Bill 120 Changes Regarding Pension Plan Funding
In this post, I will discuss important pension plan funding changes implemented by Bill 120, Securing Pension Benefits Now and for the Future Act, 2010. (Previous posts have considered some of the more controversial aspects of Bill 120, namely, changes to the rules regarding surplus withdrawals, contribution holidays and plan expenses.)
Like many aspects of Bill 120, these changes have not yet been proclaimed into force, and regulations are needed to provide much of the underlying details. However, plan sponsors and administrators should start considering the implications of these amendments now since they could require changes to current practices.
Restrictions on Benefit Improvements
Prior to Bill 120, there were no restrictions on benefit improvements. Pursuant to Bill 120, subject to certain exceptions (i.e., amendments required as a result of a judicial decision or in prescribed circumstances), plan amendments that would increase accrued benefits while reducing a plan’s funded status below the prescribed level will be void. In its August 24, 2010 announcement (the August Announcement), the Ontario government indicated that this prescribed level would be 85%. The August Announcement also indicated that improvements may be made in these circumstances provided the sponsor complies with certain new funding requirements (i.e., make a lump sum payment to prevent a reduction in the funded status and amortize any remaining cost over no more than five years).
Contribution Holidays
In addition to expressly permitting contribution holidays, unless the “documents that create and support” the plan or the fund prohibit such holidays, Bill 120 also indicates that there will be certain prescribed conditions on taking contribution holidays. The August Announcement stated that contribution holidays will not be permitted where they reduce the plan’s transfer ratio below 105%, and that plans will be required to disclose contribution holidays to members and former members and file annual statements with the regulator to confirm eligibility. We’ll have to wait for the regulations to confirm these additional details.
Letters of Credit
Bill 120 introduces provisions permitting letters of credit to be used to fund a solvency deficiency provided various requirements are met. Once again, we’ll need to wait for the regulations to confirm all the requirements, but some requirements are contained in Bill 120 itself. For example, Bill 120 provides that letters of credit will not be permitted to exceed 15% of the plan’s solvency liabilities. As well, multi-employer pension plans and public sector pension plans will not be permitted to take advantage of letter of credit funding (though public sector pension plans may be specifically so permitted in the regulations).
Solvency Funding for Jointly Sponsored Pension Plans
Bill 120 allows jointly sponsored pension plans that existed on August 24, 2010 to amend their plan documents such that contributions are no longer required in respect of a solvency deficiency.
Regulations regarding Actuarial Methods and Assumptions
Bill 120 includes new authority, now in effect, allowing the government to make regulations with respect to actuarial methods and assumptions that may be used in the preparation of actuarial reports. As well, the August Announcement referenced a number of new, more stringent rules for valuing plan assets and liabilities that were being considered by the Ontario government. We’ll have to wait for the regulations to see if these rules go forward.
We’ll discuss these funding changes and other changes implemented by the recent waves of pension legislative reform in Ontario at our upcoming client seminar, “Managing the Impact of Pension Reform: Practical Implications for Employers and Plan Administrators”, on Wednesday, January 26, 2011.
