2012 Ontario Budget — More on Pension Plans and PRPPs

On March 27, 2012, the Honourable Dwight Duncan, Minister of Finance, introduced the 2012 Ontario Budget, Strong Action for Ontario (2012 Budget). In the 2012 Budget, the government has proposed a number of reforms that will impact public and private sector pension plans. Many of the proposed pension reforms are a response to the growing costs of plan sponsorship and the current instability of defined benefit plans. However, as many of the proposed changes will not come into effect until after a consultation process, it may also be some time before these changes come into force, if ever. Set out below are the highlights.

1. Canada Pension Plan (CPP) and Pooled Registered Pension Plans (PRPPs)

Ontario continues to support a two-pronged approach to expanding retirement plan coverage consisting of a "modest, phased in and fully funded enhancement to the CPP" and "pension innovation."

Despite what some had hoped, the Ontario government did not introduce PRPP legislation. As reported in our e-Alert dated November 21, 2011, the federal government introduced Bill C-25, the Pooled Registered Pension Plans Act and amendments to the Income Tax Act (Canada) relating to PRPPs, but provincial legislation is still required in order to implement PRPPs in Ontario and other provinces. Rather than introducing such legislation, the government identified a number of concerns with the federal PRPP model, including that PRPPs may simply replace one form of retirement arrangement with another and, therefore, not expand retirement coverage. Ontario does not appear to have abandoned PRPPs but, according to the 2012 Budget, believes that their introduction should be tied to CPP enhancement and that refinements to the federal model may be needed.

2. Update on Status of Regulations Under the Pension Benefits Act (Ontario) (PBA)

The government announced that it intends to post draft regulations in 2012 to implement many of the reforms to the PBA passed in 2010. For a discussion of these reforms please refer to The State of Ontario Pension Reform — Part II. These include draft regulations that clarify pension surplus rules; implement many of the asset transfer provisions that apply when organizations are restructured; allow plan sponsors to use a letter of credit to cover up to 15% of solvency liabilities; and strengthen funding rules for defined benefit plans.

Consistent with its earlier announcements, the government committed to proclaiming the changes to the partial wind-up rules, vesting rules and grow-in provisions under the PBA effective July 1, 2012. Effective July 1, 2012, under the PBA, pension benefits will be immediately vested, future partial wind-ups will not be permitted and grow-in benefits will be made available to eligible members who are terminated for reasons other than just cause. It is not clear when the draft regulations will be posted.

3. Financial Hardship Unlocking

The government has completed its administrative review of the financial hardship unlocking program announced in the 2011 Budget and intends to implement changes to create more streamlined access to locked-in funds. Under the new system, the consent of the regulator will no longer be required to withdraw money for reasons of financial hardship, as applicants will be able to request withdrawals directly from their financial institutions.

4. Solvency Funding Relief for Private Sector Pension Plans

The government proposes to extend temporary solvency funding relief for private sector pension plans consistent with the relief measures introduced in 2009 and to introduce measures that allow solvency and going concern special payments to be amortized beginning one year after a plan valuation date.

5. Public Sector Pensions

The government has proposed a number of measures intended to limit taxpayer exposure to pension expense while at the same time increasing the sustainability of public sector pensions, including the following:

a) Jointly Sponsored Pension Plans (JSPPs)

Some public sector pension plans operate as jointly sponsored pension plans (plans under which decisions on benefit levels and contributions are shared between employer sponsors and plan member representatives). According to the government, as a result of funding shortfalls over recent years, contribution rates of JSPP members and employer sponsors are in the range of 11% to 13%.

Following consultations, the government intends to introduce legislation consistent with the following, and other, parameters:

  • if the JSPP is in a deficit position, require that future benefits or ancillary benefits (not accrued benefits) be reduced before increasing employer contributions;
  • increase employee contributions where such contributions are less than employer contributions;
  • introduce a third party dispute resolution process where plan sponsors cannot agree on benefit reductions through negotiation; and
  • review the JSPP framework after the Ontario budget is balanced.

The government’s announced objective with JSPP reform is to ensure that all JSPPs move to a 50-50 employer/member funding model. The government did not announce a timeline for the JSPP consultation process.

Following consultation with stakeholders, the government also intends to remove a barrier to the creation of new JSPPs specific to the electricity sector.

b) Single-Employer Public Sector Pension Plans

Consistent with the cost sharing proposed for JSPPs, the government believes that single employer public sector plan members should share the ongoing cost of their pension benefits equally with the employer. To that end, the government has announced that it expects that single-employer public sector pension plans will move to a 50-50 cost sharing formula for ongoing contributions within five years and it will adjust temporary solvency relief measures to encourage these plans to implement cost sharing within that timeframe. It is unclear what will happen if such plans do not move to such a cost-sharing model within the five-year transition period.

c) Pension Asset Management

The government intends to introduce legislation in the fall of 2012 to pool investment management functions of smaller public sector pension plans under which management of the pooled assets could be transferred to a new entity or to an existing large public sector fund. It intends to appoint an adviser to lead the implementation process and to provide a transition period.

If you have any questions about the 2012 Budget or how the 2012 Budget may affect you, please contact any member of the Pensions, Benefits & Executive Compensation Group at McCarthy Tétrault or your regular McCarthy Tétrault lawyer.