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On January 1, 2025, Ontario’s new Target Benefit MEPP Framework officially took effect, replacing the temporary SOMEPP regime that has governed multi-employer pension plans (MEPPs) for over a decade.  The Financial Services Regulatory Authority of Ontario (FSRA) has recently released proposed guidance on how it will consent to conversions, oversee governance and funding policies, and engage with administrators of Target Benefit Plans (TBPs).

The framework introduces a new set of permanent rules and oversight practices designed to give plans more predictability, while ensuring members understand that their benefits can fluctuate over time.  This is a step forward as Ontario is aligning pension regulation with the realities of MEPP funding and risks.

But when it comes to one of the most important features of the new system – the Provision for Adverse Deviation (PfAD) – FSRA’s guidance is somewhat underwhelming.  Instead of providing concrete direction, the regulator has left administrators with broad discretion, vague expectations, and the burden of justifying the approach they adopt.

The lack of guidance on the PfAD could be troublesome for administrators of TBPs.

What is the PfAD?

The Provision for Adverse Deviation is a buffer built into pension funding.  It recognizes that actuarial assumptions – investment returns, member longevity, member hours worked/contributions, and other variables – may not pan out as expected.  A PfAD is meant to provide a cushion so that, if reality turns out worse than projected, benefits are can still be sustainable.

In a target benefit plan, the PfAD is especially critical.  Because members’ benefits can be reduced if experience turns out worse than expected, the PfAD should strike a delicate balance: too small, and it’s likely that benefits will be cut; too large, TBPs risk an inter-generational wealth transfer to future members.

FSRA’s Position on PfAD

FSRA’s guidance requires each TBP to include in its funding and benefits policy:

• The method for determining the PfAD,
• An explanation of how the PfAD supports the plan’s funding and benefit objectives, and
• Documentation of the risks considered in setting the PfAD.

Administrators are asked to weigh risks such as market volatility, demographic shifts, asset-liability mismatches, industry-specific risks (like declining hours worked/contributions), and employer withdrawal.  FSRA stresses that the PfAD may be fixed, variable, or qualitative, as long as there is a documented rationale.

Beyond that, there’s effectively no guidance on the establishment of the PfAD.  The guidance simply lists risks, encourages transparency, and essentially says: pick a method, justify it, and hope we agree it’s reasonable.

The Problem: A Vacuum of Guidance

On the surface, FSRA’s approach sounds flexible.  Each plan is unique, so a one-size-fits-all PfAD would be inappropriate.  Nevertheless, the absence of meaningful parameters may be problematic for several reasons:

• Too Much Discretion for Administrator: Pension administrators now bear the full weight of defining their PfAD methodology.  This potentially means that trustees and actuaries must guess what FSRA will later deem “reasonable.”  Without benchmarks, plans may under- or over-shoot.  This may raise compliance risks, not to mention the possibility of inconsistent application across the sector.
• Comparison between TBPs: A vague PfAD framework makes it harder to explain why one plan’s PfAD is 3% and another’s is 10%.  The variability in the pension benefits between different TBPs is already difficult to communicate; inconsistent PfAD approaches make the picture murkier.
• Race to the Bottom: If one plan adopts a low PfAD, others may feel pressure to follow suit.  Without a clear regulatory floor, TBPs may feel incentivized to minimize their cushions, exposing members to greater benefit cuts down the line.
• Undermining FSRA’s Risk-Based Supervision: FSRA prides itself on being a dynamic, principles-based, and outcomes-focused regulator.  In this instance, it has outsourced the heavy lifting to TBP administrators.  By declining to set even basic ranges or formulas, FSRA risks turning the PfAD into an afterthought rather than a core risk-management tool.

It’s not all bad news

In the proposed guidance, FSRA notes that they will publish aggregated metrics on the TBP sector, which may include things like benchmarking data, demographic information, and the range of PfADs, discount rates, and margins for adverse deviations included in the actuarial assumptions used by TBPs.  This will allow TBPs to learn from anonymized information that is gathered through FSRA’s review process.

As such, maybe this is just a “chicken and egg” problem – where FSRA is currently unable to provide guidance on the PfAD, but they will be able to do so after it has seen what TBPs are doing.

What FSRA Could Have Done

Other jurisdictions and regulatory regimes offer useful models FSRA could have drawn from:

• Ontario’s PfAD for single employer pension plans, which is comprised of three components: a fixed component of 4% or 5%, a component for portion of assets invested in non-fixed income assets, and a component which applies if the valuation discount is greater than a specified benchmark.
• Quebec’s PfAD for single employer pension plans, which is determined based on the plan’s asset mix and asset and liability mismatch.
• BC’s PfAD for their TBPs, with a minimum 7.5% PfAD, and an additional plan-specific PfAD.

FSRA could have adopted a similar hybrid approach: set a minimum PfAD floor, then allow TBPs to adjust their PfAD within a defined corridor, provided they justify their decision.  This would give administrators greater confidence that they are operating within acceptable bounds.

The Path Forward

Ontario’s new Target Benefit Framework is an important evolution in pension regulation.  It recognizes the unique realities of TBPs, balances flexibility with oversight, and offers a permanent replacement for SOMEPPs. 

FSRA has done great work to improve and clarify the governance, transparency, and member communication requirements in TBPs.  Specifically, the requirement to develop detailed funding, governance, and communication policies is a positive step forward. 

However, FSRA’s treatment of the PfAD is, at best, a work in progress.  By leaving the PfAD guidance so open-ended, the regulator has missed an opportunity to provide information that TBPs could find useful.  By failing to set clearer expectations, FSRA may created uncertainty for TBP administrators and risks uneven application across the sector.

Nevertheless, there is hope, as FSRA has indicated they will provide key metrics in the years ahead.

Personally, I think it would be useful for FSRA to provide TBPs with clearer parameters for the PfAD – even just a minimum floor, or an expected range, would go a long way in supporting TBP administrators.