With the release of the 2012-2013 Ontario Budget, we are seeing a number of proposed changes that may affect many Ontario residents in a positive way. There were several architects involved in constructing this budget with the biggest goal being to completely eliminate the annual budget deficit by no later than 2018. This budget had to be constructed with the intent of making the plan supportable to the opposition in the Ontario legislature, reliable to capital markets, acceptable to those whose circumstances will be adversely affected, and good enough for the voting public. For more highlights on the new Ontario budget, I enclose a commentary provided by Fidelity Investments Canada, authored by Peter Drake, Vice-President of Retirement & Economic Research.
“The challenge for the Ontario government in creating this budget was to develop a credible plan to eliminate the deficit in no more than six years, within the constraints of the current legislative environment. Not only does their plan have to be tolerable to the opposition parties, it also has to be acceptable to capital markets and the voting public. Should this budget pass through the legislature, it will be the first of many steps required to change the course of the province’s future.
- The target – to balance the budget by fiscal 2017-18 – didn’t change from last year’s budget. What did change is the path to get there. That path now contains substantial spending reductions, public-private partnerships (e.g. ServiceOntario), attempts to make government more efficient and the adoption of a more conservative and realistic forecast of nominal economic growth which correlates closely with provincial government revenue.
- The plan to achieve fiscal sustainability now appears to have credibility, although that will be confirmed or denied by any subsequent announcement by7 credit rating agencies, some of whom expressed concern over Ontario’s fiscal outlook.
The pension puzzle
The Ontario government is moving forward with several measures designed to improve the fiscal sustainability of public pension plans in the province.
- Leveraging scale: As first discussed last year, the government intends to introduce framework legislation later this year that would pool the investment management functions of smaller public pension plans in Ontario. The government’s view is that this would leverage the scale and efficiencies that larger plans can bring to investment management.
- Addressing rising public pension benefit costs: The government has proposed that it develop a legislative framework to make changes to how these pension plans operate. The changes include reducing future benefits for members in plans with a funding shortfall, and requiring employees and employers to share equally in contribution costs. Any reduction in benefits would not affect current retirees.
PRPP’s – not right now: The government outlined a number of concerns it has with the proposed Pooled Registered Pension Plans (PRPP’s). In his speech to the legislature, Minister Duncan reiterated the government’s position that it favours an enhanced Canadian Pension Plan as the first course of action to help solve the retirement income issue. The government believes that PRPP’s are a complement to an enhanced CPP. The government’s concerns with the PRPP’s include
- The belief that PRPP’s may simply replace one form of retirement arrangements for another, instead of expanding retirement income savings and coverage
- Questions about whether the PRPP’s fiduciary framework adequately protects plan members
- Uncertainty as to whether the compulsory employee contributions would be flexible enough to allow for unexpected life events
- The extent to which the PRPP’s can achieve their low-cost objective
- The need for each province to establish an effective licensing and regulatory regime for the PRPP’s to be successful
- Neutral on a single securities regulator: While the government states that it is open to working with the federal and provincial governments to restructure Canada’s securities framework, it did not specify its preferred direction for change.
- Freezing the corporate income tax rate: Part of the measures will include a freeze of the current corporate income tax rate of 11.5%, which was originally scheduled to be reduced to 10% in 2013. The budget proposes to keep the tax rate frozen until the budget has been balanced.
- Modest asset sales and public-private partnerships: The government has already announced that it would divest some of its real estate holdings. It also proposed to examine possible partnership opportunities with the private sector to deliver services through ServiceOntario. Finally, the government announced plans to divest its stake in the Ontario Northland Transportation Commission.
- Solvency funding relief: private sector defined benefit (DB) pension plans received an extension to the solvency relief regulations introduced in 2009.
- Help for Ontarians in need: The government has introduced new measures to streamline the process for Ontarians with locked-in retirement savings accounts to access their funds in the event of financial hardships. They will now be able to apply to withdraw money from their financial institution instead of having to petition the regulator.
- Healthy Homes Renovation Tax Credit: The government proposes a new tax credit designed to help seniors perform renovations that will allow them to stay in their homes. This credit, while not explicitly linked to solving retirement income issues, is similar to what the Quebec government proposed in its recent provincial budget”