What Ontario can learn from British Columbia

The Ontario government provided a status update on its progress towards implementing a permanent regulatory framework for target benefit pension plans (“TBPs”) in its recent Budget.  The Budget noted that the Ontario government is taking into consideration the feedback received during the previous consultations, that they are drafting proposed regulations which they expect to be made available for technical review in the summer of 2024, and that they are also proposing legislative amendments that would support their permanent regulatory framework for TBPs.  The Budget also noted that it is the Ontario government’s intention that the permanent target benefit framework come into effect on January 1, 2025.

As the Ontario government puts this together, they may wish to consider some insight offered by Barry Gros and the C.D. Howe Institute in this recent article on what can be learned from BC’s TBPs.  Below I highlight some of the key messages from this article, with a sprinkle of some of my own thoughts.

Hey, Ontario, are you listening?

Interestingly, this article seems targeted toward the Ontario government (which is currently putting the final touches on its permanent regulatory framework for TBPs), as one of its stated purposes was to uncover lessons that can inform provinces that haven’t yet finalized their regulatory policy on TBPs.  This article also noted that BC was the first province to pass extensive TBP legislation back in 2015, and since it allowed past service conversions for Multi-Employer Pension Plans into TBPs, BC now has a significant portion of its registered pension plan members and assets in TBPs (well more than registered DC plans).

A main challenge for policymakers is how to create a regulatory environment for TBPs whereby the pension arrangement is formula-based, not fully guaranteed, and subject to the sufficiency of available assets.  For TBPs, it’s important to remember that contributions are determined independently of benefits, and while there is typically a buffer between the benefit cost and the contributions (i.e. a provision for adverse deviations), the key task is to determine whether that buffer is sufficient to sustain the target benefits.  Thus, Gros notes that successful regulation of TBPs needs to:

  • assess methodologies for converting contributions to benefits, including the need for (and magnitude of) a provision for adverse deviations and any requirements to provide equal treatment to different groups of members;
  • assess benefit sustainability based on the assets and expected contributions of the TBP;
  • allow conversions from existing programs like Multi-Employer Pension Plans; and
  • address the potential reinstatement of benefits which were previously reduced.

The TBPs in BC exhibit diversity in terms of origin, industry representation, membership trends, and plan maturity.  Such heterogeneity, Gross suggests, has policy implications which include the need for flexible legislation to accommodate diverse plan designs and conversion processes, while ensuring clarity in plan objectives and governance.

One tidbit I found quite interesting in the article is that surveys of BC TBPs suggest that they do not want to see reductions in the benefits once the benefits have been set.  In particular, most TBPs identified their primary objectives as a combination of maintaining stable pension benefits, minimizing benefit reductions, and targeting benefit security.  It goes without saying that providing a greater level of benefit security necessitates a larger buffer, and also raises questions as to how prescriptive regulations for TBPs should be.

With TBPs, it’s important to remember that contributions are usually set through the collective bargaining process, and it is up to the plan’s board of directors to determine whether accrued benefits stay unchanged, whether there is leeway to improve accrued benefits, or whether accrued benefits should be reduced.  This assessment is typically handled as part of the regular valuation performed by the plan’s actuary, along with any supplementary risk analysis the board may request from the plan’s actuary.  Gros asserts that while legislation might provide certain tests regarding minimum contribution requirements, no TBP legislation provides guidance on how to determine an appropriate sustainable pension benefit for a given contribution level, and that actuarial standards of practice do not provide specific guidance on this matter.  [Here, I would highlight that New Brunswick’s Shared Risk Pension Plans do have legislated risk management requirements for assessing their sustainability – and I believe Gros is distinguishing New Brunswick’s Shared Risk Pension Plans from the TBPs in other provisions when making this statement.]

Thus, when considering the policy implications, Gros suggests that any prescribed buffer or provision for adverse deviation should be stable, and that the rules for adjusting benefits not be applied unilaterally to both accrued benefits and future service accruals.  I agree with this sentiment – but as noted in my previous blogs on the TBPs, I believe that having a benchmark discount rate referenced as part of a provision for adverse deviations is a sensible measure to ensure the assumptions used in a valuation are not overly optimistic.

In the article, Gros reminds us that there is a strong link between plan sustainability and good governance.  While the governance of TBPs is typically overseen by boards of trustees, the composition and appointment processes vary widely.  Key governance practices include trustee education, orientation, succession planning, and developing and maintaining investment, funding and governance policies. 

In addition to good governance, Gros notes that effective member communication policies and feedback mechanisms are crucial for ensuring that members understand and have transparency on their pension benefits.  While it is ideal to communicate with plan members annually as part of the member statement process, there will be value to going above and beyond this minimum disclosure requirement and providing other channels for member engagement (e.g. newsletters, emails, videos, webcasts/podcasts).

In summary, Gros highlights the importance of clear regulation, transparent communication, and strong governance for the sustainability and effectiveness of TBPs.  It suggests less prescriptive regulation to allow flexibility in financial assessment methods and governance structures, while promoting transparency and accountability through clear communication policies and oversight mechanisms.

Where to we go from here

Mr. Gros provides a lot of good stuff to digest.  Let’s just hope the Ontario government is listening and will consider this input as they put the final touches on the permanent target benefit framework.

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