Law Times

Law Times • augusT 21, 2017 Page 11 www.lawtimesnews.com Change anticipated to make plans more affordable Pension sponsors hopeful about new funding framework BY MICHAEL MCKIERNAN For Law Times P ension sponsors are cau- tiously optimistic about Ontario's new funding framework for defined- benefit plans, according to law- yers in the field. The long-awaited reforms rep- resent a step away from onerous solvency funding requirements in favour of going-concern valu- ations, says Toronto lawyer Jana Steele, a past chairwoman of the Ontario Bar Association's pen- sion and benefits law section. "It's a welcome change for defined-benefit sponsors in the province, because it's going to make their costs a bit more pre- dictable and plans potentially more affordable," says Steele, a partner at Osler Hoskin & Har- court LLP. Provincial law currently re- quires most private DB plans to report their funding ratios on a solvency basis, a method that calculates what percentage of the fund's liabilities it could pay off using its existing assets if it were forced to wind up immediately. Any shortfall must then be made up with a special payment spread over five years. Elizabeth Brown, the Toron- to-based chairwoman of the pension and benefits practice group at Hicks Morley Hamilton Stewart Storie LLP, says solvency special payments have become "crippling" for employers over the last few years as low interest rates and poor market returns sent funding ratios plunging. Going concern valuations, by contrast, assume the plan will continue indefinitely, smooth- ing short-term f luctuations in market conditions. Although average solvency ratios of pension plans in On- tario have improved generally since the government began its review, some private employ- ers have been forced to take ad- vantage of temporary solvency relief measures introduced by the province, while more stable plans sponsored by public sector employers operate under differ- ent rules. "The system has become a patchwork of exceptions and special situations, so I think that pointed to the need for some more systemic change," Brown says. She says she's waiting for the provincial government to unveil detailed legislation and regula- tions, expected later this fall, be- fore delivering her final verdict on the changes, but she says her clients are "hopeful" they will have a positive impact. "Sponsors were no longer able to sustain the large and very volatile solvency payments they are required to make under the current regime. That has been going on for many years and has caused many to stop offering de- fined benefits plans altogether," Brown says. "Logically, you would think nothing can be as bad as the hor- rendous solvency requirements, but there's still some wait and see going on." Under the planned changes, which are the product of more than a year of consultations that attracted 90 submissions from interested parties, pensions with funding ratios of 85 per cent and above will no longer have to fund themselves on a solvency basis. The province estimates that the vast majority of plans will meet the 85-per-cent threshold. According to a recent re- port by the Financial Services Commission of Ontario, it says around 15 per cent of DB pen- sion funds fall below that mark and will have to continue mak- ing special payments according to the old rules. In what Steele calls a "trade- off " for the increased risk that plans wouldn't be able to cover their commitments to retirees in the event a sponsor goes under, the province has developed en- hanced going-concern funding rules that shorten the amortiza- tion period for shortfalls to 10 years from 15 years. In addition, pension plans will need to create a reserve fund called a Provision for Adverse Deviation, designed to protect beneficiaries should administra- tors' estimated market returns prove overly optimistic in cases where a sponsor suffers a finan- cial collapse. The province has also prom- ised to boost the maximum amount it will cover under the Pension Benefits Guarantee Fund, a government-run insur- ance program for plans with bankrupt sponsors, to $1,500 from $1,000 per month. "By providing more f lexibili- ty, defined-benefit pension plans will remain a vital part of our re- tirement income system in On- tario. With these changes, we are also ensuring that pension plans are affordable for businesses and benefit security for workers and retirees is protected," Ontario Finance Minister Charles Sousa said in a statement announcing the move. In its own statement on the changes, the Canadian Asso- ciation of Retired Persons lent its support via its vice president of advocacy, Wanda Morris, who commended the government for its focus on "improving finan- cial security for retirees. "With unprecedented gains in longevity and historically low interest rates, defined benefit pension plans have experienced significant challenges in recent years. "We are pleased to see that the government has taken a balanced approach to funding reform by providing welcome relief to plan sponsors while also improving plan security for pen- sion recipients," she added. Brown says the lack of detail about the size of the required PfAD and the prospect of in- creased employer premiums to cover the swollen PBGF pay- ments are part of the reason her clients have yet to fully embrace the changes. "We've exchanged what has become a volatile and unwork- able solvency regime for an en- hanced going concern regime, the exact scope and magnitude of which remains unknown," she says. "Anyone with a funding ratio over 85 per cent is probably feel- ing good, but they don't actually know what it will cost them. De- pending on the form and how onerous it is, it may present some difficulties." Kyle Lambert, a lawyer in the Ottawa office of McMillan LLP, says he suspects some em- ployers would have preferred the reforms to go further by eliminating solvency funding requirements altogether, espe- cially those in the minority with funding ratios below the 85-per- cent threshold. "If you have a smaller plan that's stuck around 50 per cent and struggling to stay af loat, there's still a significant burden there," he says. Last year, Quebec eliminated solvency funding requirements for privately sponsored pension plans after a consensus among plan sponsors and members emerged in favour of the going- concern standard, coupled with its own version of Ontario's new PfAD. Lambert says Ontario's more conservative approach may not be enough to stop employ- ers from abandoning DB plans in favour of the typically less generous defined-contribution model. "This is just the latest of a number of moves that seemed designed to keep as many pen- sion plans af loat as possible, but I'm not sure if it really matters to a sponsor that is thinking of moving to DC," he says. "The province seems much more focused on preventing the next Nortel than on pre- serving every single DB plan out there." LT want a stable and predictable re- tirement income," Bauslaugh adds. Izhak Goldhaber, senior vice-president at Lawyers Fi- nancial, says qualifying for pen- sion plans such as this could soon become a "more promi- nent benefit" of retaining or cre- ating a corporate structure for legal practice if federal Finance Minister Bill Morneau follows through on his plans to crack down on "income sprinkling" and other tax-saving strategies employed by professionals. In a statement announcing a review of tax planning using private corporations, Morneau said many wealthy Canadians are "exploiting the tax rules de- signed to help business thrive" by spreading income among family members to reduce indi- vidual income tax levels, hold- ing income in the business to be taxed at the lower corporate rate or converting income to capital gains. "These tax advantages are in place to help these businesses reinvest and grow, find new cus- tomers, buy new equipment and hire more people. We want to make sure those rules are used to do just that, and not to give unfair tax ad- vantages to certain — often high-income — individuals," Morneau added. But even if the ministry's consultation results in tighter rules, Goldhaber says incorpo- ration will still provide a mecha- nism for employment. "To be eligible for the pen- sion, you need to be an employ- ee in law. If you're an associate or if you have a professional corpo- ration, that establishes the em- ployer-employee relationship," he explains. LT Review of tax planning underway Continued from page 10 FOCUS Medico/Legal Your case is too important. You deserve the right EXPERT WITNESS. We offer unparallelled expertise for your most catastrophic injury cases. Direct access to hundreds of specialists from all areas of healthcare expertise. A top provider of cost of care reports for your most catastrophically injured clients. More than 2,000 malpractice, personal injury and class action cases. 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