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Earlier this year the Ontario government released a consultation document on its proposed permanent framework for target benefit pension plans.  This framework is set to replace the temporary funding regulations for Specified Ontario Multi-Employer Pension Plans (“SOMEPPs”) that have been in place since 2007, which permitted an exception from solvency funding, and are set to expire in 2024.  This target benefit plan framework would be available to Multi-Employer Pension Plans (“MEPPs”) established by collective agreement or trust agreement, and existing MEPPs will be permitted to convert their existing benefits to target benefits, so long as the following criteria are met:

• Employer contributions are fixed per the collective agreement(s) or other plan documents;
• The administrator is authorized by the plan documents to reduce benefits;
• At the end of the previous year, no more than 95% of the members were employed by one employer; and
• During the previous year at least 15 employers made contributions to the MEPP, or at least 10% of the members of the MEPP were employed by two or more employers.

For greater clarity, this framework is not available to Single Employer Pension Plans (“SEPPs”).  Moreover, this framework is not available to Multi-jurisdictional MEPPs where more than 10% of plan members are in a jurisdiction that does not currently allow for benefit reductions.

The Ontario government’s objective is to implement a framework for target benefit MEPPs that strengthens plan governance, improves transparency, and supports long-term stability.  This is to be achieved by reflecting industry best practices, and having specified regulations for plan governance, member communications, and plan funding.

Three Fundamental Pillars

The consultation document outlines three fundamental pillars to this new framework:

• Pillar One: Strengthening Governance Through Minimum Standards in Policies
  • Target benefit MEPPs will be required to create, regularly review, and file with the regulator a governance policy to address items such as the roles and responsibilities of the people involved in the administration of the plan; ways to identify, quantify, and manage the material risks of the plan; document the processes to assess what changes to the plan may be appropriate based on the results of stress testing; and the processes for the communication of relevant and timely information to plan members, participating employers, trade unions, and the pension regulator.
  • Target benefit MEPPs will also be required to create, regularly review, and file with the regulator a funding policy to address items such as the funding objectives as they relate to the stability of benefits, stability of contributions, and intra-generational risk; the use of funding margins; and the manner in which benefits would be reduced and how benefit improvements would be implemented.

• Pillar Two: Enhanced Communications to Members with Required Disclosures
  • Target benefit MEPPs will be required to provide members with various disclosures, including: an explanation of how benefits are funded; a statement that contributions are fixed and benefits may be reduced; a statement that the benefits are not guaranteed by the Pension Benefits Guarantee Fund; a summary of the plan’s funding policy; details on any adjustments to pensions over the past 10 years; details on the plan’s transfer ratio and going concern funded ratio and how it relates to the level of funding of member benefits; and details on any plan amendment or proposed action when contributions do not meet the sufficiency test.

•  Pillar Three: Enhanced Funding Requirements
  • The long-term sustainability of target benefit pensions is to be supported by:
    • having a set of funding requirements that does not require solvency funding;
    • permitting commuted values to be calculated using going-concern assumptions (but not to be adjusted based on the funded status of the plan);
    • requiring valuations every three years (and every year if the going-concern funding target falls below 85%);
    • requiring a Provision for Adverse Deviations (“PfAD”) be added to the plan’s liabilities and current service cost that is determined based 1) the amount of the plan’s target asset allocation invested in non-fixed income assets and 2) a comparison to the plan’s going-concern discount rate assumptions to a benchmark discount rate;
    • requiring the amortization of deficiencies over 12 years starting one year after the valuation date; and
    • requiring that the contributions in a valuation report meet a sufficiency test such that contributions are sufficient to cover the current service cost, the PfAD on the current service cost, and any special payments based on the going concern valuation results.
  • Target benefit MEPPs that are unable to meet the contribution sufficiency test would be required to take action, such as increasing contributions or reducing the target benefit, so that the plan would pass the test. 
  • The proposed regulations would also set out the rules for the ‘equitable application of benefit reductions’ – but the consultation document did not provide any details on these rules.  Furthermore, the proposed framework would prioritize the restoration of previously reduced benefits over benefit improvements, and permit benefit improvements regardless of the plan’s funding level, so long as the increase in the going concern liabilities and PfAD can be funded over 10 years.

Transitioning to Target Benefits

The process of transitioning a MEPP to a target benefit MEPP is already outlined in the Ontario Pension Benefits Act and requires plan administrators to apply to FSRA for consent to covert within 5 years that the proposed framework becomes effective.  To be clear, there are a number of steps to be taken to effect the conversion, including: development of the governance and funding policies; developing the member communication and required notice requirements; communicating with members, participating employers, and trade unions; having consultations in good faith with any trade union that represents the plan members; and complying with other regulations yet to be released.

The effective date of the conversion of benefits would be within 12 months of the date the FSRA consents to the proposed conversion – and the plan administrator would be required to prepare a valuation under the target benefit funding rules at the effective date, and have it filed with the regulator within the typical 9-month deadline.

For SOMEPPs that do not convert to target benefit MEPPs by the time of their first valuation date after January 1, 2024, they would be subject to the general funding rules for MEPPs that provide defined benefits.

Likes and Dislikes

In this consultation document, there are things that I like, things that I dislike, and areas where I wish the Ontario government provided more information.

I like the focus made towards plan governance and member communication.  Having formal governance and funding policies which reflect industry best practices and the CAPSA guidelines, and further requiring that these policies be formally reviewed, updated, and filed with the pension regulator will be critical to ensuring that target benefit MEPPs function properly.  Moreover, informing plan members of how a target benefit MEPP works when they join the plan, as well as in their annual member statements and when a plan is amended, should help ensure that members are informed about the nature of their target benefit.

I generally like the proposed rules for the funding requirements.  To this end, I acknowledge that there are debates within the industry as to what is the appropriate PfAD for a target benefit pension plan.  Some target benefit plans may wish to strive for a more secure target benefit by having a higher PfAD (which may lead to higher levels of intragenerational inequity); whereas other target benefit plans may wish to allow the target benefit to fluctuate more often based on plan experience, and thus prefer to minimize their PfAD (in this approach, the intragenerational inequity in minimized, but there may be a greater level of variance in the actual pensions provided to plan members over time). 

As outlined in the consultation document, the proposed PfAD that has two components: 1) a component with a reasonably low PfAD if the plan adopts a balanced asset mix (e.g. this component of the PfAD is only 4.5% if the plan is invested 50% in fixed income securities), and 2) a component that requires an additional PfAD if and only if the actual discount rate is greater than a benchmark discount rate reflecting mark-to-market conditions at the valuation date.  In my view, this proposed PfAD, which is effectively a prescribed minimum, provides plan administrators with enough flexibility to adopt whichever approach that they feel is best.

Also, on the funding requirements, I like the fact that solvency funding is no longer required and the fact that a solvency valuation is required to be disclosed in the valuation report for reporting purposes only.  I also like the fact that Commuted Values for target benefit plans will be calculated based on the going concern valuation results – however, I would have preferred if this basis allowed plan administrators with the choice to further adjust the Commuted Value payout to reflect the funded status of the plan at the time of the payout (as is permitted for target benefit plans under the actuarial standards of practice).

The consultation document states that the proposed regulations would set out the rules for the ‘equitable application of benefit reductions’.  This is an area where I would have liked the Ontario government to provide more information and sought consultation from the industry before making final regulations.

Finally, with respect to the transition and conversion, I would encourage the Ontario government to not dither in producing the additional regulations needed to support the framework for target benefits.  This will be essential for plan administrators to properly consider their options and prepare their applications for conversion.

Closing Time

For those of you who are interested in providing comments to the Ontario government on this consultation document, please act quickly, as the deadline is June 30th.