Ontario is modernizing its pension policy framework and playing a leading role in national discussions on improvements to the retirement income system.
Significant initiatives include:
Pension plans are an important source of predictable retirement income for individuals working in both the public and private sectors. A modern retirement income system helps to improve the quality of life for seniors and reduce reliance on public programs in the future.
Canada’s retirement income system is recognized as one of the best in the world. Thanks in part to responsible choices by policy-makers, the CPP is now projected to be sustainable for the next 75 years. Similarly, Ontario’s pension funds are recognized as some of the best-managed funds in the world — a reputation developed through continued commitment to good governance and professional investment management.
Ontario public-sector pension plans are some of the largest in the country. The government sponsors, co-sponsors or provides indirect funding to most of these plans. Pensions are an integral part of the total compensation of public-sector workers, but many of the plans are facing serious sustainability challenges. The government’s objective is to provide public-sector employees with pension plans that are sustainable for taxpayers and plan members in the long term.
The funded position of public- and private-sector pension plans is directly affected by the economic environment, and particularly by below-average equity returns and low long-term interest rates. Some plans are also facing significant demographic pressures.
Most of the largest public-sector plans directly affect the government’s financial statements. The government’s pension obligations — known as pension expense — have increased in recent years and are projected to increase to levels that would crowd out spending for other programs. The government believes that action must be taken now to reduce the growth in pension costs.
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PSPP: Public Service Pension Plan; OPSEUPP: Ontario Public Service Employees Union Pension Plan; TPP: Ontario Teachers’ Pension Plan; HOOPP: Healthcare of Ontario Pension Plan; CAATPP: Colleges of Applied Arts and Technology Pension Plan.
The government is proposing reforms to the framework governing public-sector defined benefit pension plans that build on Ontario’s leadership in pension reform, the recommendations of the Commission on the Reform of Ontario’s Public Services and the Province’s temporary solvency funding relief framework. The measures fall into three categories:
Most of Ontario’s largest pension plans are jointly sponsored. In these plans, known as JSPPs, decisions on benefit levels and contributions are shared between employer sponsors and representatives of plan members. As well, plan members make contributions to pay for the benefits they are earning and are responsible for sharing in the cost of funding any deficits. In most cases, plan members pay for half the cost of their benefits, with the employer matching plan members’ contributions. This model has worked well and has been recognized internationally as a sound model for pension plan governance. However, as noted earlier, the cost of providing these benefits has increased significantly and is projected to continue to rise.
Currently, when a plan experiences a funding deficit, both sponsors will discuss ways to fund the shortfall — through increases to contributions, reductions in prospective benefits, or a combination of the two. If the parties cannot reach an agreement or if the shortfall cannot be addressed through prospective benefit reductions, the Pension Benefits Act requires that the funding gap be met through contribution increases. This has been the experience in recent years as many JSPPs have raised their contribution rates significantly. For example, the contribution rates of plan members and employer sponsors are each in the range of 11 per cent to 13 per cent and are, in some cases, scheduled to increase further.
The government recognizes the demographic and financial market challenges facing these plans and will consult on measures that would help make them sustainable and affordable for members as well as all Ontarians. To meet this goal, the government proposes to focus on ensuring that measures used to improve plan funding do not add to employer and taxpayer expense, beyond what has already been agreed to. The government also wishes to ensure that all jointly sponsored plans move to 50–50 funding between employers and employees.
Following consultations, the government will introduce appropriate legislation to help achieve these objectives. The government will consult with its partners to develop a legislative framework involving the following parameters:
Plans are very aware of these issues and have already begun discussions about reducing benefits to ensure sustainability as well as affordable contribution levels. The sponsors of some JSPPs have already reduced or eliminated the level of guaranteed inflation protection. The government will consult with stakeholders to ensure the framework builds on steps already taken by the parties.
Many Ontario public-sector employees, particularly in the university and electricity sectors, are members of single-employer pension plans. Under these plans, the employer is solely responsible for funding shortfalls. Employers typically contribute more than plan members — in some cases, two or three times more. When these plans are in deficit, as many of them are today, the difference between employee and employer pension costs grows even wider.
As with jointly sponsored pension plans, the government believes that single-employer public sector plan members should share the ongoing cost of their pension benefits equally with the employer. These increasing employer pension costs are absorbing funding that is critically needed for public services. The government will consider a variety of tools to enhance the sustainability of single-employer public-sector pension plans, while freeing up funds for public services. The government:
Many of Ontario’s defined benefit public-sector plans have a relatively small amount of assets and members (for example, about 50 plans have assets of less than $1 billion), and each one has its own investment management function. Not only does this duplicate costs and prevent economies of scale, but it also means that these plans cannot access higher-return investment opportunities that are available to larger investment pools.
A recent paper by Alexander Dyck and Lukasz Pomorski of the Rotman School of Management suggests the largest pension plans (those with average assets of $37 billion) outperform smaller plans (those with average assets of $1 billion), with up to half the difference due to lower cost of internal management.
“Larger plan size is associated with better performance of the entire pension plan portfolio. The effect is economically sizeable: returns on the largest plans are higher by 43 to 50 basis points per year.”
A. Dyck and L. Pomorski, ”Is Bigger Better? Size and Performance in Pension Plan Management,“ Rotman International Centre for Pension Management Research Paper, 2011.
These results suggest that higher returns generated through the consolidation of pension fund assets could benefit public-sector employers, plan members and taxpayers.
Other jurisdictions in Canada and internationally have identified benefits of pooling pension plan investments and created new entities to manage these pooled assets.
The government intends to introduce a legislative framework in the fall of 2012 that would facilitate the pooling of pension fund assets. This could be achieved either through a new investment management entity or by building on existing large public-sector pension plans.
This is a complex undertaking and the government will seek the best possible advice on key decisions such as leadership and potential governance models. The government will appoint an adviser to lead the implementation process. This individual will work with plans and other stakeholders to develop recommendations on a model for managing these pooled assets.
The adviser will work closely with individual plans to ensure that they are consulted on the new approach and have input into structural and leadership issues. The government intends to provide an appropriate transition period, which is critical to effect these changes.
As announced in 2010, Ontario is committed to improving the retirement income system through a two-track strategy, focusing on a modest, fully funded enhancement to the Canada Pension Plan (CPP), supplemented by pension innovation to expand retirement plan coverage and to encourage lower-cost savings options.
Ontario continues to support a modest, phased-in and fully funded enhancement to the CPP to help ensure adequate and predictable earnings replacement for future retirees. This change is the core element of an effective national retirement income system strategy.
Any CPP enhancement must be fully funded. Employees and their employers would pay for the additional benefits as they are earned, with full implementation occurring over a 40-year period.
Concerns have been raised about the timing and impact of an increase in contributions in the current challenging economic environment. The federal government and provinces need to develop a phase-in strategy that ensures that any changes from a CPP enhancement would be manageable for employers and employees. A notice period followed by a gradual phase-in would allow time for them to adjust to changes in the contribution rate. For example, in the 1997 CPP reforms, new contribution rates were phased in over a seven-year period.
In December 2011, federal and provincial finance ministers agreed to report back at their next meeting on what constitutes a modest enhancement to the CPP. This meeting is an opportunity to develop a responsible and achievable plan to enhance the CPP in a way that is predictable and manageable for employers and employees. To this end, Ontario will continue to collaborate with its federal and provincial partners.
Pooled registered pension plans (PRPPs) are intended to make it easier to save for retirement by providing employees and the self-employed with a new type of simple, low-cost savings vehicle that is professionally managed and portable. Pooled registered pension plans are intended to:
On November 17, 2011, the federal government introduced Bill C-25, the Pooled Registered Pension Plans Act, as a first step in setting out the legislative framework for PRPPs that applies to federally regulated industries and employment in the territories. The federal government also announced proposed amendments to the federal Income Tax Act in December 2011 to accommodate PRPPs. Provincial legislation and regulations are required to implement PRPPs in Ontario and other provinces.
Ontario believes that the protection of plan members is critical to the success of PRPPs. In a for-profit environment, priority must be given to the interests of plan members.
Ontario has a number of concerns with the federal model as currently proposed. For example:
Ontario will continue to work collaboratively with other provinces and the federal government to develop this model. However, Ontario believes the implementation of pension innovation should be tied to CPP enhancement as part of a comprehensive approach.
With the unanimous passage by the legislature of two major pension reform packages in 2010, modernization of Ontario’s employment pension system is well underway. Regulations are being drafted that would implement many of these reforms.
For example, later this spring the government intends to post draft regulations on the Regulatory Registry that would:
Additional postings scheduled for later in 2012 include amendments that would:
The Pension Benefits Amendment Act, 2010, provided that, on dates to be proclaimed:
To allow plans to make the administrative changes to accommodate these new requirements, the government is announcing its intention to proclaim these provisions effective July 1, 2012.
Ontario permits locked-in account owners to withdraw funds in cases of financial hardship. The government has completed its administrative review of the financial-hardship unlocking program announced in the 2011 Budget, and intends to restructure the program to create a simpler, more streamlined process to access locked-in funds.
Consistent with the one-step application procedure for federally regulated locked-in accounts, consent of the regulator would no longer be required to withdraw money for reasons of financial hardship. Instead, applicants would be able to request withdrawals directly from their financial institutions. This change would align financial-hardship unlocking with all other forms of access to locked-in accounts, where applications are made directly to financial institutions.
The government intends to post corresponding draft regulatory amendments to the Regulatory Registry for public consultation. Over the next two years, the government will monitor the new application procedure to evaluate its effectiveness.
The government is proposing to extend solvency funding relief to sponsors of private-sector defined benefit pension plans while helping to protect the security of pension benefits.
Sharp declines in long-term interest rates during 2011 have increased the solvency liabilities of many pension plans while volatile global financial markets have limited investment returns. To support jobs and growth in the face of this challenge, temporary solvency relief measures introduced in 2009 would be extended. Additional flexibility would also be provided to sponsors when funding their pension plans.
Consistent with the 2009 solvency funding relief, when filing the first actuarial valuation report dated on or after September 30, 2011, a plan administrator would be able to:
As announced by the government in August 2010, regulations that would permit employers to use irrevocable letters of credit from financial institutions to cover up to 15 per cent of pension plans’ solvency liabilities would be put in place this spring. Letters of credit would provide employers with an effective tool for managing financial resources, while ensuring assets are available in the event of employer insolvency.
Additional flexibility would also be introduced by permitting solvency and going concern special payments to be amortized beginning one year after a plan valuation date. Consistent with the rules for jointly sponsored pension plans, this provision would reduce cash-flow pressures on employers required to make lump-sum contributions following actuarial valuations.