On March 8, 2019, the Financial Services Commission of Ontario released a Frequently Asked Question document summarizing key points on the new discharge for the purchase of a pension for a former or retired defined benefit pension plan member where certain conditions under the Ontario Pension Benefits Act and Regulation 193/18 have been met.
Who does the new discharge apply to?
Section 43 of the Act permits the purchase of annuities in respect of DB pensions provided to former and retired members. Effective July 1, 2018, a new section 43.1 of the Act provides single-employer DB pension plans with a full discharge of the obligation to pay pensions to former or retired members for whom a buy-out annuity has been purchased, subject to meeting the requirements of the Act and Regulation.
As the FAQ document points out, only former and retired members are currently eligible for the discharge. FSCO takes the view that an annuity purchased for a former and retired member that includes all the pension benefits payable in respect of the former or retired member (including, for example, any future survivor pension payable to a spouse, a pension for a dependent child, a guarantee period, or a pension payable to a former spouse as a result of a marriage breakdown) can result in a discharge of the full pension if the requirements for a discharge are met. The FAQ suggests that this discharge also applies to the payments made to a spouse, former spouse, child or other beneficiary after the former or retired member passes away, although this is not explicitly stated in the legislation.
In FSCO’s view, a surviving spouse’s pension, a pension for a dependent child or a guarantee period is not discharged if purchased on a standalone basis (i.e., without the underlying pension for the former or retired member being purchased).
Bill 57 will extend the discharge provisions to payments to surviving spouses once it is proclaimed into force and accompanying regulations are adopted. However, other forms of pensions payable to dependent children, beneficiaries and former spouse will still not be subject to the discharge.
The FAQ document points out that, in some cases, a pension plan administrator may wish to purchase a pension for a member whose benefits are frozen under a plan’s DB component but who is still active under the defined contribution component of the same pension plan. In such circumstances, the member is still considered an active member of the plan and therefore is not eligible for the discharge.
In some cases, an individual pension plan may be precluded from meeting the funding requirements for the discharge upon purchasing a buy-out annuity due to restrictive funding rules of the Canada Revenue Agency. In such circumstances, the discharge is not available.
The FAQ document indicates that, if a plan administrator wishes to purchase annuities for active members as well as former and retired members, these may be purchased through a single transaction under both sections 43 and 43.1. The discharge will not apply to active members, but it can be applied for at a later time after termination or retirement of the active members. The requirements of the Act and Regulation for the discharge would have to be met at that later time.
Filing requirements
In order to obtain a discharge, a certificate of compliance signed by an actuary must be filed with FSCO. FSCO points out that the discharge is gained by operation of law upon meeting the requirements of the Act and Regulation, and that FSCO does not grant the discharge. Nevertheless, FSCO will acknowledge receipt of the certificates and may from time to time, review them for compliance.
The FAQ sets out certain expectations for the certificate. In addition to the requirements specifically mentioned in the Regulation, FSCO states that the certificate should specifically confirm compliance with the notice requirements and the requirements applicable to the annuity under the Regulation. In addition, FSCO states that the certificate should set out the solvency ratio after the annuity purchase, as required under the Regulation, and the work done to support the development of that ratio. It also requests opinion statements on the data, assumptions and method employed in the calculation of the solvency ratio after the annuity purchase.
A copy of the annuity contract and the names and addresses of those covered by the annuity purchase must also be filed with FSCO.
Solvency funding requirements
If the plan was fully funded on a solvency basis in the most recently filed actuarial valuation report before the purchase, it must be fully funded on a solvency
basis on the day following the annuity purchase. If the plan was less than fully funded on a solvency basis in the most recent AVR, a plan administrator must ensure the plan is at least 85 per cent funded on a solvency basis and funding is not worsened as a result of the annuity purchase. FSCO has confirmed that a top up payment can be made in order to meet the 85 per cent threshold, but such report must be filed prior to the date the actuarial certificate of compliance is filed.
Reporting requirements following discharge
Following a discharge under section 43.1 of the Act, plans no longer need to provide biennial statements to discharged former or retired members beginning in the fiscal year in which the annuity is purchased and discharged. However, outstanding statements for prior fiscal years in which the individual was still a former or retired member at year-end are still required.
Discharged former or retired members will no longer be reflected in the Annual Information Return starting with the fiscal year in which the annuities were discharged. Liabilities of discharged former or retired members do not need to be included in an AVR and Actuarial Information Summary; however, a record of the annuity purchase and discharge will need to be reflected in the first AVR and AIS that follows the purchase. Pension Benefits Guarantee Fund Assessment Certificates filed in the year of the annuity purchase must include discharged former and retired members for whom annuities were obtained during the year, as the assessment is based on the number of former and retired members at the end of the previous fiscal year.
Other items to consider
FSCO has clarified that, for purposes of the Regulation, per industry practice, the date of purchase of an annuity is the date the administrator enters into a contract with the insurer to purchase a pension. Generally, this will be the date the administrator accepts the winning bid.
FSCO has also clarified that a buy-in can be converted to a buy-out with discharge by following the requirements set out in section 43.1 for former or retired members. The “date of purchase” in this scenario would be the date of conversion or the date on which both parties enter into a binding commitment to the buy-out annuity.
A discharge under section 43.1 is only applicable to Ontario former and retired members. FSCO indicates that the discharge provisions apply to Ontario members of plans registered in other jurisdictions, but the administrator would need to be able to prove compliance with the Act for the Ontario members. The discharge provisions, however, do not apply to non-Ontario members of a plan registered in Ontario. FSCO does not comment on the provisions of other provinces that may provide a discharge to non-Ontario members of plans registered in Ontario.
FSCO suggests that, although the Act does not specifically require permissive plan language regarding annuity purchases, it is not certain whether a tribunal or court might decide that such language is required. As a result, FSCO suggests that plan sponsors should consider the additional certainty that may be gained by ensuring that the plan text does in fact contemplate and permit annuity purchases in settlement of accrued DB pensions.
Transfer deficiency restrictions do not apply to annuity purchases under section 43.1 of the Act.
Comment
The FAQs provide useful clarification of FSCO’s expectations and beliefs in regard to obtaining the discharge under the Act for buy-out annuity purchases, as well as the impact on required filings with FSCO. Given that the Act’s provisions provide the discharge and they have not been interpreted by a court or tribunal, FSCO’s guidance does not provide absolute certainty with respect to obtaining a discharge. Plan sponsors considering an annuity purchase should consider whether to amend their plan provisions to explicitly authorize such purchases and how to deal with concerns over members in other jurisdictions, and purchases for surviving spouses, dependent children, beneficiaries, former spouses and suspended active members, if applicable.
David Gruber and Andrew Zur are pension and benefits lawyers with Morneau Shepell Ltd.