Multi-Employer Benefit Plan Council of Canada
August 12, 2024
Ontario Ministry of Finance
7 Queen's Park Crescent, 7th floor
Toronto, ON M7A 1Y7
Via email: pension.feedback@ontario.ca
On behalf of MEBCO, we would like to thank the Ministry for taking the time throughout this process to meet and discuss our concerns regarding certain matters relating to the proposed permanent framework. However, we continue to have significant concerns with various aspects of the draft Regulations recently released on June 26, 2024.
Our concerns and comments regarding the draft Regulations are set out below. Generally, our overall concerns are:
MEBCO is hopeful that the Ministry will rethink many aspects of the draft Regulations in light of the concerns detailed below and MEBCO is prepared to assist in any manner requested.
MEBCO believes having written governance policies improves the overall positive performance of a pension plan. MEBCO notes that the requirements for policies around governance, funding and benefits, and communication are specific to target benefit plans are not required for single employer plans or jointly sponsored pension plans. On the face of this differentiation, we would see this as a future development for other pension plans. However, we note certain areas of unwarranted negative bias in the draft regulations against target benefit plans and a propensity to focus on the prospect, however remote, for future benefit reductions.
MEBCO would be supportive of these new disclosure requirements for DB MEPPS if similar obligations were imposed for single employer plans and jointly sponsored pension plans. In particular, the Regulations should recognize that single employer plans bear risks such that their DB plan could be terminated at any time or become a DC plan at any time in the future. We recommend deferring the new elements of member communication until such time as the Ministry has equivalent provisions for other Ontario-regulated pension plans.
We note in the recommendation for disclosure in the funding and benefits policy, continued confusion regarding the concept of a benefit reduction. As we will note elsewhere, the Ministry informed MEBCO in 2022 that it did not consider a “benefit reduction” to be something prospective. FSRA does consider a benefit reduction to be one that both impacts accrued benefits (which MEBCO agrees with) and a prospective benefit. We note that the funding and benefits policy content now says boards must consider “… the process for deciding how to reduce benefits provided under the plan, including accrued benefits.” This is a fundamental flaw in the understanding of pension plan communications and funding and must be resolved before any final Regulation. To clarify MEBCO does not consider that a prospective change to a benefit formula is a benefit reduction – prospective changes are often made to address systemic issues such as expected capital market returns, and they are not benefit reductions.
The concept of what is a benefit reduction is a common theme and concern in MEBCO’s view which permeates other concerns, such as the recommendations for reinstatement of “reductions” for terminated persons.
We further note that the funding and benefits, governance and communications policies are now considered to be documents that create or support the pension plan and are therefore required to be filed with the regulator not only upon their creation but on any amendment. MEBCO believes that this is onerous and without parallel for other types of pension plans. While we agree and in fact advocated for these three policies to be created by DB MEPPs if not already in place, filing requirements should be deferred until there is a province-wide overhaul of all policies required by all Ontario-registered pension plans.
Separation of assets
MEBCO agrees with the restriction that assets relating to target benefits shall not be used to pay normal cost contributions for the part of the plan that provides defined contribution benefits. However, tracking expenses separately for the target benefit and defined contribution parts of the plan can be difficult or administratively impossible. Therefore, we recommend that Section 5(b) of this Regulation be amended to refer to expenses that can be reasonably allocated to the part of the plan that provides defined contribution benefits.
Benefit reductions and improvements
Sections 6 and 7 introduce a very prescriptive structure with regard to benefit reductions and improvements. We recommend that this structure be dropped and instead we recommend the Ministry recall that target benefit plans are covered by fiduciary boards of trustees who must abide by fiduciary duties that include the duty of care, the duty of loyalty to plan beneficiaries, and the duty to act even-handedly amongst plan beneficiaries.
We continue to stress that each of these plans has its own set of circumstances, and a one size fits all approach similar to what has been drafted will be problematic. In addition, in some cases, the available options are presented and all MEPP plan members are consulted on the preferred change. The Ministry should respect the process fiduciary boards, along with their professional advisers, use to determine benefits and accept they are made with full view of the risks facing the applicable plan including funding risk, benefit risk, investment risk, operations risk, governance risk and industry risk.
Section 6, which prohibits a lesser percentage change in liabilities due to benefit reductions for members relative to former members does not allow fiduciary boards of trustees to account for all relevant considerations when making these decisions. For example, to address funding issues members may prefer that the future service benefit formula is reduced rather than reducing accrued benefits, but this is not an option for former members as they are no longer earning benefits. This limitation imposed by Section 6 of the consultation draft does not allow Trustees and members to take this course of action, which they may prefer. It also limits the ability of boards of trustees to make plan design changes; for example, reducing a subsidized early retirement benefit in favour of a higher accrual rate for all members.
We also note an earlier concern raised by MEBCO that the Ministry and the regulator, FSRA are not aligned on the definition of a “benefit reduction”. The Ministry advised us in April 2022 that in their view a reduction is a change to an accrued benefit (ie retroactive). FSRA on the other hand is of the view a reduction includes a change to an accrued benefit and a prospective change to a benefit formula that would provide a lower future accrual. Overall, the proposals are problematic from every angle and must be dropped.
The limitations on benefit improvements implemented by Section 7 are also too restrictive in requiring that previously reduced benefits be reinstated prior to implementing other improvements. Fiduciary boards make benefit reductions and improvements with due care in the context of current circumstances and therefore should not be required to reinstate earlier-made reductions. In addition, the data that will need to be tracked indefinitely and the calculations that will need to be performed to comply with Section 7, introduce a significant amount of added unnecessary administrative costs and burden. In such plans where the funding is fixed, added costs lead to reduced funding and possibly reduced benefits for members.
A number of other jurisdictions have implemented permanent target benefit plan frameworks and in none of those cases are such prescriptive requirements regarding benefit reductions and improvements applicable. We recommend that Ontario maintain consistency with other jurisdictions in this respect and consistent with a more principles-based approach.
Certain multijurisdictional pension plans
Sections 8 and 9 of these draft Regulations lead to plans only being allowed to provide target benefits if no more than 10% of their membership is in a designated jurisdiction where a reduction in benefits is prohibited.
We recommend that this threshold should be much higher for the following reasons:
In addition, further clarification is required regarding what is deemed to be a “benefit whose reduction is prohibited by a designated jurisdiction”.
We note that:
We would appreciate that this requirement be amended and/or further details be provided.
Payments
Given that a new funding framework will apply, with new components to be funded and reflected in a plan’s sufficiency of contribution tests, we recommend that plans be allowed to take a fresh start approach with respect to any special payments. That is, all existing special payments established in previous reports can be replaced with a new special payment stream that will amortize any going concern unfunded liability that exists as of the date of conversion over a new 12-year amortization period.
Commuted value
We appreciate that the Ministry has included in the draft Regulations the ability for a target benefit plan to calculate the commuted value of a pension for purposes of Section 42 of the Act
in accordance with section 3500 of the Canadian Institute of Actuaries (CIA) Standards of Practice. This includes the use of the going concern assumptions and the ability to reflect the funded status of the plan.
We note that Subsection 2 of Section 6 of the draft Regulations prohibits the commuted value of accrued benefits to be reduced solely because of the termination of employment.
However, our understanding is that the Ministry will allow plans to rely on the CIA Standards of Practice as written for terminating members, including reductions where the funded ratio is less than 100% It would be helpful if this was further clarified.
Also, the draft Regulations revoke 19 (1.0.1) of the General Regulations. Therefore, after January 1, 2025, MEPPs can calculate commuted values for the purpose of Section 42 of the Act in accordance with section 3500 of the Canadian Institute of Actuaries (CIA) Standards of Practice, including the use of the going concern assumptions and the ability to reflect the funded status of the plan.
The Ministry is aware that the use of CIA Standards of Practice for commuted values was available to all Ontario-registered pension plans in 2020. Only for DB MEPPS did FSRA refuse to implement these standards and that action cost DB MEPPS tens of millions of dollars, if not hundreds of millions of dollars. We are happy to see that this has been changed in this new framework.
Funding concerns
Subsection (2.1) 2 to be added to Subsection 14(2) of the Regulation indicates that a plan has funding concerns, and therefore is required to file an annual actuarial valuation, if a portion of surplus has been allocated to reduce the contribution requirements.
We note that in the event that a non target benefit plan takes a contribution holiday, Regulations only require that the plan file an interim cost certificate. The addition of Subsection (2.1) 2 results in the inequitable treatment of target benefit plans compared to non target benefit plans and we recommend Subsection (2.1) 2 be deleted and not added to Subsection 14(2) of the Regulation. Similar to non-target benefit plans, there can be a requirement for an interim cost certificate in the event that surplus is allocated to reduce contribution requirements.
Stress Testing
The stress testing requirement added as Subsection 14.1 of the General Regulation is onerous and should not be a requirement for actuarial valuation reporting. Requiring this type of analysis at the same frequency as an actuarial valuation is unnecessary and will create a significant amount of added cost. We note that the CIA Standards of Practice reporting requirements already include stress testing in the form of plausible adverse scenario analysis and these requirements should be relied upon without the need for additional stress testing. We also note that all other jurisdictions which have implemented similar target benefit plan legislation do not require such stress testing.
Such analysis and considerations can be part of the setting, and periodically reviewing, of a plan’s funding and benefit policy and should not need to be repeated with each actuarial valuation. Given the long-term nature of these plans, the increased frequency as to which the draft regulations would require this stress testing would be of limited value and provide minimal, if any, further insights into the management and oversight of the plan compared to the analysis that would have been required to be prepared one to three years prior.
The August 2023 Follow-Up Consultation Document issued by the Ministry of Finance indicated that existing MEPPS that wish to convert to Target Benefit Pension Plans would be exempt from the requirement to provide notices of the proposed conversion and notices for the application for consent from the CEO of FSRA to convert to members (active, former, retired and others that receive benefits from the Plan). MEBCO has reviewed the proposed amendments and is pleased to see that those requirements have been removed from the Act under Section 81.0.2.
However, in Consultation Document #4 – Provision of Information Overview – page 5 – last paragraph there is contradictory information indicating that the Plan would be required to include in a notice within 60 days of registration of the amendment to convert to a target benefit plan as follows:
“Notice after registration of an amendment If the amendment relates to a conversion of benefits to target benefits under section 81.0.2 of the Act, the following rules would apply:
We accept that new members will need to be informed of the prescribed criteria, however, requiring a notice within 60 days of conversion is an inefficient use of the Plan’s limited resources. Required disclosures can naturally be made for existing members (active, former, and retired) at the time of the annual (or biannual) pension statement to avoid confusion and unnecessary costs being generated.
The contradictory information regarding notice should be addressed by removing this from any stand-alone regulation, or within the current Regulation 909 regarding amendments involving conversion to target benefits.
Additional criteria re proposed conversion
The Additional criteria re proposed conversion added with subsection 3(1) includes that “Employee contributions to the pension fund in respect of the benefit do not exceed employer contributions to the pension fund in respect of the benefit.” We do not see the need for this requirement and recommend it be removed. Typically, the contributions to these plans are collectively bargained and allocated from a negotiated total wage package, so whether they are classified as employer or employee, they are always coming from the same wage package.
Effective date of conversion
Subsection 5(1) requires that the effective date of conversion must be after the day on which the CEO consents to the proposed conversion and no later than 12 months after that day. This creates uncertainty for plans and boards of trustees on when their actual date of conversion will be and what date they are working towards. Given the requirements and efforts involved with conversion, plans should be able to pick their date of conversion prior to receiving consent so they can then plan accordingly to implement the conversion and all necessary requirements.
As noted above MEBCO might be supportive of some new disclosure requirements for DB MEPPS if similar obligations were imposed for single employer plans and jointly sponsored pension plans. In particular, the Regulations should recognize that single employer plans bear risks such that their DB plan could be terminated at any time or become a DC plan at any time in the future.
We recommend deferring the new elements of member communication until such time as the Ministry has equivalent provisions for other Ontario-regulated pension plans.
Specifically, we are concerned that the draft Regulations has an over-emphasis on negative bias and implications regarding benefit reductions. Recall that persons entering a DB MEPP do so because contributions are required under their collective agreement.
We think it is sufficient for plan communications for new members to point to existing board policies, or summaries of such policies at the fiduciary board’s option, rather than an exhaustive “welcome letter” for new members that is overwhelming and contrary to good communication practices. Many of the items in this proposed Regulation are already provided in the members’ annual statement and that should be sufficient when coupled with the access to information members have regularly provided by DB MEPP fiduciary boards.
We also object to the proposed Regulation regarding proposed adverse amendment. As the Ministry is aware this notice is not required in current Regulation. Further, the calculations required in the proposed notice are onerous if not impossible such as calculations of benefits before and after the proposed amendment. Similar notice requirements do not apply to other Ontario-registered pension plans including single employer plans (ie there is no provision to show a single employer pension plan member the impact of a cancelled DB plan in favour of a DC plan). MEBCO believes this entire proposal should be dropped.
In respect of notice after the registration of an amendment, MEBCO believes the current Regulations are sufficient and the draft Regulation changes should be dropped.
For annual members statements certain elements proposed will not be applicable to DB MEPPs but are suggested as required. For example, the proposed Regulation requires that the members years of employment be provided. Many DB MEPPS do not provide benefits with reference to the metric of years of employment and do not retain this information.
The proposed disclosure introduces new costs to DB MEPPS, for example a calculation of the funded ratio at the date of the statement rather than reference to the most recent actuarial valuation.
Given the errors in the new disclosure requirements, we suggest the current disclosure in annual member statements is sufficient. However, as recommended above, if there is to be a full overhaul of disclosure for all Ontario-registered pension plans, MEBCO would actively participate and advocate for balanced disclosure and communication to all plan members.
The same issues arise in the new requirements for biennial former member statements and retired member statements.
A new requirement for a statement on termination of membership is that the plan include the following:
“An explanation of how, because the plan’s funding and benefits objectives depend on risk pooling, a member could have a lower income in retirement than the accrued benefit if the member chooses to transfer the commuted value of their benefit out of the plan.”
Again, there is no parallel for this information being given in any other Ontario-registered pension plan’s communication. Many plans recommend the terminating member seek financial advice when considering their options under the plan. This is sufficient. We further consider the recommended information could be confusing to a terminating member and perhaps introduce new liabilities for the plan.
The statement requirements for statements on the death of a member, former member or retired member are similarly onerous and with no similar provision in other pension plans. For example, a new requirement is that the plan provide a uniquely calculated going concern funded ratio at the date of the person’s death. This introduces substantial new costs as many DB MEPPS will have hundreds of deaths in any given year.
Further, in the case of a person who is retired, the going concern funded ratio is not relevant and the retired person selected the type of death benefit on their retirement.
Again, MEBCO recommends that the current disclosure requirements remain in place and that, if the Ministry wishes to have an overhaul of disclosure for all Ontario pension plans this be done in a consistent fashion.
Overall MEBCO is concerned that asset transfers are only available between plans that are target benefit plans. There is no provision for asset transfers from a DC plan.to a target benefit plan. In our view this defeats the purpose of using target benefit plans for greater security of lifetime benefits.
MEBCO has reviewed the amended provisions for Wind Up under the proposed regulations and has no comments to make on them.
MEBCO has reviewed the proposed amendments to the Pension Benefits Act concerning certain Family Law Matters and believes that Family Law Valuations that are received on or after the approved Target Benefit Conversion date should be calculated using the Canadian Institute of Actuaries Standards of Practice for calculating commuted values applicable to Target Pension Arrangements which includes the going concern basis rather than the solvency valuation basis. This would reduce administrative complexity and provide consistent and fair treatment of all members receiving valuations on or after conversion.
Thank you for the opportunity to provide further comments. We would welcome any opportunity to meet with the Ministry to discuss our concerns.
Yours truly,
Alex McKinnon, MEBCO President
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