On April 20, 2018, the Ontario Government filed the detailed regulations that formally implement the new funding framework for DB pension plans, as well as formalize the formula for calculating a pension plan’s annual Pension Benefit Guarantee Fund (PBGF) Assessment.
For the most part, the regulations related to the new funding framework come into effect on May 1, 2018 (leaving very little time for sponsors to complete funding valuations with a valuation date on or after December 31, 2017 under the old framework – if they have chosen to do so). Whereas the regulations relating to the PBGF Assessment become effective on January 1, 2019.
What Was Expected…
Regular readers of our blog and client memos will recall that the new funding framework significantly alters the funding rules for DB pension plans registered in Ontario by reducing the solvency funding target from 100% to 85%, and requiring enhanced going concern funding through a Provision for Adverse Deviations (PfAD) that will “gross up” the going concern liabilities and current service cost. In December 2017, the Ontario Government released a proposed description of the regulations for the new funding framework (which we discussed in our previous client memo and blog); and on January 19, 2018, the Ontario Government released a proposed description of the PBGF Assessments (which we discussed in a separate blog).
To a large extent, the final regulations are consistent with the proposed descriptions of the regulations previously issued by the Ontario Government. To this end, the final regulations confirm that:
- Solvency special payments would only be required to fund the pension plan up to 85% of the solvency liabilities (rather than the current requirement to fund to 100% of solvency liabilities);
- Letters of Credit can continue to be permitted to fund solvency special payments up to 15% of the solvency liabilities;
- The PfAD for the enhanced going concern funding basis will be determined based on three factors: i) whether the plan is open or closed to new members, ii) the asset mix of the plan, and iii) how the discount rate compares to a “Benchmark Discount Rate” (and there is no material change in factors from the proposed regulations);
- Deficiencies on the enhanced going concern funding basis will be required to be funded over a 10-year period, starting one year after the valuation date, with such deficiencies being consolidated and amortized over new 10-year periods at each valuation report (with the exception of special payments related to benefit improvements);
- Plan sponsors who take a contribution holiday will be required to file a cost certificate within 90 days of the plan’s fiscal year-end, and provide notice to the plan participants and unions regarding the contribution holiday;
- There will be transitional rules applicable to the first valuation filed under the new framework that will allow for a reduction in contribution requirements if the contribution requirements under the old rules are more favourable;
- Plan Administrators will be required to disclose details of the new funding framework in the first annual/biennial statement sent to members after a valuation is prepared under the new funding framework; and
- The formula for calculating a pension plan’s annual PBGF Assessment is unchanged from that which was previously proposed (i.e. there will be an increase in both the amount of coverage and in the premium paid by plan sponsors).
What Has Changed…
Nevertheless, there were some differences from the proposed descriptions of the regulations, including:
- The threshold on the funded status for permitting benefit improvements without requiring immediate funding will be 80% on both a solvency basis and enhanced going concern basis (the proposed thresholds were 90% for solvency and 85% for going concern);
- Generally, the increase in the enhanced going concern liabilities due to a benefit improvement will need to be funded over 8 years beginning on the effective date of the plan amendment (the proposal was for 5 years);
- The rules for contribution holidays were eased somewhat in that the annual limit on a contribution holiday will not be restricted to 20% of the ‘available actuarial surplus’ (the overall limit remains unchanged);
- Similar to contribution holidays, PBGF Assessments will be permitted to be paid from the fund if there is ‘available actuarial surplus’ and the plan sponsor has complied with the cost certificate and member notice requirements; and
- The annual/biennial statements to members will be required to disclose an estimate of the Transfer Ratio calculated at the end of the period in the statement, regardless of whether a valuation is filed or not.
Other Noteworthy Items…
In addition to the items noted above, there are a few other noteworthy items for plans sponsors to be aware of:
- Plan sponsors will be required to amend their pension plans within 12 months of the first valuation being filed under the new regulations to incorporate certain items such as allowing for the funding of the PfAD;
- There will be new requirements for the Statement of Investments Policies & Procedures (SIP&P) of a pension plan to include the target asset allocation for each asset category listed in the regulations;
- For pension plans that perform a funding valuation under the new funding framework as at December 31, 2017 (or up March 1, 2018), the typical 9 month filing deadline has been extended to November 30, 2018.
This new funding framework will have a significant impact on the funding requirements for many defined benefit pension plans. In particular, the reduced requirement to fund to a solvency target of 85% could significantly reduce the special payment contribution requirements for plan sponsors. In light of the potential reduction in, or even elimination of, the special payment contribution requirements, many plan sponsors may wish to consider the merits of performing a valuation as at December 31, 2017 (even if a valuation is not required by legislation).
Furthermore, since the changes in the new funding framework provide such a dramatic shift from the current rules, some plan sponsors may be inclined to re-examine their investment and risk management strategies for their defined benefit pension plans.