Discharge Upon Annuity Purchase
On July 1, 2018, Section 43.1 of the Ontario Pension Benefits Act comes into effect, providing Administrators’ of single-employer defined benefit pension plans with the ability to obtain a discharge if an annuity is purchased on behalf of their deferred or retired members, provided that certain administrative requirements are met. This discharge will also be available to Administrators who previously purchased annuities on behalf of their deferred or retired members, so long as they follow certain administrative requirements.
This is a significant development, which will encourage many plan sponsors to consider an annuity purchase as part of their pension risk management strategy.
Obtaining a Discharge
The following is a list of some of the key items required for an annuity purchase to obtain the discharge:
- The annuity must provide the same pension (i.e. same amount, form of pension, ancillary benefits, etc.) that a retired or deferred member would have received from the pension plan;
- The insurance company must be authorized to sell annuities;
- No money payable from the annuity can be assigned, charged, anticipated, or given as security except as permitted under the Family Law Act, a family arbitration award, or domestic contract;
- An order under Part I (Family Property) of the Family Law Act, a family arbitration award, or a domestic contract is not effective to the extent that it purports to entitle a spouse or former spouse of the retired or deferred member to a share that exceeds 50% of the payments under the contract (as determined as of the family law valuation date);
- Where a deferred member has a spouse at the time the pension commences, the pension shall be paid in the form of a joint and survivor pension (unless the deferred member and spouse provide a waiver);
- Where a deferred member dies prior to pension commencement, the pre-retirement death benefit will be administered in accordance with Ontario pension legislation;
- The insurance company is also required to provide the affected retired/deferred members, as well as the spouses of retired members, with a certificate confirming the annuity purchase;
- The Administrator is required to provide a notice document containing certain prescribed information to the affected retired/deferred members; and
- The Administrator must keep a record of the annuity purchase, and certain data for the affected retired/deferred members.
In addition to the requirements above, the Administrator must have an actuary prepare a certificate certifying that the Administrator has complied with the legislation, and that the following funding requirements have been met:
- The Solvency Ratio of the pension plan on the day after the date of the annuity purchase must be:
- At least 100%, if the Solvency Ratio of the pension plan was 100% or more in the most recently filed valuation; or
- At least equal to the greater of 85% and the Solvency Ratio in the most recently filed valuation, if the Solvency Ratio in that most recently filed valuation was less than 100%.
- If the Solvency Ratio of the pension plan does not meet the threshold above, the employer shall, within 90 days after the date of the purchase, make a special contribution sufficient to raise the Solvency Ratio so that it is at least equal to the Solvency Ratio thresholds required above.
When filing the actuary’s certificate with the regulator, the Administrator must also provide the regulator with a copy of the annuity contact, and a list of the names and addresses for the affected retired/deferred members.
Effect of Discharge and Surplus Entitlements
These discharge rules effectively remove the affected retired/deferred member from a pension plan.
However, if a pension plan has a surplus on its eventual wind-up, the retired/deferred members affected by the annuity purchase discharge will have the same rights with respect to the payment of surplus as any retired/deferred members that exist at the eventual wind-up date (so long as they would have been entitled to payment of surplus under the plan if the plan were wound up on the date of the annuity purchase).
As previously noted, it is possible to seek a discharge for annuities which were purchased prior to July 1, 2018. Generally speaking, the existing annuity contract will need to meet the requirements noted above, and the Administrator will need go through the notice and funding requirements.
If an additional payment (i.e. price adjustment) is necessary to be paid from the plan to the insurer to enable the contract to satisfy the requirements in the legislation, then the Solvency Ratio of the plan after the additional payment is made must meet the funding requirements noted above. However, if no such additional payment is necessary, then the Solvency Ratio must be at least 85% in the most recently filed valuation.
While these new rules create a certain level of administrative burden in obtaining a discharge for an annuity purchase, they are an improvement over the previous rules which never allowed for a full discharge. Furthermore, the administrative burden is not insurmountable, and we would expect that any plan sponsor exploring a ‘buy-out’ annuity would seek the discharge.
Finally, these new discharge rules are coming into force at a potentially opportune time for plan sponsors, with many experiencing an improvement in the funded status of their pension plans over the past few years. Thus, for plan sponsors wishing to ‘de-risk’ their pension plans, this might be the right time to consider an annuity purchase strategy.