In December 2017, Ontario released the highly anticipated details of its consultation

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1 May 11, 2018 Ontario Defined Benefit Plan Funding Reform: Funding Rules Finalized In December 2017, Ontario released the highly anticipated details of its consultation on Reform of Ontario s Funding Rules for Defined Benefit Pension Plans: Description of New Funding Rules (Consultation). Ontario has since finalized its new funding rules for defined benefit (DB) pension plans with the April 20, 2018 filing of O. Reg. 250/18 (Regulation). The Regulation follows a Consultation released in December 2017, that provided a description of proposed regulations and that was discussed in Eckler s Special Notice, Ontario Defined Benefit Pension Funding Reform Moves Closer (December 21, 2017). The funding rules outlined within the Regulation apply to actuarial valuations with a valuation date of December 31, 2017 or later, and filed after April 30, The new funding rules will not apply to specific jointly sponsored pension plans (JSPPs) or to Specified Ontario Multi-Employer Pension Plans (SOMEPPs), but will apply to multiemployer plans that are not SOMEPPs. In addition to funding rules, the Regulation also details changes to the calculation of the annual Pension Benefits Guarantee Fund (PBGF) assessment. The new assessment formula, the subject of a Consultation released in January 2018, will take effect for assessment dates of January 1, 2019 and later. The 2018 Budget announced that the corresponding increase in the PBGF coverage limit to $1,500 per month, and the related elimination of age and service requirements for coverage, will be effective retroactively for plans wound up on May 19, 2017, or later. The Regulation s funding framework is generally similar to what was proposed within the Consultations, although there are some noteworthy changes and clarifications. This Special Notice provides an overview of the Regulation and the new funding framework, as well as details regarding the impact these new funding rules will have on affected Ontario-registered DB plans. Please contact your Eckler consultant to obtain more information about how these changes will affect your organization s plans. 1 A MEMBER OF ABELICA GLOBAL

2 Funding Changes Solvency and Going Concern The Regulation makes several significant changes to both the going concern and solvency funding rules, and specifically outlines the rules governing the establishment and funding of the new Provision for Adverse Deviations (PfAD). Changes to solvency funding rules: Solvency special payments are only required for plans that are less than 85% funded on a solvency basis; Solvency deficiencies are amortized over five years (beginning up to 12 months after the valuation date), but only the portion of the deficiency below the 85% threshold needs to be amortized; and Letters of credit may be used towards special payments with respect to a plan s reduced solvency deficiency up to a maximum of 15% of a plan s solvency liabilities (up to the new 85% solvency funding threshold). Changes to going concern funding rules: Going concern unfunded liabilities are amortized over a period of 10 years (beginning 12 months after the valuation date); Amortization schedules, except those relating to benefit improvements and past service liabilities, are consolidated at each valuation; and Separate amortization schedules must be established for benefit improvements (as discussed on page 3). Calculating and Funding the New Provision for Adverse Deviations (PfAD) Plans must establish and fund a PfAD, a new reserve in the going concern valuation for the plan. Required minimum contributions must be sufficient to cover the PfAD in respect of the normal cost, as well as the amount needed to amortize any unfunded portion of the PfAD in respect of the going concern liabilities. The PfAD is calculated as a percentage of the normal cost and of the going concern liabilities (excluding liabilities associated with future indexation). The PfAD consists of three components: 1. Fixed component The fixed component is based on whether the plan is closed (5%) or open (4%) to new members a closed plan is defined as a plan at least one portion of which, according to the terms of the plan, does not permit new members to join and accrue defined benefits ; 2. First variable component This variable component is based on the plan s target asset allocation to non-fixed income assets 1, ranging between 0% and 23% for closed plans and between 0% and 12% for open plans; and 3. Second variable component The second variable component is based on the plan s going concern discount rate in relation to a benchmark discount rate (BDR) defined in the Regulation for many plans, this variable component will currently be 0%. 1 Fixed income assets include insured contracts, cash, bonds, term deposits, GICs, short-term notes, and t-bills. To be considered fixed income, the asset must meet a minimum credit rating (for example, BBB). Non-fixed income assets include equities and employer-issued securities. Certain other assets, such as real estate, are considered to be 50% fixed income. 2 ONTARIO DEFINED BENEFIT PLAN FUNDING REFORM

3 Combined PfAD for Components 1 and 2 Target allocation for non-fixed income assets PfAD - Closed Plan PfAD - Open Plan 0% 5% 4% 20% 7% 5% 40% 9% 6% 50% 10% 7% 60% 12% 8% 70% 16% 10% 80% 20% 12% 100% 28% 16% The increase in a plan s going concern liabilities that is not funded by a lump sum contribution must be amortized over eight years from the date the amendment takes effect. As noted above, any such payment schedules are established and tracked separately, and may not be consolidated with other going concern amortization schedules. A combination of the old and new benefit improvement rules will apply in respect of plan amendments made before May 1, 2018, or to amendments articulating the implementation of benefit improvements contained in collective agreements that were in effect before May 1, Funding for Indexation Funding will be required for both pre- and postretirement indexing, also known as escalated adjustments. However, the PfAD would not be applied for either the liabilities or normal cost in respect of this future indexation. Benefit Improvements The Regulation prohibits plan amendments to improve benefits unless the plan meets both of the following tests after the improvement: Solvency ratio of at least 80% (down from 85% as originally outlined in the Consultation); and Going concern funded ratio (without the PfAD) of at least 80% (down from 90% as originally outlined in the Consultation). Plans that do not meet the required tests may still improve benefits if a lump sum contribution is made to the pension fund. The lump sum contribution must be equal to the greater of the increase in solvency liabilities or the increase in going concern liabilities resulting from the amendment. In such cases, the plan s solvency and going concern funded ratios must be at least the same before and after the benefit improvement. Contribution Holidays and Surplus Plans that are fully funded (including the PfAD) on a going concern basis, and that have a transfer ratio of at least 105%, may use any available actuarial surplus remaining after these thresholds are met to take a contribution holiday. Note that for public sector pension plans, the solvency ratio replaces the transfer ratio when determining available actuarial surplus. This available actuarial surplus may also be used to pay the cost of a plan s PBGF assessment. Unlike the Consultation, the Regulation does not limit the surplus that may be used in a single year to 20% of a plan s available actuarial surplus. In any year where the intention is to use the available actuarial surplus to take a contribution holiday and/or to pay a plan s PBGF assessment, an annual cost certificate must be filed. In addition, an annual notice advising of the intention to take a contribution holiday must be sent to plan participants, including active, former and retired members, and any union(s) or advisory committee(s). The notice may be included in that year s annual or biennial benefit statements. 3 ONTARIO DEFINED BENEFIT PLAN FUNDING REFORM

4 Transitional Rules and Other Changes For plans where total contribution requirements under the new rules are higher than the total contribution requirements under the old rules, the new funding requirements will be phased in over a three-year period from the date the first valuation report is filed under the Regulation. These plans will not be required to increase contributions in the first year of this transition period. The filing deadline for required valuation reports with valuation dates on or after December 31, 2017, and before March 1, 2018, has been extended to November 30, The filing deadline for required December 31, 2017 reports would normally be September 30, 2018 (nine months after the valuation date). Broader public sector plans receiving funding relief under O. Reg. 178/11 will be subject to the new funding rules for valuations filed after May 1, 2018, with transitional provisions applying in respect of contribution holidays and benefit improvements. Every affected plan is required to set out the obligation of the employer and, where applicable, of employees, to contribute towards the PfAD in respect of the normal cost, the cost of any plan amendment that increases going concern liabilities, and the portion of any solvency deficiency below the 85% threshold. Amendments to clarify these obligations must be made within 12 months after the date the first valuation report is filed under the new rules. Specific content regarding the changes to plan funding rules must be included in the first annual or biennial statement sent to active, former and retired members after the filing of the first valuation report dated on or after December 31, PBGF Changes A Consultation on proposed changes to the PBGF was released for comment on January 19, To pay for enhancements to the fund, which increased the maximum monthly coverage limit to $1,500 and eliminated age and service requirements for future wind-ups, and to help ensure the fund s sustainability, the Consultation proposed numerous changes to the calculation of the annual PBGF assessment paid by employers. Consistent with the Consultation, the Regulation outlines the following: Elimination of the $5 basic assessment per plan member, Elimination of the $250 minimum assessment per plan, Increase to the maximum assessment per Ontario plan beneficiary from $300 to $600, Addition of an assessment component equal to 0.015% of a plan s PBGF liabilities, Increase to the existing risk-based assessment by 50% (subject to the above-noted maximum assessment per member), and Increase to the plant closure/permanent layoff benefit assessment component by 50% for employers that had previously elected to exclude all such benefits when calculating solvency liabilities. The above changes will take effect January 1, In addition, a retail sales tax of 8% is applied to the assessment calculated from the above formula. In addition, effective January 1, 2019, annual or biennial statements must include the estimated transfer ratio of the plan calculated as of the end of the period covered by the statement. 4 ONTARIO DEFINED BENEFIT PLAN FUNDING REFORM

5 Implications Ontario s new funding rules are expected to lead to more stable and predictable plan contributions. However, adjusting to the new rules will present some new challenges. Plan sponsors will need to: Revise member statements to reflect new disclosure requirements, including the estimated transfer ratio for each statement period; Adjust to more stringent rules for the use of available actuarial surplus; Potentially pay for significantly larger PBGF assessments; Review and update plan investment policies; and Reassess de-risking strategies that might currently be in progress. Several unanswered questions pertaining to the new rules also remain. These include: Whether the going concern discount rate assumption should include, or exclude, margins; Whether plans that state that contributions will be remitted as required by the PBA and regulations will need to be amended to specifically address funding obligations for the PfAD and other aspects of the new rules; and If certain non-traditional asset classes will be classified as fixed income assets. While plan sponsors who must file valuation reports dated between December 31, 2017 and March 1, 2018 have been given an extension until November 30, 2018 to file their reports, we expect that many will likely want to file sooner rather than later, and take advantage of the reduced contributions most will see under the new funding rules. This Special Notice has been prepared for general information purposes only and does not constitute professional advice. Should you require professional advice based on the contents of this Notice, please contact an Eckler consultant. 5 Copyright 2018 Eckler Ltd. All rights reserved. Halifax Montreal Quebec City 5 Connect ONTARIO with DEFINED us: BENEFIT PLAN FUNDING REFORM Toronto Winnipeg Vancouver Barbados Jamaica eckler.ca