About 1.7 million workers and pensioners will be affected by a major overhaul to Ontario's pension system that will be debated this fall, Finance Minister Dwight Duncan said Tuesday.

The proposed changes are intended to stabilize and strengthen about 8,000 defined-benefit pension plans and Ontario's pension benefits guarantee fund -- the only one of its kind among the provinces.

The fund, which provides pensioners with up to $1,000 a month if their company plan fails to provide its full benefit or any at all, has been an albatross for the governing Liberals, who have repeatedly warned that it hasn't been funded properly since its inception 30 years ago.

That looming threat came to a head during the global recession in 2008. The government was faced with a fund that didn't have enough cash to help thousands of workers at corporate giants like General Motors and Nortel that were poised to collapse into bankruptcy.

The fund got a $500-million boost in this year's provincial budget to cover claims stemming from Nortel's demise, and Duncan said the proposed changes should help keep it stable enough to meet current claims.

The government won't take the recommended step of increasing the fund's top-up to $2,500 a month, but it does want to hike the contributions that companies make to the fund and make other changes that could pull in an extra $30 million each year, Duncan said.

Companies with fully funded plans would have to pay $5 instead of $1 per employee, and those with underfunded plans would have to pay a maximum of $300 per worker, rather than $100.

The fund took in $43 million last year, about $13 million of which came from GM, which is no longer contributing to it, officials said.

"I will never forget the look on pensioners faces that I saw, whether the folks I met with from Nortel or General Motors, who thought they had a secure pension," Duncan said.

'Moral hazard'

"These rules will help reduce — hopefully eliminate — the kind of moral hazard that I would associate with companies and employee groups agreeing to benefits without properly funding them."

To that end, the government wants to tighten the rules to require pensions to fund their promises such as benefits that are indexed to inflation, shorten the time provided to fund benefit improvements from 15 years to eight, and introduce limits to so-called "smoothing" — a method of reducing the impact of a sudden loss in value of the pension by spreading it out over several years.

Other changes include tightening the rules governing contribution holidays and provide a binding arbitration process to resolve long-standing debates over the use and distribution of surplus funds.

"They're trying to specifically target certain situations where they feel that employers have been taking advantage of the rules, shall we say, to deliberately underfund or not properly fund the pension promise," said David Vincent, a senior partner at Ogilvy Renault and a member of the government's pension advisory committee.

Duncan is also proposing some temporary relief for certain pension plans in the broader public sector -- similar to those offered recently to universities — by offering them more time to pay down solvency deficits, as long as they meet certain conditions.

He said he's also trying to encourage innovation in the pension sector by offering more flexibility to employers, who will be able to use irrevocable letters of credit from a financial institution to cover as much as 15 per cent of solvency liabilities.

The minister emphasized that his proposals, which will be introduced in a government bill this fall, would be gradually phased in, with plenty of time for public feedback. If passed, it will be the first major change to Ontario's pension system in 20 years.

The package includes a proposal that would require the government to review Ontario's pension system every five years.

The government is handling the potentially explosive issue of pension reform with "kid gloves," said Vincent.

"They're very aware of the political danger that lies with pension reform, because if you're seen to be tilting too far in either direction — either in favour of employees or in favour of employers — it's politically very risky," he added.

"These changes are introduced in kind of a very tentative fashion, in the middle of August when a lot of people are on vacation. I think they're hoping this doesn't attract very much controversy and that they can be seen to be moving towards pension reform without doing anything too controversial."

The opposite seems to be on the horizon this fall, as opposition parties gear up for a fight over the changes.

The NDP say the changes don't go far enough to help retirees or workers, while the Opposition Conservatives complain that higher fees will drive business out of Ontario.

"I'm concerned that Ontario is the only province in the country that has a pension benefit guarantee fund," said Tory critic Norm Miller.

"By increasing the cost, it will make Ontario less competitive than other provinces."

The changes are "extremely disappointing" because they don't help pensioners or the millions of Ontario workers who don't have a company pension plan, said NDP critic Paul Miller.

"Are they going to have to pay more? Probably. Will they see any reasonable benefit from these announcements today, financially month-to-month? No. And I don't think there's really anything there to help pensioners in this province."

Duncan's first round of pension changes — more technical and administrative in nature — were unanimously passed by the legislature in May.

They included clarifying benefits for people who are affected by layoffs, eliminating partial pension windups after 2011 and making it easier for plans to restructure when companies do, and extending benefits that allow laid-off workers to qualify for early retirement to make it available for more people.

Much of the overhaul is based on recommendations made in 2008 by Harry Arthurs, former president of Toronto's York University, who suggested that the province enhance its pension guarantee fund and appoint a full-time pension advocate, among other things.