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February 2, 2018

Ontario’s government has been debating reforms around its defined benefit pension plans since late last year and, on January 29, 2018, the consultation period ended with a raft of changes.

The proposed new laws address the funding of employee pensions, and how officials judge the long-term health of such plans.

So what impact will the rule changes have on pension plans registered in the province?

“Essentially, the changes will reduce the amount of money single employer plans need to invest in plans that are currently undercapitalized,” explains Gaurav Mathur, from JLL’s Capital Markets team in Canada.

Currently, plans that can’t pay 100 percent of their obligations need to make special payments over five years to fully capitalize the plan. Under the proposed changes, plans only need enough to cover 85 cents for every dollar owed in the future, Mathur said.

Pension funds will need to undertake a stress test to calculate how much would be available in the plan immediately to meet all future obligations. Plans that are capitalized above the 85 percent threshold would get immediate relief from payments when the legislation takes effect, which is expected during 2018. Struggling plans that are financed below 85 percent would only need to pay up to the new benchmark, making it easier and faster for them to pass the solvency test.

According to human resources consulting and technology company Morneau Shepell, the proposal will mark a shift “away from volatile solvency funding and towards more stable, long term going-concern funding,” which, it says, will “result in lower and more predictable contributions for most but not all plans.”

Implications for allocations
Pension fund giants – such as the Ontario Teachers’ Pension Plan, OMERS, CPPIB, HOOPP and OPTrust – will be unaffected by the changes. Nor will they apply to plans outside of Ontario, since for the moment the measures are limited to the province.

However, private sector DB pensions (i.e. large plans covered by a single employer) that are either poorly managed or lack the flexibility to address their going-concern pension deficits will come under the new regime.

“The proposed rules allow for some breathing space, giving these plans time to critically analyze their portfolios,” says Mathur.

This, he adds, could have significant implications for their investment decisions. “To fund their long-term obligations, there is a high possibility the pension plans will devote a larger allocation to direct commercial real estate, as a way to increase the stable cashflows to the fund.”

And that, potentially, will have important consequences for the Canadian real estate market going forward.

Click to read more on Canada’s real estate investment market.

 

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Gaurav Mathur

Capital Markets Research, JLL Canada

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