Subtle reforms restructure Canada's pension landscape

After a turbulent 2024, marked by sweeping reforms from CAPSA and regulatory tensions in Ontario, it has been a relatively quiet year on the pension legislation front.

Yet, beneath the calm, pension lawyers are pointing to significant structural and policy changes unfolding across provinces and at the federal level, affecting everything from target benefit plan conversions to tax treatment of unclaimed pensions.

At McCarthy Tétrault’s 15th annual pensions and benefits seminar, Emmanuel Onyemachi, associate at the firm, outlined how Ontario’s long-anticipated shift to target benefit legislation is now formally underway, impacting multi-employer defined benefit plans that had previously operated under temporary exemptions. Many of these plans had opted into the Specified Ontario Multi-Employer Pension Plan (SOMEP) regime, which gave them relief from solvency funding requirements and allowed retroactive benefit reductions by exempting them from the void amendment provisions. That framework was always intended to be transitional, Onyemachi explained.

“This legislative framework became effective January 1st, 2025. There is a five-year window. So if you fall under multi-employer plans that are trying to move to a target benefit plan, you have to keep that in mind,” he said.

While the framework is in place, he noted that FSRA (Financial Services Regulatory Authority of Ontario) is still in the process of finalizing its guidance for how conversions will occur and how such plans will be supervised going forward. In the interim, the regulator is reviewing applications to convert plans from defined benefit to target benefit models.

Susan Nickerson, partner, head, pensions, benefits, & executive compensation McCarthy Tétrault, underscored the point, highlighting the urgency for plans under the specified Ontario multi-employer plans rules to act.

“You have to ensure that you do this conversion under the new regime before your next valuation. Otherwise, you'll be subject to the solvency funding rules, and nobody wants to be subject to those,” she said.

Meanwhile, across the country, British Columbia and Nova Scotia are also showing legislative momentum albeit in very different ways. In Nova Scotia, the province is allowing private sector employers to offload defined benefit plans into the public service superannuation plan.

“The Superintendent’s consent is required before any transfer can take place. In addition, members are to be informed and a vote is conducted to determine support for the transfer,” Onyemachi explained, adding that unions also have authority to vote on behalf of their active members, introducing a governance-heavy process to prevent backlash.

Whereas BC is turning its attention to information security and “decided to take a forward-looking approach,” Onyemachi said, explaining that pension plan administrators must now identify risks to systems, monitor controls, and report any security incidents, especially those involving data breaches or disrupted benefit payments.

Nickerson noted that BC’s regulator is taking a more proactive supervisory approach, wanting to get ahead of vulnerabilities rather than reacting after the fact.

On the case law front, Onyemachi reviewed a significant arbitration decision involving the Victorian Order of Nurses (VON), where the employer was ordered to restore pension benefits and provide indexation after failing to honour surplus-related commitments.

“The ruling confirmed that employers can be held accountable for failing to act on pension commitments once those agreed upon conditions are met,” he noted.

A second arbitration decision centered on the termination of benefits for employees over age 65, which found that the union was stopped from challenging the age 65 benefit termination, explained Onyemachi, noting that the union’s historical inaction and previous bargaining behaviour solidified employer expectations.

Meanwhile, as Nickerson acknowledged, the federal government and the CRA have been busy trying to find ways to make lives easier in administering pension plans. She pointed to a proof-of-concept pilot with CRA addressing unclaimed pensions.

“They took 50 names and they said that you're missing a balance. It’s a letter that came from the CRA, so it looks serious,” she said, noting the pilot had a 100 per cent response rate, with one person discovering they were owed $75,000.

“They were supposed to have started their pension ten years before but didn’t,” she added.

The pilot’s success led to a planned expansion to 1,000 cases. However, as Nickerson noted, there’s still a legislative gap in allowing CRA to share data with plan administrators and have since asked for a legislative change to Section 241 of the Income Tax Act.

Federal Finance Canada’s Andrew Donelle later confirmed the issue, acknowledging the ongoing pilot and the needed legislative amendments. In terms of how unclaimed property will be handled under upcoming changes, “we will only tax the future recipient,” explained Donelle, senior director in the tax litigation division at Finance Canada.

Rather than plan administrators withholding taxes before transferring funds, the unclaimed property authority will handle taxation when the funds are claimed, noted Donelle.

On the topic of capital guarantees in annuities, Donelle admitted to being surprised by the limitations in existing tax rules.

“I was subsequently proven wrong,” he said, explaining that the 2025 amendments now allow residual death benefits when annuitants die early. “You get at least back the premium you paid for the insurance product,” he said.

While insurance companies haven’t yet rolled out products under the new rule, Donelle expects that to change.

Susan Nickerson agreed, noting that Australia has long allowed similar guarantees.

Perhaps the most pointed exchange came around the ongoing tension between PFADs (provisions for adverse deviation) and federal contribution limits. Donelle clarified that the federal limit of 125 per cent funding ratio is being sidestepped by some plans.

“Actuaries are reporting 1.24, when if you were to look at the assumptions being made, your funding ratio really should be 1.4,” he said.

Nickerson added that CRA seems to believe there are employers continuing to contribute even while exceeding surplus thresholds. While Donelle didn’t dispute it, he framed the issue carefully.

“This is the bottom-line concern. People are getting themselves to the point of not having constitutional holidays by getting under 1.25,” he said.