A new Blakes Pension & Employee Benefits Bulletin includes a summary of key provisions in the second phase of Ontario pension reform. Of particular interest is the discussion of three major changes to the types of benefits and pension plans authorized under the PBA reproduced below.
TYPES OF BENEFITS AND PENSION PLANS
Bill 120 makes three major changes to the types of benefits and pension plans authorized under the PBA. These include the provision of target benefits and optional benefits, as well as explicit authorization for payments out of defined contribution (DC) plans.
1. Target Benefits
One of the new inclusions to this phase of pension reform in Ontario is the addition of target benefits into the scheme of the PBA. This addition was among the recommendations in the Expert Commission on Pensions, A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules (the Expert Report). The purpose of target benefits is to allow for an evolution from those benefits provided under traditional defined benefit (DB) plans and those provided under DC plans. Like traditional DB plans, contributions are to be based on a target relating to projected benefits. Unlike traditional DB plans, if the target cannot be achieved then benefits are reduced.
Bill 120 proposes that a pension plan would provide target benefits where three requirements are met. First, the benefits provided must not be DC benefits. Second, the employer’s contribution obligation must be limited to a fixed amount that is set out in one or several collective agreements. Finally, the administrator must be authorized to reduce a benefit, deferred pension, or accrued pension and the authority is not restricted by the terms of agreements or legislation.
While there is a requirement that employer contributions be limited to a fixed, collectively bargained amount, the target benefit provisions are not limited to jointly sponsored pension plans (JSPPs) or multi-employer plans but should also be applicable to single employer plans provided employees who participate in the plan are represented by a “trade union” (within the meaning of the Labour Relations Act, 1995 (Ontario)) that can enter into a collective agreement with the employer. We note that “trade union” may include certain employee associations that are not traditionally viewed as “unions”.
2. Optional Benefits
Bill 120 proposes allowing members of DB pension plans to make contributions in order to receive optional benefits such as enhanced spousal benefits or an unreduced early retirement pension. Contributions made by members would be used solely for the purpose of providing such optional benefits. Where a plan so allows, members would be permitted to vary the amount of contributions.
3. Defined Contribution Benefits
Currently, options for payment out of DC plans are limited to annuity purchases and transfers to accounts such as Registered Retirement Income Funds (RRIFs) and Life Income Funds (LIFs). Bill 120 proposes to allow DC pension plans to authorize payment of benefits in any manner authorized by the Income Tax Act (ITA), subject to restrictions that may be made in future regulations. As such, in addition to the presently available options, variable benefits may be paid directly from DC accounts, so long as ITA authorization exists and the restrictions provided for in future regulations are met.
Other changes relating to funding, surplus and plan administration are also covered. READ MORE