This document provides an update on 2012 Major Pension Issues as of August 9, 2012.
Sustainability of Ontario Public Pensions
MEPCO advocates for policy that:
- Promotes a sustainable and affordable OMERS Pension Plan over the long term, and
- Supports fair and workable OMERS governance.
Currently, indications suggest that many of Ontario’s public pension plans are in trouble, including OMERS. To reduce OMERS funding deficits, there are three options. Increase contributions (i.e. property taxes go up and employees pay more of their salaries into the pension fund), decrease benefits (until the deficit disappears), or a combination of contribution increases and benefit reductions.
It is difficult for municipalities to justify property tax increases to fund public pension plans, particularly when the same taxpayers may have private pensions that do not offer comparable benefits or no pension coverage at all. Last year, the one per cent increase in OMERS contributions required, very roughly, the collection of an additional $150 million in property taxes. Public pension funds should not undermine a municipality’s ability to deliver core government programs and services, and to invest in infrastructure.
The 2012 provincial budget included proposed changes to public sector, jointlysponsored plans that would generally cap contributions and direct sponsors to make choices about reduced benefits for new employees.
The Government of Ontario began the consultation on a legislative framework in April 2012 and the OMERS Sponsors Corporation (SC) participated in several consultation meetings. The following components are to form the basis of the legislative framework:
- In case of a new funding deficit, plans would be required to reduce future or ancillary benefits before increasing contributions;
- In exceptional circumstances, limits to be set on the amount or value of benefit reductions before considering further contribution increases;
- Benefit reductions would affect future benefits, not those already accrued or those paid to current retirees;
- Employee and employer plan contributions to be matched to help reduce pension deficits (OMERS contributions are split equally between employees and
- employers whereas there are public pension plans where the employer pays 75 per cent of the contribution amount);
- When plan sponsors cannot agree on benefit reductions through negotiations, a new third party dispute resolution process would be invoked; and,
- The legislative provisions would be reviewed, once the provincial budget is balanced.
The Province’s decision to address the cost of public pensions through a cap on contribution rates and the reduction of future benefits during deficit periods was applauded by AMO, MEPCO and municipal governments.
In early August 2012, the government indicated that it hopes that sponsors of the various pension plans would come to a voluntary agreement on how to cap rates and reduce benefits given that each pension plan is somewhat unique. However, in the absence of a voluntary agreement among the sponsors of a pension plan, the province has indicated it will legislate in the early fall 2012.
Submission to Ontario’s Pension Investment Advisor
In May 2012, the Ontario Government appointed Bill Morneau as the Special Advisor – Broader Public Sector Pension Efficiencies. Mr. Morneau will lead the public consultation process on the changes introduced in the 2012 budget and provide the Minister of Finance with final recommendations by early-fall 2012. In July 2012, MEPCO made a submission to Mr. Morneau making clear its support of the existing voluntary pooling of public sector pension fund assets under Bill 206.
Should OMERS act as a “Consolidator” (where assets of smaller plans are pooled with OMERS assets), any changes to the governance structure should not limit OMERS’ sponsor representation and existing sponsors should decide on the scope of any expansion and pooling.
OMERS Governance: OMERS Sponsors Corporation By-law Review
OMERS Sponsors Corporation (SC) and Administration Corporation (AC) Boards are subject to OMERS Corporate By-laws. By-law #4 and By-law #13, which govern the Boards’ composition and process for appointment, have been reviewed in 2012. MEPCO made a submission to the SC Board composed of these key points:
- AMO should continue to have representation on both the SC and AC Boards within the current weighted voting model.
- Management and non-union employees represent over 20 per cent of the employee membership. Accordingly, they should have an active voice in the Plan’s governance and the SC should pursue options to accomplish this.
- The current SC Board Co-Chair approach works well and is strongly supported. Based on plan membership, one of AMO’s representatives should consistently be a Co-Chair.
- The appointment processes for both Boards must be as timely as possible, and sponsors have a need to reflect established competency requirements in its nominee and from the sponsor’s perspectives that a sponsor’s nominee be seated as expeditiously as possible.
Bill 206 Review
The
2006 Ontario Municipal Employees Retirement System Act, also referred to as
Bill 206, requires that the legislation be reviewed by 2012. The review is focused on the effectiveness and fairness of OMERS governance, including the effect of the current governance structure on:
- Representing the interests of OMERS employers, members and retirees
- Accountability to employers, members and retirees
- The level of fairness and the overall financial stability of OMERS.
The legislation does not allow for reconsideration of the principle of devolving responsibility for OMERS governance to plan sponsors or the decision to create supplemental plan options for fire and police.
The Honourable Kathleen Wynne, Ontario’s Minister of Municipal Affairs, announced the appointment of Tony Dean to undertake the review. MEPCO’s Board/AMO is working on a submission to Tony Dean that will advance the perspective of municipal employers. MEPCO will provide updates to members as the review process moves forward.
The stakeholder consultation process is set to be completed by early September and a report will be submitted to the Minister by the end of 2012, as required by legislation.
You can learn more about the Review process and its terms of reference by visiting the Ministry of Municipal Affairs and Housing website.
OMERS Plan Changes: Specified Plan Change (SPC) Process
MEPCO develops as well as evaluates other groups’ plan change proposals that go before the OMERS Sponsors Corporation (SC) Board every year. Using actuary and pension legal counsel, MEPCO assesses the impacts of these proposals on municipalities and the overall health of the OMERS Plan.
Eleven SPC proposals were submitted in 2012 and two were approved. One approved proposal set the contribution rate methodology for 2013 and the other put restrictions on the Retirement Compensation Arrangement. You can learn more by reading MEPCO’s July OMERS Update or visiting the OMERS Sponsors Corporation website, which also shows past years’ submissions and results.
Contribution Rate Allocation
In 2010, the OMERS Sponsors Corporation (SC) negotiated temporary measures designed to address the OMERS funding deficit which stood at $7.3 billion as of December 31, 2011. The Multi-dimensional Approach to Funding Deficit included increases to contribution rates for 2011, 2012 and 2013.
2011 contribution rates were established by adding one per cent to each of the four groups: Normal Retirement Age (NRA) 60 and 65 and earnings under and over the Yearly Maximum Pensionable Earnings (YMPE).
In 2012, the SC approved a new methodology for establishing future contribution rate allocation and set the rate allocation for 2013. The total contribution rate for 2013 is 21.2 per cent which is an increase from the 2012 rate of 19.4 per cent.
OMERS 2013 Primary Plan Contribution Rates
Rates are per side (employee/employer)
|
Normal Retirement Age 65
Members
|
On earnings below the YMPE |
9.0% |
On earnings above the YMPE |
14.6% |
Normal Retirement Age 60
Members
|
On earnings below the YMPE |
9.3% |
On earnings above the YMPE |
15.9% |
Contribution rate allocation has varying impact on municipalities depending on the composition of employee groups (NRA 60 and 65).
Retirement Compensation Arrangement (RCA)
The Retirement Compensation Arrangement provides benefits to members whose pension benefits exceed the limit set out in the Income Tax Act and Regulation (ITA). For 2012, the Canada Revenue Agency set this limit at about $145,000. The RCA is a separate arrangement from the OMERS Primary Plan with specific tax treatment. Viability of the RCA over the long term, including maintaining a fund of sufficient size to pay benefits, was a key issue during the 2012 Specified Plan Change (SPC) proposal process.
Through the 2012 SPC proposal process, a proposal was approved that limits the total contributory earnings to seven times the Canada Pension Plan earnings limit, i.e. about $350,000. Without a cap, there would be no pension limit. The change takes effect January 1, 2014 for members enrolling in OMERS after January 1, 2014. The changes takes effect on January 1, 2016 for members enrolled prior to January 1, 2014.