This is the third consultation on a new target benefit framework, following consultations in March 2023 and September 2023. (We discussed those consultations in our March 2023 Briefing and September 2023 Briefing, respectively.)

This Briefing presents an overview of the revised proposed new funding framework and conversion process. The government intends for the new target benefit framework to come into effect on January 1, 2025.

Eligibility

The draft Regulation includes these additional criteria plans would have to satisfy to convert to target benefits:

• At the end of the previous year, no more than 95 percent of the members of the plan were employed by one employer
• During the previous year, one of the following circumstances existed:
  • At least 15 employers made contributions to the plan
    or
  • At least 20 percent of the members were employed by two or more employers
• If a pension plan provides both target benefits and defined contribution benefits, then for conversion and as an ongoing requirement the value of assets for defined contribution benefits shall not exceed 5 percent of the assets for target benefits
• More than 10 percent of members cannot be in a jurisdiction that does not allow benefit reductions for MEPPs
• The plan is not a jointly sponsored pension plan
• Employee contributions do not exceed employer contributions

Funding rules

As proposed in the original consultations, solvency funding for plans that convert to target benefits would be permanently eliminated but will be subject to enhanced going concern requirements.

Provision for Adverse Deviations

Plans would be required to add a margin to their normal cost and ensure that their contributions can meet the existing funding requirements plus the margin. The margin is called a Provision for Adverse Deviations (PfAD). The PfAD would be a percentage of the normal cost.

Plan administrators would have the discretion to establish the plan’s PfAD in compliance with their funding and benefits policy. If the valuation date is the effective date of conversion to target benefits, the PfAD does not need to comply with the funding and benefits policy.

The FSRA would assess whether the PfAD complies with the funding and benefits policy and may request information from the plan administrator or actuary to assess compliance.

Contribution sufficiency test

The contribution sufficiency test would require contributions to the plan to be no less than the sum of:

• The normal cost of the plan
• The PfAD in respect of the normal cost
• Going concern special payments to fund an increase in liability and the associated PfAD on that increase related to plan amendments
• Going concern special payments determined in a valuation report not in respect of a plan amendment

Additionally, plans would be allowed to apply the lesser of the following amounts to offset the requirements in the contribution sufficiency test:

• Plan assets in excess of 105 percent of the plan’s going concern liabilities
• Plan assets in excess of 100 percent plus its PfAD percentage of the going concern liabilities of the plan

Special payments

Special payments, as referred to above, would continue to be calculated to remove deficits over a 12-year period beginning on a date not later than one year after the valuation date in which the going concern unfunded liability was determined.

Each schedule of special payments will continue until that element of deficit is fully funded, meaning that no “fresh start” will be permitted. However, where positive experience eliminates part of a prior deficit, special payment amounts could be reduced or the balance of the deficit may continue to be funded at the same annual rate, albeit the number of required annual payments will be reduced.

Benefit reductions

The specific process to reduce benefits would have to be included in the plan’s funding and benefits policy.

The regulations would mandate that:

• Liabilities for former members cannot be reduced by a greater percentage than for active members.
• Benefit reductions cannot be made purely due to termination of plan membership or death, with the exception of reductions to commuted values by the going concern funded status, if permitted by the plan rules.
• The reduction may be prohibited by applicable legislation of another jurisdiction if at the end of at least one of the plan’s last three fiscal years, no more than 10 percent of members entitled to target benefits have a benefit whose reduction is prohibited by that jurisdiction.

Benefit improvements

Benefit improvements would be permitted regardless of the plan’s going concern funded level and would be funded over 10 years beginning on the effective date of the amendment.

Plans may apply surplus to fund the benefit improvement provided that, after the improvement, plan assets are the greater of 105 percent of going concern liabilities and 100 percent plus the PfAD percentage of going concern liabilities.

Previously reduced benefits would be prioritized over other benefit improvements. Any benefit improvement would not be allowed to increase liabilities for active members by a greater percentage than for former members.

Stress testing

The proposed framework would introduce additional disclosure requirements to be included in each valuation report. Each filed valuation report would be required to include results of stress testing of each material risk identified in the plan’s funding and benefits policy. For each material risk, the report would have to disclose:

• An explanation of the rationale for the actuary’s opinion
• A description of the potential effect on the funded position and any changes to benefits or contributions that would be needed to ensure contributions are sufficient to meet the plan’s funding requirements

Governance

The Ministry would require target benefit plans to establish a “funding and benefits policy.” In addition to following the Canadian Association of Pension Supervisory Authorities (CAPSA) guidelines, the funding and benefits policy would be required to include:

• The method for determining the PfAD
• An explanation of how the PfAD, in conjunction with other actuarial methods and assumptions, supports the funding and benefits objectives
• An explanation of how the PfAD, in conjunction with other actuarial methods and assumptions, mitigates material risks

Plan administrators would also need to establish a governance policy that must contain, in addition to the CAPSA requirements, the systems and measures in place, such as the PfAD, stress tests and projections, to identify, quantify and manage material risks to the pension plan or pension fund.

If the final regulations follow the proposal, MEPPs will have one year after the effective date of conversion to establish and file their funding and benefits policy and governance policy documents with the Financial Services Regulatory Authority of Ontario (FSRA).

Both policies would be subject to review within three years from when the documents were established or last reviewed. Any changes to these policies would need to be filed with the FSRA within 60 days.

Communications

Plans would be required to establish and file a communications policy with the FSRA that would establish:

• The main objectives for communication strategies with members, former members and retired members
• The processes for communication of relevant, timely and accurate information to individuals entitled to benefits, employer, trade unions and associations representing members of the plan
• Any additional information that should be included on statements to members, former members and retired members
• An explanation of the different communication needs and how the processes for communication will meet the needs of anyone entitled to benefits under the plan
• Any additional information that will be provided to individuals entitled to benefits and the method used to provide this information other than prescribed statements

Plan administrators would have one year after the effective date of conversion to file their communications policy with FSRA and must review the document at least every three years. Any changes to this policy would need to be filed with the FSRA within 60 days.

Members' communications

The following table summarizes the information that would have to be disclosed to members in addition to those already required by the Regulation.

* Information must be included in annual and biennial statements.

The following is a summary of the information that would have to be included in a notice of proposed adverse amendment:

• The going concern funded ratio of the plan as of the valuation date of the most recently filed report and the going concern funded ratio assuming the proposed amendment is in effect
• Explanation of the going concern funded ratio and a description of how it relates to the level of funding of members’ benefits
• The annual amount of the member or former member’s pension benefit payable at the normal retirement date, assuming the proposed amendment is in effect and assuming the amendment is not in effect
• The annual amount of a retired member’s pension benefit, assuming the proposed amendment is in effect and assuming the amendment is not in effect
• If the proposed amendment is an action taken by the administrator for the purpose of meeting the test for contribution sufficiency for target benefits:
  • The valuation date of the relevant valuation report that identifies the requirement to take such action
  • A statement that contributions to the plan are not sufficient to meet the plan’s funding requirements without amending the plan and that the plan’s funding requirements would be met with the proposed amendment
  • A statement that the proposed amendment is consistent with the plan’s funding and benefits policy
• Statement that the member is entitled to inspect at FSRA or to receive a copy from the CEO of FSRA (after paying a fee) any of the following plan documents: funding and benefits policy, governance policy, communications policy, statement of investment policies and procedures and going concern funding rules

Plan wind-up

Under the proposed framework, the wind-up procedure for target benefit plans would be similar to the current procedure for MEPPs, with certain exceptions as follows:

• Retired members would have the option to transfer their commuted value to a prescribed retirement savings arrangement.
• There would be no requirement for contributions for shortfalls at wind-up. Benefits would be adjusted depending on available assets.

Asset transfers

Asset transfers between MEPPs are permitted under the Pension Benefits Act and the regulation. In the new proposed framework, assets related to target benefits under the original plan would have to be used to provide target benefits in the successor plan.

In addition, the amount transferred from the original plan would be based on the proportion of going concern liabilities transferred rather than solvency liabilities and would be adjusted to reflect pension payments made from the effective date of wind up to the beginning of the month in which the transfer is made.

Transition and conversion

The Pension Benefits Act sets out the process and timelines for plans to convert to target benefits. Plans would have five years from the effective date of the proposed framework to apply for consent to convert.

Plan administrators would be required to engage in good-faith consultation with participating trade unions and associations prior to applying for consent to convert.

The following information would have to be included with the application to convert to target benefits:

• A copy of the proposed plan amendment reflecting conversion
• A statement certifying that the administrator has consulted with any applicable trade union
• A statement from the administrator certifying that the eligibility criteria outlined in the Pension Benefits Act have been satisfied

The effective date of conversion would be within 12 months of the date the FSRA consents to the conversion. Plans must file an actuarial valuation report within nine months of the effective date of conversion.

Action item

The Ministry is accepting comments on the draft regulations until August 12, 2024.

Trustees of MEPPs will need to start considering how best to implement this new regime if it is introduced as proposed. Start with a review of their current policies to decide on the best course of action. A specific funding analysis will determine the appropriate level of PfAD.