Ontario Government Provides Insight into Next Stage of Pension Reform
Yesterday’s Budget announcement by the Ontario government included its “vision” for further pension reform – with the emphasis being on changes to the funding of defined benefit plans.
Ontario began its reform of the pension system late last year with the introduction of Bill 236, which it described as the “first stage” of a multi-step process to reform the province’s occupational pension system. With the tabling of Budget, the government began taking steps towards the next stage by setting out three principles upon which the pension reform will be based:
- funding should be required for all benefits that a pension plan provides;
- risk and responsibility should be shared among stakeholders; and
- funding rules should match benefit and governance structures.
Keeping in mind these principles, the Budget went on to outline the following chief areas of concern being considered by the government:
- Contribution Holidays: enhancing requirements to ensure greater benefit security and requiring disclosure of contribution holidays to plan members and retirees;
- Benefit Improvements: enhancing requirements for funding when existing benefits are not fully funded and requiring that all benefit improvements be funded more quickly;
- Defined Benefit (DB) Plan Valuations: setting a uniform funding threshold at which annual actuarial valuations would be required, and limiting the extent to which funding can be based on valuations that exclude the value of certain benefits, employ asset values that significantly depart from market values, or smooth interest rates;
- Letters of Credit: permitting them to be used to partially satisfy solvency funding requirements;
- Surplus: clarifying procedures for determining surplus entitlement when a pension plan is wound up; and
- Innovative Plan Designs: encouraging innovative designs by providing a framework for “flexible pension plans,” as permitted under the federal Income Tax Act.
Based on the Budget, it appears that the next round of pension reform will largely focus on the funding of DB plans and, in keeping with the recommendations of the Ontario Expert Commission on Pensions, improving the security of the benefits provided under such plans. While the real impact of such an approach on plan sponsors and administrators will not be fully understood until legislation is introduced later this year, the Ontario government is promising to implement reform in stages so that any cost measures are “mitigated” as appropriate.
