New target benefit plan framework 'more appropriate and based on fiduciary duties'

Proposed framework requires a number of new polices but will provide flexibility so trustees can continue to manage prudently

New target benefit plan framework 'more appropriate and based on fiduciary duties'
Domenic Barbiero, Principal, Pension at Eckler

After over 20 years of lobbying and getting by with temporary funding rules, on September 1, 2023, the Ontario government has proposed a new funding framework for Target Benefit Plans, reports Eckler in a ‘Special Notice.’ After an initial proposal in March 2023 that many in the industry claimed missed the mark, the government has released a more appropriate funding framework based largely on a principles structure that relies on trustee fiduciary duties to properly, and prudently, manage their pension plans, although there are some restrictions for benefit adjustments and detailed prescriptive requirements for the new required policies.

“This gives plan administrators and boards of trustees who operate in the multi-employer plan space more certainty around what funding requirements will be,” says Domenic Barbiero, principal, pension at Eckler. “Multi-employer plans have been operating under a temporary framework in Ontario since 2007. We think plan administrators and boards of trustees will be very happy to have a permanent framework in place on which they can base their analysis and manage on an ongoing basis while knowing what the permanent rules are.

“A number of provinces have already implemented their permanent framework for multi-employer plans and Ontario is one of the last jurisdictions to do so.”

The proposed framework requires trustees to establish a number of policies – funding and benefits, communications, as well as overall governance. Trustees will determine the appropriate level of margins, justified through risk analysis, and which many plans already regularly conduct. The recently released draft ‘Canadian Association of Pension Supervisory Authorities (CAPSA) Pension Plan Risk Management Guideline’ will be instructive for the risk analysis and plans will be required to implement (if not already in place) a comprehensive member communication program which must include an evaluation of the program.

Eckler says this principles-based approach goes a long way to achieve the government’s goals of providing certainty, increasing transparency, and improving equity.

Eligible plans

Most Specified Ontario Multi-Employer Pension Plans (SOMEPPs) will be eligible to convert to a Target Benefit Plan provided they satisfy these four conditions:

  1. Employer contributions are fixed;
  2. Benefits can be reduced;
  3. No more than 95% of members employed by one employer; and
  4. There are at least 15 employers or at least 10% of members were employed by two or more employers.

Trustees will be required to establish a governance policy as well as a funding and benefits policy. The proposed framework provides a lengthy list of items each policy must address. Eckler says it is likely that the Financial Services Regulatory Authority of Ontario (FSRA) will expect trustees to comply with the CAPSA guidelines on these policies.

Some of the elements addressed include removal of solvency funding requirement, a Provision for Adverse Deviation (PfAD), and requirement to file a valuation report every three years. However, if the going concern funded ratio falls below 85%, valuation reports will need to be filed annually.

In addition, lump sum benefits (typically for terminated members who elect to transfer their benefits out of the plan, death benefits, and marriage breakdown) will be determined on the plan’s going concern funding basis. This is consistent with actuarial professional standards as well as legislation in other jurisdictions.

Trustees may amend the plan document to adjust the lump sum amount based on the plan’s financial position. This would apply to lump sum amounts for terminated members and marriage breakdown. Plans applying this adjustment will be required to advise members of the amount and impact of the adjustment.

Benefit improvements will be allowed regardless of the plan’s funded level. Any increase in the going concern liabilities and the PfAD on the increase will need to be funded over 10 years.

Welcomed news

SOMEPPs have successfully navigated the numerous challenges that pension plans have faced since solvency funding requirements were temporarily removed in 2007. The proposed framework is welcomed news that will provide flexibility and allow trustees of Target Benefit Plans to continue to prudently manage their plan in accordance with their fiduciary duty. Given that SOMEPPs have been operating as target benefit plans for decades, for most plans, there will be no impact on members by moving to the proposed target benefit framework. Although there are details to understand, we believe that the framework will promote long-term sustainability for target benefit plans and will rely on enhanced governance instead of prescriptive rules.

“This is a  move in the right direction, and an improvement relative to the initial consultation,” says Barbiero. “We're happy that the Ministry of Finance listened to the different points that were made. But, although there is some improvement and some moves in the right direction, there's also a number of additional requirements that boards of trustees currently aren't required to fulfill. There will definitely be some work to comply with the new framework, both initially and an ongoing basis.

“There are also restrictions in the proposal, related to benefit adjustments, and that will put additional constraints on boards of trustees in overseeing their plans. That's something that will need to be taken into consideration.”

Barbiero says plans will have to take a step back and look at what their current governance structure is and what they have in place. “Then they can see how that fits in relative to the new requirements in the Ministry of Finances proposal and determine what needs to be done to either modify or implement new policies in order to be able to comply with the new framework.”

He adds that there are “definitely points that need clarification.” Eckler and other industry stakeholder will reach out to the Ministry of Finance “to get further clarification on some of the additional details that are new in the second iteration of the consultation.”

The consultation period for the current proposal is open until October 17.