The State of Ontario Pension Reform

On October 29, 2010, Bill 120, the Securing Pension Benefits Now and for the Future Act, 2010, the second phase of pension reform, was released. The first phase, Bill 236, the Pension Benefits Amendment Act, 2010, had received Royal Assent on May 18, 2010. These bills are legislative responses to the November 2008 Report of the Expert Commission on Commissions. Regulations for both, which should provide many of the missing details, are still outstanding.

We expect to publish articles on Bill 120 and the future regulations in upcoming issues of the Business Law Quarterly. The following is a quick review of the highlights of Bill 236 which is generally focused on substantive issues.

  1. Like Québec, Ontario has opted for immediate vesting and locking-in. This change comes into effect on a date to be proclaimed. It means that vesting and locking-in will occur on or soon after hire in those plans where there is little or no waiting period. Therefore, in conjunction with amending their pension plans to comply with this new requirement, plan sponsors may also wish to provide for eligibility requirements that can extend to 24 months of continuous employment.
  2. Ontario and Nova Scotia are the only Canadian jurisdictions providing "grow-in benefits." Currently, these benefits consist of a right, arising on the wind-up of a defined benefit pension plan, to receive a pension beginning on the date on which the plan member would have been entitled to an enhanced or unreduced pension if membership had continued to that date. In order to qualify for grow-in benefits, the member’s age and years of service must equal at least 55 as of the wind-up. Grow-in benefits are extended to any Ontario plan member whose age and years of service equal 55 when his or her employment is involuntarily terminated on or after July 1, 2012. The only exceptions are terminations for cause, expressed as terminations resulting from "willful misconduct, disobedience or willful neglect of duty by the member that is not trivial and has not been condoned by the employer," and any other exception that may be prescribed in the upcoming regulations. Jointly sponsored and multi-employer pension plans are allowed to elect to opt out from extended grow-in benefits.
    It will be interesting to see how employers and employees react to this change. It should discourage employees from resigning where they are likely to receive grow-in benefits if the employer terminates their employment instead. Seen in this light, the extension of grow-in benefits may be viewed as a retention tool, and early retirement windows will have to be structured to take this into account. The extended grow-in benefits may also motivate employers to eliminate enhanced early retirement and bridging benefits to avoid additional costs.
  3. The quid pro quo for extended grow-in benefits is the elimination of partial wind-ups that would otherwise have occurred on a date to be proclaimed, and the revisions to the surplus rules that will allow surplus reversion to an employer if the terms of the pension plan allow for it OR the employer, plan members and other plan beneficiaries enter in a written surplus-sharing agreement. Details as to the proportion of consenting members and beneficiaries will be revealed in the regulations.
    Interestingly, this change affects even partial wind-ups that were identified by the Financial Services Commission of Ontario (FSCO) as being required to deal with surplus following the Supreme Court of Canada’s decision in Monsanto. This is an odd policy choice since it may benefit those plan sponsors who may have been less than diligent in responding to FSCO’s promptings in dealing with surplus entitlement with respect to these partial wind-ups.
  4. Bill 236 will bring about a variety of changes to portability rights such as the right of a plan member to transfer a small pension to a registered retirement savings plan or registered retirement income fund, the right of a spouse to transfer the lump-sum pre-retirement death benefit consisting of pre-1987 member contributions, and the elimination of the requirement that the election of portability options be made in a form approved by the Superintendent.