Late last week, the Ontario government announced that it would provide temporary solvency funding relief to certain public sector and broader public sector (BPS) pension plans. Obtaining such relief, however, will not be an easy matter. The government has made it clear that in an effort to ensure that these plans are sustainable in the long term, there will be many “hoops” for plan sponsors to jump through.
Temporary solvency funding relief for defined benefit (DB) plans is not a new concept in Ontario – in 2009, regulations were passed outlining a variety of funding relief measures for DB plans. This time around, though, the government is specifically responding to requests for funding relief from public sector and BPS pension plans.
In this post, I provide a brief overview of the government’s funding relief proposal. Those seeking further information on the complex requirements of this program should refer to the detailed description provided on the Ontario government website.
Which Plans Are Eligible?
In order to be eligible for this funding relief, plans must fall within the proposed definition of “public sector pension plan”, which includes plans provided by Crown agencies and corporations, school boards, colleges, universities and municipalities. The plan must provide defined benefits and at least 25% of the total plan membership must be actively accruing benefits. Multi-employer and jointly sponsored pension plans are specifically excluded from this funding relief proposal.
Applications for Relief
Plans which intend to request this solvency funding relief, must submit an application to the Ministry of Finance (Ministry) within the applicable window. (As I note below, the first window is now open.) The government lists a number of documents that must be provided with the application, including:
- the estimated “savings target” of the plan;
- a detailed funding plan showing how the pension plan could be amended to improve its sustainability;
- evidence that the funding plan has been shared with plan members and any union, and will be shared with retirees;
- identification of applicable collective bargaining agreements;
- identification of plan amendments made or scheduled to come into force within the last 5 years that may have enhanced the plan’s sustainability;
- identification of amendments scheduled to come into effect after entering the funding relief program that may have increased the cost of the plan; and
- copies of all plan documents, amendments and valuation reports filed since December 31, 1999.
Details of the relief measures, including eligibility criteria and additional conditions, will be outlined in amendments to the regulations under the Ontario Pension Benefits Act (PBA), which the government expects to come into force by mid-May of this year. In the meantime, you should consult the backgrounder if you think your plan may be eligible for the new relief.
The proposed measures would provide temporary funding relief in two stages – with specific criteria attached to each stage.
If a sponsor’s application to the Ministry is accepted, plan sponsors would file a valuation report with the Financial Services Commission of Ontario. During this stage, plan sponsors would be required to make minimum payments to ensure that the solvency shortfall did not increase.
Plan sponsors would have three years from the date of the valuation report to determine what plan amendments could be made to improve the plan’s sustainability. Examples of design changes suggested by the government are: converting to joint sponsorship for future service, providing for more equitable cost sharing of benefits between sponsors and members, linking some future benefits (e.g., inflation protection) to plan performance, and enhancing cost certainty through benefit adjustments. Since many of the members of these plans are unionized, this process will likely include discussions with collective bargaining agents.
After three years, plan sponsors would be required to prepare another valuation and submit a report to the Ministry to demonstrate their progress in meeting their funding plan targets. The results revealed in the valuation would be measured against “savings targets”, which outline the criteria a plan would have to be meet to qualify for Stage 2 relief.
If the Ministry is of the view that targets have been met, it could recommend that the plan be eligible for further relief in Stage 2. Otherwise, the normal funding provisions in the PBA effective at the time would begin to apply. Among the benefits of Stage 2 would be the ability to amortize any solvency deficiency identified in the second valuation report over a ten-year period.
Window Now Open
Even though the amendments to the regulations have not yet been finalized, the first window for applying for funding relief is already open – from February 10, 2011 to March 23, 2011. Eligible pension plans with a valuation date as at December 31, 2009 or with a valuation date in 2010 could apply during this window. The government indicated that other windows of opportunity for eligible pension plans with valuation dates in 2011 and 2012 will be announced at a future date.