Eligibility

Converting to a target benefit plan requires that a plan meet the following regulatory conditions:

• No more than 95 percent of the members of the plan were employed by one employer at the end of the year prior to the conversion date.
• One of the following conditions existed in the last three years prior to conversion:
  • At least 15 employers made contributions to the plan.
  • At least 10 percent of the members were employed by two or more employers.
• For plans that provide both defined benefits (DB) and defined contribution benefits (DC), the market value of the DC assets must be no more than 5 percent of the market value of assets in respect of benefits that will be converted. This requirement is both for conversion and an ongoing basis.
• No more than 10 percent of members can 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 to the pension fund.

Commuted values

All target benefit plans will be permitted to determine commuted values (CVs) using the Canadian Institute of Actuaries’ Standards of Practice. The Standards of Practice allows CVs to be determined using the going concern assumptions.

The new framework includes the Market Value Ratio (MVR), which is the ratio of the market value of assets to the going concern liabilities. The payment of CVs will need permission from the Financial Services Regulatory Authority of Ontario (FSRA) if either of the following circumstances exist at payment:

• The last filed MVR was greater than one and the ratio has decreased to less than 0.9.
• The last filed MVR was less than one and ratio has decreased by 10 percent or more.

Funding rules

Plans that convert to target benefits will not have to fund solvency deficits. In exchange, such plans will be subjected to greater going concern funding. Actuarial valuations will be required annually if a report discloses a going concern ratio below 85 percent.

Contribution sufficiency test

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

• The normal cost of the plan
• The Provision for Adverse Deviations (PfAD) in respect of the normal cost (described below)
• Going concern special payments related to deficits
• Going concern special payments related to any increase in liability and associated PfAD resulting from a plan amendment

Plans may offset the above costs by the amount that the market value of plan assets exceeds the greater of:

• 105 percent of going concern liabilities
• 100 percent plus the PfAD percentage of going concern liabilities

Provision for Adverse Deviations (PfAD)

This is a new component of plan costs that are included in the contribution sufficiency test. It acts as a margin and is a percentage of the normal cost.

Trustees and actuaries will determine the plan’s PfAD in coordination with their 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. The valuation as of the effective date of conversion will have a PfAD deemed to be zero.

Special payments

Special payments referred to above are calculated to fund deficits over a 12-year period. Special payments are to start within one year from the date that the deficit was determined.

If the plan reports a new going concern deficit at the next valuation, then a new schedule of special payments will be established. Each schedule of special payments will continue until the respective deficits are fully funded. Positive plan experience from one valuation to the next may eliminate part of a prior deficit. If so, the plan would have the option to either (i) reduce the dollar amount of special payments or (ii) keep the dollar amount the same but reduce the period of time needed to fully fund the deficit.

Benefit reductions

The process to reduce benefits will have to be specified in the plan’s funding and benefits policy. The regulations mandate that:

• Accrued benefits cannot be reduced if a member terminates or dies. However, CVs can be reduced to the going concern funded ratio, 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 are from jurisdictions that prohibit benefit reductions.

Benefit improvements

Benefit improvements will be allowed regardless of the plan’s going concern funded level. Improvements must be funded over no more than 10 years starting on the effective date of the amendment.

Plans may apply surplus to fund the benefit improvement as long as the market value of plan assets remain equal to the greater of:

• 105 percent of going concern liabilities
• 100 percent plus the PfAD percentage of going concern liabilities

The final Regulations do not require the restoration of previously cut benefits before improving benefits.

Stress testing

The framework introduces additional disclosure requirements to be included in each actuarial valuation report. The additional disclosures are the results of stress testing each material risk identified in the plan’s funding and benefits policy.

For each material risk, the report will have to disclose:

• The actuary’s opinion on how the risk could cause a material impact that would lead to benefit reductions
• The impact on the benefits or contributions that would be needed to pass the contribution sufficiency test

Governance

The Ministry of Finance requires that administrators of target benefit plans create certain policies.

The first is a governance policy. This document will include details on the material risks to the plan and how those risks will be identified, quantified, stress tested and projected. This policy should follow Canadian Association of Pension Supervisory Authorities (CAPSA) requirements.

The second document is a funding and benefits policy. This too should be developed following the CAPSA guidelines, and must include:

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

The third required policy is a communications policy that would outline:

• The main objectives for communication strategies with current and former members
• The processes of communicating relevant, timely and accurate information to members, employers, trade unions and associations representing members of the plan
• Any additional information that should be included on statements to members and former 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 with benefits and the method used to provide this information other than prescribed statements

Target benefit plans will have one year after the effective date of conversion to create and file these three policies with the FSRA. All 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.

Members’ communications

The following table summarizes the information that will 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 will 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

The wind-up procedure for target benefit plans will be similar to the current procedure for MEPPs, with certain exceptions as follows:

• Retired members would have the option to transfer their CV 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 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 will 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.

Administrative penalties

The administrative penalties outlined in the Regulation have been updated to reflect the new target benefit framework.

The following items were added as General Administrative Monetary Penalties (General AMP):

• Failure to issue notice to members, former members and pensioners that the plan has ceased to be a SOMEPP within 60 days
• Failure to file the notice that the plan has ceased to be a SOMEPP with FSRA and employers within 60 days
• Failure to issue notice of plan amendment to a conversion of benefits to target benefits to participating employers and trade unions that represent members within 60 days of registration
• If a plan that provided target benefits no longer meets the criteria specified in the Regulation, the administrator must issue a notice within 60 days to employers and trade unions and file the notice with FSRA
• The assets in respect of defined contribution benefits shall not exceed 5 per cent of the market value of assets for plans that provide target benefits and defined contribution benefits
• If the plan does not satisfy the contribution sufficiency test, the administrator must take corrective action within 90 days after the filing of the actuarial valuation report with FSRA and must file any relevant documents within 120 days with FSRA
• Failure to file the funding and benefits policy, governance policy and communications policy within one year after the effective date of conversion

General AMPs do not have set monetary penalties. Any monetary penalty is set by FSRA.

Transition and conversion

The Pension Benefits Act sets out the process and timelines for plans to convert to target benefits.

The effective date of conversion will be within 12 months of the date the FSRA consents to the conversion. Plans must file an actuarial valuation report with a valuation date that is the effective date of conversion.

Plan administrators will 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
• A statement from the administrator certifying that all benefits provided by the plan that are not defined contribution benefits are proposed to be converted

Within 60 days after a plan ceases to be a SOMEPP, the administrator shall give written notice to each member, former member and retired member of the plan. A plan will cease to be a SOMEPP when a valuation report is filed with a valuation date after January 1, 2025.

Within 60 days of registration of the amendment related to conversion to target benefits, the administrator shall issue written notice that the plan has been amended to every:

• Member, former member and retired member
• Every participating employer
• Any trade union that represents members of the plan

Action item

Trustees of MEPPs will need to start considering how best to implement this new regime and, if they wish to convert, begin the conversion process. Determining a conversion timeline and project plan will be an important first step, along with a review and update of their current policies and the plan rules and regulations. An appropriate funding analysis should be done to help determine the appropriate level of PfAD.

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Segal can be retained to work with boards of trustees and their legal counsel on determining the implications of Ontario’s new permanent framework for MEPPs.