Ontario Eases Rules For Pension Funding?
Ontario is planning to ease the rules around how some pensions are funded and how officials judge the long-term health of those plans.Rob Ferguson of The Toronto Star also reports, Ontario to relax solvency rules for ‘defined benefit’ pensions plans:
The changes would affect how defined benefit plans provided by single employers are funded in Ontario and would reduce the amount of money that they need to invest in plans that are currently undercapitalized. The expected legislation follows a decade of low interest rates and poor returns in which the provincial government has twice been required to help private-sector plans that have failed strength tests.
The new rules, unveiled by the Finance Ministry on Friday, would reduce the solvency funding requirement.
The requirement is a stress test where a pension fund needs to calculate how much would be available in the plan immediately to meet all future obligations. Plans that currently can’t pay 100 per cent of obligations need to make special payments over five years to fully capitalize a plan. Officials say they will now allow plans to have only enough to cover 85 cents for every dollar owed in the future.
Plans that are capitalized over the 85-per-cent threshold would get immediate relief from payments when the legislation takes effect, expected in the 2018 election year. Struggling plans that are financed below 85 per cent would need to pay only up to the new benchmark, making it easier and faster for them to pass the solvency test.
“Everyone deserves a secure retirement. By providing more flexibility, defined benefit pension plans will remain a vital part of our retirement income system in Ontario,” Finance Minister Charles Sousa said in a statement released by his office.
The changes, which cover about one million current and future retirees, won’t affect the benefits that will be paid. While the shift will touch large plans covered by a single employer, pension giants such as the Ontario Teachers’ Pension Plan will be unaffected by the changes.
But Corey Vermey, the director of pensions for Unifor, said that the government did not provide enough for retirees facing an uncertain future if their plans lack funds.
“A single-employer defined benefit pension plan has become a very leaky boat in the sea of pension plans. The risk of insolvency is real to you as a retiree. We think that the balance should be to a view of enhancing a retiree’s benefit as opposed to offering a lesser obligation to the employer,” Mr. Vermey said.
But Toronto’s St. Michael’s Hospital welcomed the news: “Money we were going to have to put aside to meet pension solvency obligations now can be invested in patient care,” the hospital said in a tweet.
To balance the relief, the government will increase the requirements of a second test pension plans must undergo. Pensions must prove they have enough money to fund all current obligations under something known as the “going concern” test. If they fail that test, the plans currently have 15 years to get back to full funding, but Mr. Sousa’s office would cut that back to only 10 years.
As the number of retirees continues to increase in future years and fewer young workers are added, some plans could struggle to return to 100-per-cent funding. Many large employers in Ontario have moved away in recent years from defined benefit plans, which commit employers to providing employees with a certain monthly payment in retirement. Many young workers are now on defined contribution plans, where employers pledge only to invest a certain amount.
The government’s plan will also increase the maximum guaranteed payment a retiree can get from the province’s Pension Benefits Guarantee Fund, from $1,000 a month to $1,500 a month. The fund, which is financed through employer contributions, exists to help retirees in case a company falters into bankruptcy with an underfunded plan. The fund tops up an employee’s pension when it falls short. Employer contributions will rise to cover the increase.
The average private-sector pension in Ontario is $1,300 a month.
Employers feeling the pinch of funding defined benefit pension plans for their staff are getting a break that will result in “huge cost savings,” the Ontario Chamber of Commerce says.The problem in Ontario isn't with jointly sponsored plans. Ontario Teachers' is fully funded and doing well. OPTrust is fully funded and changing the conversation to focus primarily on funded status. HOOPP is super funded and in the best position of any Canadian pension plan.
The provincial government is relaxing the rules so that single-employer plans will no longer have to meet the most strict solvency tests, Finance Minister Charles Sousa announced Friday.
Legislation will be introduced in the fall.
St. Michael’s Hospital welcomed the move, which many private and public sector employers had been urging the government to make.
“Money we were going to have to put aside to meet pension solvency obligations now can be invested in patient care,” the downtown health care institution said on its Twitter feed.
The change is intended to make it easier for companies in the private and broader public sectors to maintain defined benefit pension plans, which guarantee a set level of retirement income.
“By providing more flexibility, defined benefit plans will remain a vital part of our retirement income system in Ontario,” Sousa said in a statement.
“With these changes, we are also ensuring that pension plans are affordable for businesses and benefit security for workers and retirees is protected.”
He added “there will be no impact on the pensions that retirees now receive.”
Defined benefit plans have long been prized because of the predictability they provide workers, but have been under pressure because of high costs resulting from low interest rates and longer life spans for retirees.
Some employers have switched to less expensive “defined contribution” plans, which don’t provide guaranteed levels of income in retirement and depend more heavily on fluctuating market returns.
“Today’s announcement is a positive development that will go a long way in preserving single employer DB (defined benefit) plans, in enhancing competitiveness for Ontario companies and preserving jobs,” said the lobby group Canadian Manufacturers and Exporters.
“It will level the playing field with the U.S. that doesn’t have solvency requirements and Quebec that eliminated solvency funding altogether.”
The solvency test in Ontario required defined benefit pension plans be 100 per cent funded so that, if the plan were to be wound up, there is enough money, given expected investment returns, to meet all future obligations to retirees and current members.
Employers whose plans fell below the 100-per-cent mark had five years to make booster payments to return to that level, often resulting in “excessive and volatile contributions,” the manufacturers’ group said.
Under the new rules, defined benefit pension plans will have to be funded to 85 per cent of solvency to meet the (“going concern”) test of paying out current obligations, but will also have to fund a reserve to offset any risks they could fall short.
Consultations will be held in the coming months to determine the appropriate size for those reserves, finance ministry officials said.
In another measure to offset the risk of easing the solvency test, monthly guarantees from the province’s Pensions Benefit Guarantee Fund will be increased by $500 monthly to $1,500 to eligible workers in the event a defined benefits plan fails.
About one million Ontarians are members of defined benefit pension plans, which provide regular payments in retirement based on length of service and salary levels.
The changes do not apply to jointly sponsored plans such as the pension plan for Ontario teachers or to multi-employer plans in the skilled trades, often sponsored by unions.
Even OMERS has done a great job improving its funded status in the last few years and for all intensive purposes, is fully funded in my book (94% funded status is excellent).
Now, as an aside, the key difference between Ontario Teachers' and HOOPP relative to OPTrust and OMERS is in the form of risk-sharing. The latter two plans guarantee inflation protection, which means no matter what, they never reduce benefits to their beneficiaries.
OTPP and HOOPP have both partially or fully cut inflation protection (otherwise known as cost-of-living adjustments or COLA) when their plans have experienced a deficit in the past. This has been a very useful mechanism to allow them to become fully funded again (watch this OTPP clip to understand why).
OPTrust and OMERS guarantee inflation protection so they have a harder job attaining an maintaining a fully funded status which in my view isn't right (their members need to share the risk of the plan more if they run into trouble).
Still, there's no denying that the problems at Ontario's DB plans aren't with OTPP, HOOPP, OPTrust, OMERS or even CAAT which is also fully funded and has a 50/50 shared risk model.
The problem lies with private-sector DB pensions that are either poorly managed or that don't have the flexibility to address their (going concern) pension deficits. And a lot of these pensions are going to get whacked hard in the near future as rates decline to a new secular low (as the US economy slows).
In this regard, I agree with these new rules to give these private DB plans some more breathing room. Imposing a 100% fully funded status is overly harsh in my opinion.
But I will share something else with you, I firmly believe private companies should not be managing pensions. I would rather see CPPIB or another large public sector entity with great governance responsible for managing the pensions of millions of Ontario workers, backed by the full faith and credit of the province (which admittedly isn't much these days).
Last November, I talked about Ontario's new pension chief, Bert Clark, and the creation of the Investment Management Corporation of Ontario (IMCO). The Government of Ontario mentioned it in its budget recently but we haven't heard much on this entity.
If it were up to me, I would force all large private DB plans to shift their pensions to this new organization and have them managed there and backed up by the province. I don't know why in 2017 we still need private pensions, especially in Ontario where there are a lot of talented pension fund managers.
I understand, the logistics and politics of such a huge undertaking aren't easy, not to mention it might not be legal to do so, but that's too bad because it would be in everyone's best interests, including Ontario's taxpayers.
Below, a couple of clips from OTPP which explain how inflation protection keeps their members' pension in tune and plan from missing a beat.
Also, Ron Mock, OTPP's CEO, was interviewed on CNBC recently discussing their long-term outlook on investing in a changing world. Watch the clips below, very interesting insights (I embedded the full interview clips that are available on OTPP's website here).
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