Matriculating the ball down the field
The Ontario government appears to be making real progress towards implementing a regulatory framework for target benefit pension plans (“TBPs”).
In my blog from earlier this year, I provided my thoughts on the Ontario government’s consultation document on the proposed permanent framework for TBPs. To refresh, the Ontario government’s fundamental pillars for a regulatory framework for TBPs are to 1) strengthen the governance with minimum standards of practice, 2) enhance member communication with required disclosures, and 3) enhance the funding requirements for TBPs.
As noted in my earlier blog, there was much that I liked in their proposal (such as the focus on governance and member communication, and the reference to a benchmark discount rate in the PfAD), one item for which I didn’t much care for (being unable to adjust commuted values to reflect the current funded status of the plan), and another item that I thought the government needed to expand upon (providing more details on their proposed rules for the ‘equitable application of benefit reductions’).
Making Some Halftime Adjustments
Good news, the Ontario government is listening and responding to stakeholder feedback. Late in the summer, the Ontario government released a follow-up consultation on the proposed framework, reflecting updates which considered the feedback they received. In particular, revisions to the proposed regulatory framework for TBPs include:
- A revised approach to the PfAD in which a TBP administrator will have discretion to establish the PfAD in line with their funding policy – and not be required to reference a benchmark discount rate in the PfAD;
- Permitting the commuted value calculation to include a reduction by the plan’s going-concern funded status if required by the terms of the TBP;
- Streamlining some of the conversion processes for existing Multi-Employer Pension Plans (MEPPs) to transition to TBPs, and
- Adjusting some of the requirements for member communications.
From my perspective, these revisions are largely a step in the right direction.
I am a fan of providing TBPs the ability to adjust the commuted value paid to a terminating member to reflect the plan’s current funded status, assuming of course, that this is permitted by the plan terms and communicated to plan members. For clarity, this approach is permitted under Actuarial Standards of Practice for TBPs (and only TBPs) – and adjusting the payouts to reflect the plan’s current funded status to terminated members who elect a transfer when a TBP is less than 100% funded is, I believe, one mechanism that trustees should be able to consider as a means to ensure these members are treated consistently with those who remain in the plan.
I am also a fan of the streamlining of the conversion processes for MEPPs to transition to TBPs, and the requirements for a communication policy to be developed and filed with the regulator.
I am less of a fan of the revised approach to the PfAD. The new PfAD process is far more discretionary and simply needs to comply with the TBPs funding and benefits policy. Even though this approach will provide TBP administrators with greater flexibility over the management of their plan – personally, I believe the benchmark discount rate is sensible, and I believe that it is a suitable tool for ensuring that the future investment return assumption used by plan administrators and actuaries is not overly aggressive.
Some of the updates in this follow-up consultation are intended to protect certain groups of TBP members – namely former members and future members. In particular, there are proposed restrictions on any benefit reductions which could disproportionately affect former members, and there are restrictions on the use of surplus to fund the normal cost benefit accruals for current and future members. Some industry participants have commented that these protections are unnecessary, and in fact are inappropriate, given the fiduciary obligations of the boards of trustees that administer TBPs. However, in the follow-up consultation document, the Ontario government stated that their analysis of benefit reductions demonstrated that the benefits of former members have, at times, been reduced more frequently and by higher amounts than the benefits of active members. While my initial instinct was that these restrictions were fairly reasonable, I am sympathetic to the stakeholders raising concerns, as this may limit the ability of a board of trustees to use ancillary benefits, such as early retirement subsidies or indexing, as an ‘adjustment lever’ for benefit reductions and improvements.
In the Redzone and looking to score?
For MEPPs who have been waiting a longtime for a permanent funding framework for TBPs, there is a feeling like we are nearing the endzone, and with one more play, things may pop wide open – bringing these rules to fruition.
To this end, it is worth noting that the so called “temporary” SOMEPP funding rules were recently extended for one more year to January 1, 2025. Furthermore, the Ontario government’s recent fall economic statement included a section highlighting the progress made to get this regulatory framework to the stage it is at today.
While I am sure there are further improvements that could be made to the TBP regulatory framework, at this stage, I feel it would likely be best to get this into legislation, and further fine tuning can be handled in the future. While I am not a betting man, it seems like we are nearing the finish line, and I suspect 2025 will be the year we see the TBP regulatory framework take effect.
What do you think? Is this proposed regulatory framework a play which can ‘pop wide open’ and score a winning touchdown? Or does the government need to go back to the drawing board and design something better? For all you aspiring play callers out there, please share your comments below.