More Details on the Funding of Ontario’s Defined Benefit Pension Plans

The Ontario government recently unveiled the highly anticipated details of its proposed defined benefit pension plan funding reform, announced on May 19, 2017. Interested stakeholders can submit their comments on the proposals to the Ontario Ministry of Finance until January 29, 2018. Our experts have prepared a summary of the proposed amendments.

The reform will apply to actuarial valuation reports dated on or after December 31, 2017 that will be filed after the new framework comes into force. It will not apply to jointly sponsored pension plans and specified Ontario multi-employer pension plans (SOMEPPs), but will apply to multi-employer pension plans that are not SOMEPPs. Largely inspired by new funding rules introduced in Quebec in 2016, the main funding rules provided by this reform are the following.

• New funding goal of 85%
• Amortization of deficits over five years, starting no later than a year after the valuation date
• Elimination of temporary relief measures introduced in 2016
• Possible reduction of letters of credit considering the new target of 85%, without additional employer contributions
• Unchanged frequency of actuarial valuations

• Amortization of deficits over 10 years with consolidation at each valuation (except for those relating to benefit improvements)

• Funding for indexation now mandatory
• Introduction of a provision for adverse deviations (PfAD):
  • Future service: increase of the normal cost contribution by a percentage equal to the PfAD
  • Past service: amortization payments required if the PfAD is not determined

For example, for a plan with 60% of variable income assets, the PfAD would be 8% for an open plan and 12% for a closed plan.

• Benefit improvements
  • Amortization of the cost of the improvements over five years
  • Lump sum contribution required if the solvency ratio is less than 85% and the going concern funded ratio is less than 90%
• Contribution holiday possible if:
  • The PfAD is fully funded
  • The transfer ratio is at least 105%

Maximum annual use of 20% of the available surplus

• Transitional measures
  • Gradual increase in contributions over three years if the new legislative framework results in increased funding contributions

Plan sponsors will undoubtedly welcome the new funding rules with open arms. In addition to providing a financial cushion with the introduction of the PfAD, they should greatly help to reduce the volatility of contributions related to actuarial valuations on a solvency basis and thus increase the stabilization of contributions.

The legislator will also table other proposals with respect to certain aspects related to the funding of defined benefit plans, namely:

• funding policy requirements
• governance policy requirements
• changes to the Pension Benefits Guarantee Fund
• provisions of discharge for the purchase of annuities (we’ll be covering this topic in a bulletin in 2018)

Draft regulations will follow the publication of these proposals.

Normandin Beaudry consultants are currently analyzing the scope of the bill and would be happy to discuss with you the impact it may have on your plan.

Please feel free to contact us for additional information.