Ontario to allow administrator discharge upon annuity purchase

On April 3, the Ontario government filed a regulation amending the Pension Benefits Act, which will allow a complete discharge to the administrator of a single employer pension plan following an annuity purchase. The modifications will come into force on July 1, 2018.

While buy-out annuity purchases are allowed under current Ontario legislation, they do not allow for the complete discharge of liabilities for plan sponsors, except if the plan is terminated. These annuity purchases do not constitute a final settlement of the rights of members affected, as the legislation does not provide for severing the link between the member and the plan. Therefore, should the insurer go bankrupt, the risk that the plan sponsor would be responsible for paying the portion of pensions not covered by Assuris, the non-profit organization that protects Canadian policyholders, remains. This is commonly known as the boomerang risk.

With these latest changes, the Ontario government eliminates the boomerang risk. Ontario is following the lead of British Columbia and Quebec, two provinces that recently amended their legislation to remove this risk.

Administrators who purchase annuities and that wish to obtain a discharge will have to comply with certain requirements, notably:

• Former members and retired members must be provided with the same benefits following the annuity purchase.
• Former members and retired members retain their rights to any surplus should the plan be terminated, if the plan text allowed for it at the time of the annuity purchase (whether or not a surplus exists at the time of the annuity purchase).
• The administrator must notify members affected by the annuity purchase, in accordance with the prescribed requirements. A certificate confirming compliance with the prescribed requirements, prepared and signed by an actuary, must be filed with the Superintendent of Financial Services, as well as a copy of the annuity contract.
• For a plan that was solvent prior to the annuity purchase, the solvency ratio after the annuity purchase must be at least equal to 100%.
• For a plan that was insolvent prior to the annuity purchase, the solvency ratio after the annuity purchase must be at least equal to the highest between:
  • the plan’s solvency ratio prior to the annuity purchase,
    OR
  • 85%

• If the solvency ratio does not meet the applicable threshold, the sponsor will have to pay a special contribution to the pension fund in the 90 days following the annuity purchase to maintain the solvency ratio at the required level.

The following charts illustrate examples of this special contribution.

Quebec has recently modified its legislation to allow a complete discharge to the sponsor of a pension plan following an annuity purchase, with some conditions. Modifications to Ontario’s legislation are different in some aspects. For instance, Ontario will permit a discharge for the rights of former plan members through the purchase of deferred annuities, which is not allowed in Quebec. Also, there is no possibility of a benefit reduction upon plan termination following the sponsor’s bankruptcy, and rights to surplus distributions upon plan termination are maintained for members affected by an annuity purchase in Ontario.

The following table compares some of Ontario’s and Quebec’s requirements for an administrator discharge upon annuity purchase.

As mentioned previously, modifications will come into force on July 1, 2018.  However, the regulation provides that a discharge can also apply to annuity purchases made prior to that date, subject to certain conditions.

These changes are part of the Ontario pension plan funding reform. Normandin Beaudry’s consultants will continue to closely monitor the progress of legislative changes concerning pension plans and will keep you informed of future developments.

For additional information, feel free to contact Normandin Beaudry’s consultants.