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BC AND ALBERTA PENSION PLAN ASSESSMENTS – DEADLINE APPROACHING

As part of the enhanced governance requirements under British Columbia’s Pension Benefits Standard Act and Alberta’s Employment Pension Plans Act, pension plan administrators in Alberta and British Columbia are required to conduct an assessment their plan every three years. The deadline to complete the first assessment is December 31, 2017.

December may seem far off with summer just getting into full swing, but if you administer a pension plan in Alberta or BC you should start the assessment process soon in order to meet the deadline.

Contents of the assessment

The scope of the assessment under the legislation is broad, covering the “administration of the plan”. The assessment should at a minimum cover the following areas and policies:

  • the plan’s compliance with the applicable pension legislation
  • the plan’s governance
  • the funding of the plan
  • the investment of the pension fund
  • the performance of the trustees, if any, and
  • the performance of the administrative staff and any agents of the administrator

The Alberta Superintendent of Pensions has issued draft guidelines stating that the use and completion of the CAPSA Guideline No. 4 Pension Plan Administrator Governance Self-Assessment Questionnaire is acceptable as the written assessment. The British Columbia Superintendent has not yet issued assessment guidelines, but we understand guidance is under development.

Administrators may also develop their own assessment framework or use one prepared by a third party. Regardless of which assessment framework you use, you should be satisfied that it is appropriate for your plan.

Does the assessment need to be filed?

No. You must complete and retain the written assessment and make it available to the relevant Superintendent of Pensions upon request.

Confidentiality concerns

Although required by statute to complete the assessment, you should be careful about what you include in the final written assessment. Much like pension committee minutes, the assessment may contain confidential information about your plan and is a potential source of liability. Further, an assessment in the hands of a Superintendent may be subject to a request under freedom of information legislation.

A review by a lawyer prior to finalizing a plan assessment can mitigate some of these confidentiality concerns and identify potential liability in the written assessment.

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BC AND ALBERTA PENSION PLAN ASSESSMENTS – DEADLINE APPROACHING

Interesting times for employers with Ontario pension plans

Yesterday the Ontario Deputy Superintendent of Pensions released a formal statement that included the comment:  “these are interesting times in the pension sector.”  How true.

Many long-anticipated improvements to Ontario pension legislation, regulation and policies are finally coming into force.  The pension regulator will have more specific, helpful powers to target non-compliance issues.  Plan sponsors will have more choices in the design of pension plans, especially in the defined contribution sphere.  And many employers who sponsor defined benefit pension plans will be pleased by this morning’s Ontario government announcement about an entirely new framework for funding defined benefit pension plans, which will come into effect “in the coming weeks”.

We have written about some of these promised changes in prior posts (here and here).  We will be providing more details and strategic suggestions about these interesting developments, in future articles.  In the meantime, you can find information about this this morning’s announcement by the Ontario government here.

Please contact a member of Dentons’ Pensions and Benefits group for information and advice about how these significant changes will affect your business.

 

 

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Interesting times for employers with Ontario pension plans

2017 Ontario Budget: Highlights for Pension Plan Sponsors and Administrators

Pension plan sponsors and administrators have much to anticipate with the release of the 2017 Ontario Budget: A Stronger, Healthier Ontario (Budget) on April 27, 2017.  The Budget provides updates to several pension reform initiatives that many stakeholders have been waiting for, as well as new proposals aimed at benefiting plan sponsors, administrators and members.  The Budget also recaps recent major changes to the pension landscape, including the future enhancements to the Canada Pension Plan and the ability to implement Pooled Registered Pension Plans in Ontario.

Review of Ontario’s Solvency Funding Framework

Plan sponsors of defined benefit (DB) pension plans will be most interested in the Ontario government’s progress in reviewing the solvency funding regime in Ontario. Last summer, a consultation paper was released outlining two general approaches for reforming Ontario’s solvency funding framework: (i) maintaining the requirement to fund on both going concern and solvency bases, while modifying solvency funding requirements; and (ii) enhancing going concern funding requirements while eliminating current solvency funding requirements. The Budget provides that guiding principles for the new solvency funding framework will be released before the end of June 2017, along with measures to support transition to the new framework.  Draft regulations will be released for public consultation later this fall.

  • If you sponsor an Ontario-registered DB pension plan, you should continue to follow Ontario’s review of its solvency funding framework.  In particular, if an actuarial valuation report will be filed for your pension plan in the coming months, you should assess how the new framework could impact your pension plan and whether adjusting your funding objectives may be beneficial.

Framework for Target Benefit Multi-Employer Pension Plans

The Budget reiterates the Ontario government’s commitment to establishing a new regulatory framework for target benefit multi-employer pension plans (MEPPs). Later this spring, the proposed framework for target benefit MEPPs will be announced and draft regulations for public consultation will be released this fall.  The new framework will be of greatest interest to unionized employers participating in certain MEPPs, known as specified Ontario multi-employer pension plans (SOMEPPs), as the new framework would replace the current time-limited funding rules for SOMEPPs.

  • If you participate in a SOMEPP, you should continue to monitor these changes and consult with you plan administrator to confirm whether modifications will be made to your plan.

Modernizing the Framework for Defined Contribution Pension Plans

Several proposals to modernize rules relating to defined contribution (DC) pension plans are included in the Budget. Most notable are (i) the introduction of amendments to allow DC pension plans to pay variable benefits directly to plan members; (ii) potential updates to DC disclosure rules on plan member annual statements; and (iii) discussions with stakeholders regarding new approaches for managing the decumulation phase.

  • If you sponsor a DC pension plan, you may want to consider the advantages and disadvantages of offering variable benefits through your pension plan and the additional expenses that could be imposed in doing so.  Note that regulations regarding variable benefits will be developed this spring.
  • If you are a plan administrator, you should be mindful of the possible changes to pension governance obligations and administration costs if your pension plan provides variable benefits directly to plan members.  Among other things, you would continue to owe a fiduciary duty to plan members who choose to leave their assets in the plan, be required to maintain accounts with your DC service provider for these members and be obligated to provide ongoing plan information, such as member statements and investment disclosure, in accordance with legislative requirements and the CAP Guidelines.  We encourage you to assess the possible impact to your pension plan in light of the proposals and consider how best to discharge your obligations in the most effective and cost efficient manner.

Dealing with Missing Beneficiaries

The Budget acknowledges the challenges faced by plan administrators in trying to locate missing plan beneficiaries as well as the lack of guidance in dealing with this issue. In response, the Ontario government will instruct the Superintendent of Financial Services (Superintendent) to develop a policy to assist plan administrators in locating missing plan beneficiaries.  In addition, amendments to the Pension Benefits Act will be made to allow the Superintendent to waive requirements for providing pension statements to beneficiaries who cannot be located.  Other measures such as creating a registry for such beneficiaries will also be explored.

  • If you are a plan sponsor or administrator, you can look forward to the helpful guidance on dealing with missing plan beneficiaries as the proposed measures should have a positive impact on your pension plan administration policies.

 

New Pension Regulator and Powers of the Superintendent

The Ontario government reaffirmed its commitment to establishing a new financial services and pension regulator, the Financial Services Regulatory Authority (FSRA), in the Budget. The government expects to appoint a board of directors for FSRA in spring 2017.  It will also continue to consult with stakeholders and review recommendations from the expert advisory panel in developing FSRA’s mandate and governance structure.  More information regarding FSRA can be found in our November 24, 2016 blog post.

The government is moving forward with expanding the powers of the Superintendent. Draft regulations regarding the Superintendent’s authority to impose administrative monetary penalties (AMPs) were posted on April 28, 2017 and comments are due by June 12, 2017.  Additional amendments will also be introduced to further expand the Superintendent’s powers, including the ability to direct plan administrators to provide certain information to plan beneficiaries and to hold meetings to discuss matters specified by the Superintendent.

  • If you are a plan sponsor or administrator, you should be aware of the new rules regarding AMPs and when and how they can be applied.  Taking care to fulfil your fiduciary obligations will be key to avoiding possible AMPs and orders from the Superintendent.

Conclusion

Many of the pension reform initiatives announced in the Budget provide for further information to be released and action to be taken in the coming months.  We will keep you updated on these changes.  For more information and assistance in reviewing how these changes impact you and your pension plan, please contact a member of Dentons’ Pensions and Benefits group.

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2017 Ontario Budget: Highlights for Pension Plan Sponsors and Administrators

Changes to the Canada Pension Plan: a field guide for Ontario employers

Are you an employer who is uncertain about what you should be doing to prepare for the changes to the Canada Pension Plan (CPP)?  This guide will help you.

The changes were announced by the federal government a year ago, and formal rules became law at the end of 2016.  Unlike the infamous Ontario Retirement Pension Plan, these government-run pension changes are here to stay.

Here is a summary of the changes.

 Mandatory contributions to the CPP by employers and employees will increase, starting January 2019.  The increases will be phased in gradually over several years.  By 2023 employers and employees will each be paying 5.95% of their eligible income to the CPP.  Right now they are each contributing 4.95% of eligible income.

It’s a significant increase in contributions.  The combined employer and employee mandatory contributions to the CPP will go from 9.9% of employees’ eligible income to 11.9% of their eligible income.  That’s a 21% increase.

And it’s an even bigger hit for higher-income employees and their employers.  Anyone with an annual salary of more than $70k (approximately), and their employers, will have to make additional contributions commencing 2024.

The upside is that the amount of the CPP benefit paid to Canadians will increase.  It is expected that the annual benefit paid by the CPP will increase by as much as 50%.  In today’s dollars, the maximum CPP annual payout would go from $13,370 to $20,000.  This full enhancement to the CPP benefit probably won’t be seen for approximately 40 years.

If you have Quebec employees, beware:  the CPP does not apply.  Changes to the Quebec Pension Plan are being considered, but it’s not known whether or when any changes will be made.

January 2019 is not far away.  If you will be making changes to retirement and savings plans as a result of the CPP changes, you may want to communicate those changes to employees in the next year or so.

As a starting point, here are some high-level strategic suggestions:

 If you have a Group RRSP or defined contribution pension plan:

  • Consider whether to reduce the amount of required employee contributions to your plan, so that there will be little or no impact on your employees’ take-home pay.
  • Consider reducing employer contributions to your Group RRSP or defined contribution pension plan, so that the overall employer costs of contributing to the CPP and your employer-sponsored plan remain level.  If you decide to do so, communicate the changes to employees now, so they are well aware in advance of any changes.

If you have a defined benefit pension plan:

  • Find out if there is anything in your pension plan that relates to the CPP.  Are employee contributions computed based on how much they contribute to the CPP?  Is there a “bridge benefit” that relates to the CPP?
  • Ask your actuary whether the liabilities of your pension plan will increase as a result of any provisions that relate to the CPP.
  • Consider amending your pension plan to lessen the impact of the CPP changes, if any, on the design of your plan.

If you have a union:

  • Find out if there are sections of the collective agreement that will restrict you from making changes to your retirement savings plans.  Consider letting the union know, in collective bargaining, that changes may be made due to CPP changes.
  • If the term of the collective agreement goes beyond 2018, formulate a plan to communicate to the union the fact that employee take-home pay will go down as a result of higher CPP contributions.

Please contact a member of the Dentons Canada pension and benefits group for assistance in understanding how the CPP changes will impact your organization.  Be prepared.

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Changes to the Canada Pension Plan: a field guide for Ontario employers

Who is a “parent” in the Ontario pension world? And why does it matter?

Any person who is the “spouse” of a member of a registered pension plan in Canada has rights regarding the pension entitlement of his or her partner. That important policy has been entrenched in pension legislation for decades.  Exactly who is a “spouse”?  The answer to that question has recently become a bit more complicated.

The Ontario government changed the Ontario Pension Benefits Act effective January 1, 2017 to recognize the evolving definition of a family, for legal purposes.  Administrators of registered pension plans should take steps now to ensure that their pension plan documentation and administration is keeping up with these changes.  Reputational and financial costs could be imposed on pension plan administrators who fail to recognize spouses’ rights to pensions, in this modern world where there has been an evolution of what constitutes a spouse.

The basic rules in Ontario are that two people are spouses for pension purposes if they are married to each other, or they fall within one of the following two categories:

  • they have been living in a conjugal relationship continuously for at least three years, or
  • they have been living in a conjugal relationship of some permanence for less than three years and are the parents of a child.

Effective January 1, 2017 a change was made to Ontario pension benefits legislation that is relevant to the phrase, “parents of a child”.

Prior to 2017, the Ontario legislation said that spousal pension rights under the parent category were triggered if the plan member and his or her partner were “the natural or adoptive parents of a child”.  That wording was simple.  Arguably, it did not capture circumstances where a child was conceived with assisted reproduction.  And it certainly did not address the complex issues of surrogacy or sperm donors.

The Ontario government has stepped in to address these complex issues. The definition of “parents of a child” in the Ontario pension benefits legislation now refers to provisions of the Ontario Children’s Law Reform Act.  That legislation has detailed provisions that address the complicated question of “who is a parent?”.  These are not simple provisions.  For example, they address circumstances of surrogacy where entitlement to parentage has been waived.  They also address circumstances of sperm donors where there is a written agreement, prior to conception, confirming that the donor does not intend to be a parent.

Pension plan administrators should consult their advisors to understand how to navigate these new requirements. Pension plan texts, member booklets, forms, and all other communications and administration must align with these changes.  Administrators will have to rely on experts to determine whether an individual is a spouse of a pension plan member, if the two individuals have been living together for less than three years, but may qualify as “spouses” because there is a child.

Administrators have a legal obligation to ensure that the correct individuals receive their pension entitlements. That means that these new Ontario requirements should be considered and implemented in all aspects of documentation and administration.

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Who is a “parent” in the Ontario pension world? And why does it matter?

Ontario regulatory form regarding pension plan contributions: comply!

Trustees and administrators of Ontario registered pension plans: beware of Form 7.

That’s the form that administrators of registered pension plans must complete, and send to their pension fund trustees, that summarizes the estimated employer and employee contributions that will be due to be made to the pension plans in future. The form must be provided by the registered administrator of every Ontario registered pension plan to the trustee, at least annually.  If there’s a change to the estimated future pension contribution requirements, the administrator must send a revised Form 7 to the pension fund trustee within 60 days of becoming aware of the change.

Trustees of pension plans (which for this purpose include insurance companies) are not required to complete Form 7’s. But trustees have an important, independent legal obligation to notify the Ontario Superintendent of Financial Services if they do not receive the required Form 7.  Further, if contributions to the pension plan are not received by the trustee in accordance with the estimates in the Form 7 received by the trustee, the trustee must notify the Superintendent.  There are prescribed time limits for all of these requirements.

In essence, the Form 7 rules require pension fund trustees to police timely plan contributions. The law requires trustees to blow the whistle if a plan administrator is not making contributions on time.

In 2013 a trustee was prosecuted in Ontario for failing to report the non-filing of a Form 7 with respect to a plan administrator who eventually filed for bankruptcy protection from its creditors. The trustee plead guilty and was fined $50,000.

The gravity of compliance with Form 7 rules was recently emphasized by the Ontario pension regulator in an announcement that can be found here.  A few days ago, the regulator released a revised Form 7 that can be found here, as well as a comprehensive User Guide that can be found here, to assist plan administrators in completing Form 7.  It also released two new standardized templates, to be used by pension fund trustees to report to the Superintendent when a plan administrator fails to submit a Form 7, or fails to make the contributions as summarized in a Form 7.  The templates can be found here.

Although Form 7 is a prescribed form, it does not have to be filed with the Ontario pension regulator. It is simply a required communication from plan administrators to pension fund trustees.  Do not take this as an indication that the Ontario pension regulator is indifferent about compliance with the Form 7 rules.  It has clearly demonstrated that it requires compliance, and it has provided a guide and templates to assist the pension industry with the rules.

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Ontario regulatory form regarding pension plan contributions: comply!

Witness the Creation of Ontario’s Modern Pension Regulator

To remain relevant and effective, industry regulators need to stay current. They must be attentive to economic realities, adapt to new technology and evolve with the industries they regulate. Ontario’s pension regulator is overdue for a major overhaul that will bring it into the 21st century.

Ontario’s Fall 2016 Economic Statement announced that government’s intention to introduce a new financial services regulator which will be known by the acronym FSRA (Financial Services Regulatory Authority). The FSRA announcement came shortly after the release of the Final Report, of the Ontario Expert Advisory Panel mandated to examine the Financial Services Commission, Financial Services Tribunal and Deposit Insurance Corporation.

The March 31, 2016, cover letter that accompanied the Panel’s Final Report stated that its recommendations for a ‘world-class regulatory system’ were prepared with “both the present and future in mind, and in light of industry and regulatory trends here and around the world.” It also recognized the rapid pace of change in the financial and pension sectors and concluded that the agencies under review had to be modernized and sufficiently independent, flexible, innovative and expert to facilitate the changes in governance, structure and accountability necessary to achieve the desired result.

Panel recommendations of particular relevance to the pension industry include:

  • FSRA should operate as an integrated financial services regulator with responsibility for, among other things, consumer protection (referred to as ‘market conduct’), prudential oversight and pension plans;
  • FSRA should be directed to protect beneficiaries while promoting a strong sustainable pension system that would operate in an efficient and fair manner, balancing the interests of all parties;
  • FSRA’s mandate should require it to use its authority to adequately, firmly and consistently discourage fraudulent activities or behaviours that mislead or harm consumers and pension plan beneficiaries;
  • FSRA’s mandate should require that it undertake its activities in a proactive manner;
  • to remain relevant and flexible, FSRA’s mandate should include a commitment to innovation and transparency – to stay abreast of those issues that could compromise its ability to satisfy its mandate;
  • the existing Financial Services Tribunal, which is housed within the current Financial Services Commission and, therefore, subject to potential conflicts, should be established as an independent tribunal with its own budget funded by government; and
  • the Financial Services Tribunal should have authority to adjudicate matters clearly articulated in its enabling statute, including appeals from certain decisions of FSRA.

Bill 70, Building Ontario Up for Everyone Act (Budget Measures), 2016, was introduced by the Ontario government on November 16, 2016, and passed ‘First Reading’ in the Legislative Assembly. Among other things, this omnibus legislation would:

  • enact legislation establishing FSRA, replacing both the Financial Services Commission and Deposit Insurance Corporation; and
  • amend the Pension Benefits Act (Ontario) (PBA) to provide the Superintendent of Pensions with authority to impose significant administrative penalties for contravening or failing to comply with the PBA.

It is too soon to tell whether all aspects of the Panel’s recommendations will be implemented by the Ontario government. The proposed legislation is bare bones and creates only the framework for the FSRA. It does not set a clear mandate other than the fact that FSRA will regulate specific financial sectors of the Ontario economy.

On the other hand, proposed changes to the PBA clearly demonstrate a new regime involving administrative penalties – a hallmark of modern regulatory systems, providing the muscle to enforce compliance. If adopted, the amendments will enable the Superintendent to quickly impose meaningful administrative penalties (up to $25K for corporations and $10K for individuals) to ensure compliance with legislative requirements, orders and undertakings. As an added jolt, administrative penalties may not be paid from the pension fund of an offending administrator.

While there is a right to a hearing if an administrative penalty is proposed by the Superintendent, the process is swifter and more appropriate than current regulatory measures that require Crown prosecution under the Provincial Offences Act (Ontario). The difference between an administrative penalty and offences prosecution can be likened to the difference between a speeding ticket and a drunk-driving charge. Both involve motor vehicles, but in the former case you can pay your fine and drive away, while in the latter you’re obliged to spend time in court and will likely want a lawyer.

Bill 70 represents an initial response to the Panel’s numerous recommendations. Nevertheless, with just these preliminary changes, pension administrators and their agents should brace for more fines and greater enforcement in the future. Industry professionals expect the Ontario government to implement more Panel recommendations in 2017 and sense that they are witnessing the creation of a modern, responsive and far more dynamic pension regulatory system for Ontario.

Witness the Creation of Ontario’s Modern Pension Regulator

Environmental, Social and Governance Factors: Should Pension Plan Administrators Look to Rating Agencies for Links Between ESG and Credit Worthiness of Target Investments?

In my August 17, 2016 post (found here), I summarized Ontario’s recent changes to the Pension Benefits Act and Regulation that require a pension plan’s statement of investment policies and procedures (“SIPP”) to include information as to whether environmental, social and governance (“ESG”) factors are incorporated into the plan’s SIPP and, if so, how those factors are incorporated.  I noted that while the incorporation of ESG factors into a pension plan’s SIPP is not a statutory requirement, the question arises as to whether a failure to consider ESG factors in your pension plan’s SIPP could be a breach of fiduciary duty.  I didn’t answer the question directly but did say that many of Canada’s largest public sector pension funds have now incorporated ESG into their investment policies.

Given that provincial pension legislation requires plan administrators to exercise the care, diligence and skill that a person of ordinary prudence would exercise when dealing with the property of another person, would that exercise not, by logical extension, include investigation of the consideration of ESG factors in the assessment of creditworthiness of investee entities?

Recent announcements by some of the world’s largest credit rating agencies recognize that ESG factors can affect borrowers’ cash flows and the corresponding likelihood that they may default on their debts. S&P Global Ratings, Moody’s, Dagong, Scope, RAM Ratings and Liberum Ratings signed a “Statement on ESG in Credit Ratings” (the “Statement”) in May of this year acknowledging that ESG factors are important elements in assessing creditworthiness of borrowers and, for corporations, “concerns such as stranded assets linked to climate change, labour relations or lack of transparency around accounting practices can cause unexpected losses, expenditure, inefficiencies, litigation, regulatory pressure and reputational impacts.”

Included in the Statement are 100 investors managing US $16 trillion of assets, all of whom are signatories to the six UN-supported Principles for Responsible Investment wherein the investors affirmed their commitment to:

  • incorporate ESG factors into investment analysis and decision-making processes;
  • seek appropriate disclosure on ESG issues by investee entities; and
  • report on activities and progress towards implementing responsible investment.

Several well-known Canadian institutional investment corporations are included in the list of 100 investors.

Rating agency reports that incorporate ESG factors in the assessment of credit risk may soon form part of the statement of the valuation method process required by pension regulators.

The Fall 2016 Corporate Knights article, Credit ratings and climate change, cited a 2015 report from the Center for International Environmental Law, which accused the rating agencies of repeating their risk analysis mistakes from the sub-prime mortgage debacle when it comes to fossil fuel investments: “In assuming a business as usual scenario, rating agencies may be artificially inflating the credit ratings and financial value of companies that contribute to global warming”.  The report added that “This poses significant risks for investors, and the climate, and could expose rating agencies themselves to legal liability.” The May 2016 Statement on ESG in Credit Ratings appears to be the first step in addressing the gap in credit rating which doesn’t necessarily consider sustainability and governance factors in credit ratings and analysis.

Plan administrators should seek legal advice to ensure their fiduciary duties are fulfilled when they embark on considering ESG factors in their investment decision making process.

Environmental, Social and Governance Factors: Should Pension Plan Administrators Look to Rating Agencies for Links Between ESG and Credit Worthiness of Target Investments?

Ontario Pension Advisory Committees

If you are involved with the administration of an Ontario registered pension plan, you should familiarize yourself with new Ontario rules regarding pension advisory committees. The new rules will be effective January 1, 2017.  They give significant additional rights to plan members, and could impose extra costs and administrative burdens on plan administrators.  You can find the new rules here: Ontario Pension Advisory Committee Rules

I wrote about these new rules a few weeks ago, when draft regulations were released by the Ontario government. The regulations are now final and are described in my article here: Pension Article

It is possible that these new rules will have no impact on your plan. If unions and plan members take no action, plan administrators are under no obligation to take any action.  There will be no pension advisory committee in that case.  But if a request is made by a union, or by at least ten members of a plan (including retirees), the new rules will be triggered.  The rules set out a clear and detailed process to communicate the request with all plan members, distribute materials and conduct a vote.

If a vote to establish an advisory committee is successful, the plan administrator is then required to do several things, including:

  • hold the initial meeting,
  • give the committee or its representative “such information as is under the administrator’s control and is required by the committee or its representative for the purposes of the committee”,
  • make the plan actuary available to meet with the committee at least annually if the plan provides defined benefits,
  • ensure that the committee has access to an individual who can report on the investments of the pension fund at least annually, and
  • provide administrative assistance to the committee.

The pension advisory committee will not have any legal authority to dictate how the plan should be administered. The new legislation says simply that “[T]he purposes of an advisory committee are (a) to monitor the administration of the pension plan; (b) to make recommendations to the administrator respecting the administration of the pension plan; and (c) to promote awareness and understanding of the pension plan.”

Reasonable costs related to the establishment and operation of the committee are payable out of the pension fund.

Please contact a member of the Pension, Benefits and Executive Compensation group at Dentons Canada LLP for more information about this potentially significant change to the governance of Ontario registered pension plans.

Ontario Pension Advisory Committees

Target Benefit Plans: A New Proposed Plan Design Option for Federally-Regulated Employers

On October 19, 2016, the federal government introduced Bill C-27 which, if passed, will permit federally-regulated employers to establish single-employer and multi-employer target benefit plans.  The bill proposes to amend the Pension Benefits Standards Act, 1985 to add target benefit plans as an alternative to the traditional defined benefit (DB) and defined contribution (DC) plan design options.  Following the steps of other Canadian jurisdictions like New Brunswick, Alberta and British Columbia, Bill C-27 addresses the perceived need for alternative pension plan designs as a way to increase and/or improve pension plan coverage in the private sector.  If you are a federally-regulated employer seeking to establish a new pension plan, or re-evaluate or re-design your current pension and retirement savings program, you may want to consider target benefit plans.

Target benefit plans contain both DB and DC plan design features. They aim to provide members with a defined monthly pension benefit at retirement, similar to a DB plan, but are funded through fixed contributions, like in a DC plan.  Depending on the funding level of the plan, benefits (including accrued benefits and future benefits) may be adjusted.

Like other provincially regulated employers, federally-regulated employers (such as banks, airlines, railways and telecommunications companies) are seeking ways to control the volatility of pension contributions and the often corresponding negative impact on their balance sheets associated with DB plan designs. The ability to create target benefit plans would offer employers with an opportunity to provide sustainable and predictable pension benefits with more cost certainty and without the solvency liability risk associated with traditional DB plans.

While many details regarding the federal target benefit plan framework will be set out in regulations that have yet to be released, some of the main features being proposed include the following:

  • Target benefit plans must be created as new plans.  Converting an existing pension plan into a target benefit plan will not be permitted.  However, pension benefits under an existing pension plan may be surrendered by members in exchange for pension benefits under a target benefit plan with the member’s informed consent.
  • Target benefit plans must be administered by a board of trustees or other similar body.
  • A written governance policy must be established for the plan, in accordance with the regulations.
  • A funding policy must be established for the plan.  The funding policy is required to include, among other things, the rate of employer and, if applicable, employee contributions; the objectives of the plan with respect to pension benefit stability; a deficit recovery plan; and a surplus utilization plan.
  • Once a target benefit plan’s objectives regarding pension benefit stability are established, they cannot be amended.  In addition, an amendment reducing accrued benefits is void unless it complies with the plan’s funding policy.
  • If DB benefits under an existing pension plan are surrendered and transferred to a target benefit plan and the target benefit plan is terminated within five years of the transfer, members will be entitled to the greater of the benefit under the original pension plan and the target benefit plan.

The introduction of Bill C-27 is a positive step towards providing more choice to employers in pension plan design options which will hopefully encourage more employers to offer, and continue to offer, pension plans as part of their employee benefits package.

We will keep you posted on any new developments regarding target benefit plans and the proposed federal legislation.

Target Benefit Plans: A New Proposed Plan Design Option for Federally-Regulated Employers