The Ontario Pension Benefits Act Regulations (Regulations) have been amended by O. Reg. 329/12 to implement solvency funding relief measures for private sector defined benefit (DB) pension plans. The new solvency relief measures are similar to the measures introduced in 2009 and consist of:
- Up to a 12-month deferral of new amortization schedules,
- Consolidation and re-amortization of existing solvency deficiencies over a five-year period, and
- Amortization of new solvency deficiencies over a 10-year period, subject to a process which will allow members to object to this relief option.
Unlike the 2009 relief measures, the deferral for up to 12 months of new amortization schedules becomes a permanent feature of Ontario funding requirements. In addition to these changes, the filing deadline has been extended for valuations with effective dates from September 30, 2011 to May 30, 2012. Such valuations can now be filed by February 28, 2013.
This Advisory summarizes the new solvency funding relief measures and will be of interest to private sector DB plan sponsors with plans registered in Ontario.
Qualifications for Solvency Relief
Under the amended Regulations, the solvency funding relief is only available to DB pension plans established prior to September 30, 2011, including plans that are a successor to a pre-existing plan. Certain types of plans are excluded, including specified multi-employer plans and plans with special funding rules (e.g. the General Motors and Stelco plans). Plans eligible for broader public sector relief also do not qualify under these funding relief measures, even if the plan does not apply for the broader public sector form of relief.
Deferral of new Amortization Schedules
For valuation reports with an effective date on or after September 30, 2011, commencement of any new going concern and solvency schedules can be deferred for up to 12 months after the valuation date. No election filing or member notification is required.
Temporary Solvency Relief
The relief is available as a one-time election and must be elected for the first valuation report filed with an effective date on or after September 30, 2011 and before September 30, 2014 (Solvency Relief Report). The written election of solvency relief must be submitted to the Superintendent of Pensions (Superintendent) no later than the day the Solvency Relief Report is filed.
Consolidation of Prior Solvency Schedules
The remainder of solvency deficiencies established in previous valuation reports can be consolidated and re-amortized over five years. The administrator is not required to provide advance notice to plan members or allow them to object when making this election, but a notice to advise members of the election is required.
Extended Amortization of new Solvency Deficiency Over 10 Years
The amortization period for a new solvency deficiency established in the Solvency Relief Report can be extended to a maximum of 10 years. Under this option, plan administrators are required to notify active, deferred vested and retired members in advance and the administrator may not proceed if more than one-third of voting members submit a notice of objection within the prescribed time period. (A minimum of 45 days must be provided to voting members to indicate their objection.) Since the filing of the Solvency Relief Report for many plans is due by February 28, 2013, employers who want to elect this option may need to start the process immediately.
Accelerated Funding for Future Amendments
Where temporary solvency relief elections have been made, accelerated going concern funding will be required for future amendments implemented during the relief period. Any increase in a going concern unfunded liability arising from an amendment must be funded over a period of no more than five years. This accelerated funding requirement does not apply to amendments required by law.
All temporary solvency relief options require delivery of a notice of election to members describing the relief option to be applied under the plan and containing prescribed information that includes estimates of employer contributions that would be required with and without the election and an explanation of the impact that the election will have on pension benefit security. As noted above, the 10-year amortization option also triggers an advance notice and a chance for members to object. A union that represents active members of the plan will exercise the right of objection on behalf of members in the bargaining unit. In addition, where the 10-year amortization option is elected, the administrator must send a progress report each time that it files a valuation during the relief period.
Further information on these measures is provided on the website of the Financial Services Commission of Ontario.
The implementation of the much anticipated solvency funding relief for private sector DB plans will be welcome news for many employers with DB plans who are experiencing significant demands on their cashflow in the current economic environment.
Employers should consider the merits of electing either or both of the temporary solvency relief options in light of their pension funding strategy and the potential reaction of plan members.
Providing funding relief notices can present some challenges for plan administrators, but may provide an ideal opportunity to also communicate with employees regarding pension and benefits issues other than solvency relief.
The possibility that members may object to the 10-year amortization option may prove to be a significant hurdle to seeking this type of relief for many employers. Given the deadlines imposed by the Regulations, some employers who want to elect this option must contemplate starting the process immediately.
This Advisory is not intended to constitute or serve as a substitute for legal, accounting, actuarial or other professional advice.