On August 24, 2010, the McGuinty government in Ontario released a broad package of reforms with the intent to “help strengthen Ontarians’ pensions”. The reforms intend to recalibrate the balance between employer and employee interests in occupational pension plans. The reforms do not introduce anything new per se, but are rather an update of the status quo in that they clarify rules and establish guidelines for pension plan funding.
The reforms are based on a number of recommendations made by the Ontario Expert Commission on Pensions. To read the report please click here The changes brought forward by the McGuinty Government purportedly focus on three broad areas of concern raised by the expert panel:
• Ontario’s pension funding rules require more sustainable funding of promised benefits and “tougher standards for benefit improvements”.
• Pension surplus rules need clarification and a dispute resolution process to allow members, retirees, and sponsors to reach agreements on how surplus should be shared on wind-up.
• A more sustainable Ontario’s Pension benefits guarantee fund is needed by implementing a strategy to build reserves, increase revenues, limit current exposure and reduce risk to tax payers in the future.
Included in the reforms are changes to the funding structure of the Pension
Benefits Guarantee Fund (PBGF) – a fund that helps off-set the losses in pension income suffered by employees and retirees of companies that become insolvent.
The PBGF has been chronically underfunded and was given a $500-million bailout by the Ontario government earlier this year to cover the costs of dealing with the collapse of Nortel Networks. Additional revenues will be raised by increasing the base fee per plan member from $1 to $5 and raising the maximum fee per plan member in underfunded pension plans from $100 to $300, the main intent of which is mitigating financial risks and placing the PBGF on more stable footing.
While increasing the funding will help build reserves, the new reforms did not raise the maximum top-up under the PBGF from the current $1000 per month, despite encouragement from the Expert Panel to increase the amount to $2,500 per month.
Finance Minister Dwight Duncan has claimed that premiums would have had to increase by 1,000 per cent to fund a benefit of $2,500 a month. Critics claim that premiums are already climbing 500 percent from $1 to $5 per worker annually, and the premium amounts are still very low, suggesting that the increases to the base amount could have been made.
Many of the reforms introduced, including the changes to the funding structure of the PBGF, indicate that moral hazard is a significant issue. Duncan told the press that “These rules will help reduce — hopefully eliminate — the kind of moral hazard that I would associate with companies and employee groups agreeing to benefits without properly funding them.” Essentially, the changes are meant to ensure that promises made are promises kept and that employers and employees are both playing by the same, newly clarified, rules.
In that vein, another change will seek to provide an improved framework for contribution holidays. Currently, “the rules do not require disclosure when a contribution holiday is underway.” Information about contribution holidays, however, is crucial to understanding the funding structure of pension plans and helps determine predictability of funding.
To help correct the information gap, the government has decided to “expressly permit contribution holidays, unless prohibited by the plan documents, only if they do not jeopardize the plan’s fund transfer ratio below a specified amount.” Likewise, the new changes will require plans to “disclose contribution holidays to members, retirees, and other beneficiaries of the plan.”
While the new changes certainly clarify the rules and represent a step in the right direction, some critics argue that funding shortfall issues would have been better resolved by eliminating contribution holidays altogether. Duncan has admitted, however, that all of these changes attempt to balance the needs of employers and employees.
Other changes introduced include strengthening required contributions, clarifying surplus entitlement rules, modifying funding requirements for Multi-employer Pension Plans and Jointly Sponsored pension Plans (the full technical backgrounder can be read here)
The changes may be based on expert recommendations, the goal of which was to streamline pension issues in Ontario, but not everyone is convinced that the changes will have enough, or the desired, impact. In this newsletter we’ve provided you with some expert commentary. The true success of these reforms, underwhelming as they may seem, may yet depend on if or when the Ontario government pursues other more substantial reforms, as these reforms only potentially benefit Ontarians who already belong to occupational plans.
Coming out of the talks in PEI this past June, Minister Duncan supported marginal increases to the CPP, but the PEI announcements strongly suggested that no Province, Ontario included, would be seeking to create a universal pension plan that will give those currently outside of workplace plans a safer and more reliable vehicle for retirement savings. Instead, they left it to the private sector to come up with innovative structures. Clearly, the regulation of those new products will have to ensure universal access, affordability as well as more properly balancing the interests of employees and employers.
Keywords: pension reform, costs