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Nov 24, 2020
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New Pension Rules

On September 21, 2020, Ontario Regulation 520-20, which amends the Pension Benefits Act (PBA), was filed.

Under this new Regulation, employers who sponsor eligible defined benefit (DB) plans can defer contributions for up to six months between the period of October 2020 to March 31, 2021. Only private sector employers sponsoring single-employer DB plans are eligible to participate. Multi-employer pension plans, jointly sponsored pension plans, and public sector pension plans, are not eligible to participate.

If a company opts to defer its contributions under Regulation 520-20, it must repay the contributions with interest. The Regulation specifies certain time frames for repayment, and in all cases the repayments must be made by no later than March 31, 2022. If companies find their financial outlook has suddenly improved, they may choose to accelerate their repayments at any time. Once they are caught up, they may return to their regular contribution schedule.

New Conditions on the Deferral

This new Regulation is aimed primarily at helping employers get over a cash crunch as a result of COVID-19 or the lockdown impacts. However, as with other funding relief, there is a risk that the employer becomes insolvent before repaying these deferred payments, and that the deferral could exacerbate any underfunding.

While the Regulation includes standard requirements such as filings with the regulator and disclosure of the deferral in member annual statements, it goes further. The Regulation provides two important safeguards that specifically protect employees by ensuring only those companies that truly need the deferrals are able to access them.

First, the above-described deferral mechanism is only available to employers who, as of October 2020, are up to date on all their payments. If an employer is behind in making required contributions to its DB pension plan, it will not be allowed to participate in the program.

Second, and most importantly, the legislation specifically prohibits companies from using corporate assets for certain purposes during the deferral period.  For example, an employer may not increase the salary, benefits or perquisites, or pay bonuses to its executives for the entre period they are deferring payments. "Bonus" includes both long-term and short-term incentives, and specifically includes stock option awards, meaning even a non-cash award would likely be prohibited. The Regulation broadly defines "executives" to include not only presidents and vice-presidents, but also a wide range of other employees who may hold "any other executive position or office with the employer".  As well, companies are prohibited from paying out dividends or redeeming any of their shares.

Unions and employee advocates have argued for decades that if the government gives employers a break on funding their pension plans, employers should not be able to turn around and increase executive salaries or pay out dividends.  It is interesting that the current government, which has repeatedly slashed employee protections since taking office in 2018, is the first government to make this important connection between the plans funding and corporate decisions about other uses of capital.

A related union and employee concern with funding relief has been the lack of information about the financial state of the employer, which is so important to the financial status of a single employer pension plan.  The previous government passed but did not put into force an amendment to the PBA (s. 98.1) which could have paved the way for administrators and/or employers to be required to provide notice of “disclosable events”.  It was hoped by many that disclosable events would include material changes in the financial position of the employer which would provide notice of impending challenges for pension plan funding.  This provision remains inactive.

These restrictions on executive compensation and dividends during the deferral period will likely mean that employers will not take advantage of this deferral program unless they are truly desperate. Thus, the Regulation provides some relief to companies in need of a break, while preventing companies from taking a business-as-usual approach to executive compensation and dividends as the pension plan bears additional funding risk.

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