening governance, improving transparency and supporting long-term sustainability for plan members and employers through written policies, disclosures and funding requirements for target benefit plans.

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