Ontario Pension Reform

Author:Ms Mary Picard, Heather Di Dio and Mark Dunsmuir
Profession:Fraser Milner Casgrain LLP

The Ontario government has announced several sweeping changes to Ontario pension laws over the last two years. July 1, 2012 is a key date when many (but not all) of the changes will become effective. This FMC Law client bulletin describes most of the Ontario pension changes, and the actions that plan sponsors should take now in response to the changes.

In summary, sponsors of defined contribution ("DC") and defined benefit ("DB") pension plans must ensure that their plan texts provide immediate vesting for all Ontario members, effective July 1, 2012. There is no legal requirement to make other changes to plan texts at this point. However, DB plan sponsors may wish to consider changes to their plan texts in order to try to avoid the potentially costly new "grow‐in" rules described below. In addition, all plan sponsors should consider making additional changes to their plan texts regarding some of the other pension reforms, even though they are not legally required to do so.

Immediate vesting and locking in

Under the current rules, employers can require Ontario members of pension plans to wait two years after joining a pension plan, to "vest." In other words, if an employee terminates employment within the first two years of joining a pension plan, it has been permissible, until now, for plan texts to state that he is not entitled to receive anything (other than a refund of employee contributions, if any).

Starting July 1, 2012, the two‐year vesting rule will no longer be permitted. Ontario is adopting the approach that has long been in place in Quebec: as soon as an Ontario employee becomes a member of a pension plan, he is immediately vested and his benefit is locked‐in. There will no longer be any forfeiture amounts in pension plans with respect to Ontario members.

In reaction to this change, plan sponsors may want to consider lengthening the eligibility period for joining the plan, if it is currently less than two years. Ontario pension law will continue to permit employers to impose a two‐year waiting period to join a pension plan.

Cashing‐out of small benefits

The rules for cashing‐out or "unlocking" small benefit amounts have been overhauled. It is expected that effective July 1, 2012, it will be a lot easier to pay cash to a departing plan member who has a small benefit. In summary:

The threshold amount for cashing‐out has been increased such that administrators can pay a terminating employee a lump sum amount in cash from the pension plan, if the amount of the employee's annual pension is less than 4% (rather than the current 2%) of the year's maximum pension earnings (YMPE) amount. The 2012 YMPE is $50,100; it increases annually. For 2012 that annual pension amount is $1,002 under the old rules, and $2,004 under the new rules. DC plan administrators will no longer have to convert a departing employee's individual DC account into an annual pension amount in order to determine if the cash‐out threshold is met. Under the new rules, the benefit can be cashed‐out if the DC account is less than 20% of the YMPE (in 2012, that's $10,020). Many DB and DC plan texts set out the current small benefit payout threshold of 2% of the YMPE. There is no legal requirement to change plan texts to adopt the higher...

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