Ontario Prepares an Overhaul of Pension Funding Obligations

Updated on
  • Solvency funding requirement to drop to 85% from 100%
  • Relief aimed mostly at firms with more retirees than workers

OPTrust CEO Says Ontario Pension Reform Good for Industry

Ontario is easing rules for its pension funds as years of low interest rates, poor equity returns and a looming retiree glut pressure companies.

The biggest of a complex series of proposals would reduce the so-called “solvency funding” requirement of certain plans to 85 percent from 100 percent. That means companies would be in compliance if they had enough to pay 85 cents on the dollar if they were wound-up immediately.

The government announced the measures Friday morning, confirming an earlier report by Bloomberg. The changes come a year after Canada’s most populous province began a review of funding needs for pension sponsors, after having to provide temporary relief in 2009 and 2012 to offset plunging global returns. The measures are subject to consultation, will be formally proposed in legislation this fall and would take effect in 2018, according to government officials, speaking on condition of anonymity ahead of the release.

These would affect nearly 1 million people and roughly 1,150 plans, the officials said. Critically, the changes are aimed at current funding requirements and do not affect payouts for current retirees.

Balancing the changes are a tightening of other amortization requirements and a new Provision for Adverse Deviation reserve fund contribution. There will also be an increase in the maximum guaranteed payment from the province’s Pension Benefits Guarantee Fund to C$1,500 ($1,100) each month from C$1,000 for claimants who meet certain requirements; however employer contributions will also rise.

“By providing more flexibility, defined benefit pension plans will remain a vital part of our retirement income system in Ontario,” Ontario Finance Minister Charles Sousa said in a written statement Friday. The changes are aimed in part at “enabling business to grow and be more competitive,” according to the statement.


  • AFFECTED: Single-employer defined benefit pensions -- largely private plans such as those of universities or major retailers
  • UNAFFECTED: Jointly funded defined-benefit giants like Ontario Teachers’ Pension Plan, Healthcare of Ontario Pension Plan, Ontario Public Service Employees Union; also unaffected are multi-employer defined benefit plans, such as those from trade unions, or any defined-contribution plans
  • NOTE: Defined-benefit plans guarantee a certain payout monthly upon retirement, while defined-contribution plans only guarantee a certain pay-in during a worker’s career. Funding crunches led employers to move away from DB toward DC plans
  • UNCHANGED: Affected funds will continue to have a five-year window to correct if solvency funding drops below mandated level (85% in new rules versus 100% currently)
  • RISK: Solvency funding is an indication of health; therefore the new rules raise the possibility that pension funds could for years keep the level below 85 percent
  • WHAT ELSE?: Another measure of health is "going concern" funding. Currently, companies have 15 years to ensure they reach 100 percent funding. That will be 10 years under the new rules
  • IMPACT: Lower funding needs mean companies that meet current requirements could see substantial amounts of money freed up in the near term; most impacted would generally be those with a higher ratio of retirees than workers, struggling to maintain the current rules. Companies that don’t meet current solvency requirements now need to reach only 85 percent -- not 100 percent -- but will have fewer years to get there. They will also need to pay more into the reserve fund

The government will also change rules for annuities purchased by pension plans from insurance companies -- rather than retaining liability, employers will be fully discharged of obligations when they purchase annuities. It’s expected to raise demand for annuities and lead to a premium for acquiring them, the officials said.

The Ontario government is also considering establishing an agency to administer benefits for pension plans that have been wound up.

Friday’s announcement won support from the Canadian Manufacturers and Exporters industry group, which said the changes will help businesses stay competitive.

— With assistance by Scott Deveau

(Updates with confirmation, finance minister comment in 6th paragraph.)
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