As part of the ongoing reforms to the Ontario Pension Benefits Act, major changes were made to Ontario’s pension asset transfer rules, effective Jan. 1, 2014. These changes apply to asset transfers that are either between separate employers’ plans because of a sale, assignment or other disposition of a business, or between plans of the same employer.

With these long-awaited changes now in place, employers with two or more Ontario-registered DB pension plans should consider the merits of a plan merger, as a merger can improve both administrative efficiencies and the ability to manage pension risk.

Background
Prior to 2014, the Ontario Superintendent of Financial Services limited the ability of plan sponsors to transfer assets between plans because of its interpretation of historical court decisions. More specifically, if any of the pension funds involved in an asset transfer were subject to a trust, then the language of the trust had to be reviewed to determine whether it was possible to commingle assets following the asset transfer.

In past years, employers that desired to merge their Ontario-registered pension plans usually concluded that a merger was not practical due to the restrictions on asset transfers. However, under the new rules, plan mergers have become viable for many employers.

What’s changed?
Following are some of the more significant changes to the rules affecting mergers of Ontario-registered DB pension plans.

  • The new rules are more prescriptive, with less discretion given to the Ontario Superintendent who must now approve asset transfer applications that follow the mandated procedures and standards.
  • Before a plan merger will be approved by the Ontario Superintendent, either
  • (i) the solvency ratio (the ratio of plan assets to solvency liabilities) of the merged plan must be at least 100%; or
    (ii) the solvency ratio of the merged plan cannot be more than 5% lower than the highest solvency ratio of the original pension plans.

  • Under the previous rules, the merged plan had to preserve the pension that a transferred member had accrued in the original plan, including any ancillary benefits that were vested at the time of the merger. The new rules no longer require the preservation of accrued benefits for an active plan member. However, if the commuted value of the member’s benefits in the merged plan is less than the commuted value in the original plan, the difference must be paid to the member. Also, the lifetime pension accrued by the member in the original plan can be reduced by no more than 15% at the time of the merger.
  • The new rules set out the deadlines for various filings and the contents of notices that must be sent to parties affected by the merger.

Why merge pension plans?
Following are reasons for an employer with more than one Ontario-registered pension plan to consider a plan merger.

  • A merger increases administrative efficiencies by reducing ongoing costs related to items such as plan administration, custodial and recordkeeping fees, actuarial fees, auditor fees, legal fees and government filings. A merger is also likely to free up the time of internal employer resources responsible for pension administration and oversight.
  • The ability to change benefits accrued by active members in the original plans enables an employer to consolidate plans into one plan with a common formula for both past and future service. This facilitates more consistent treatment of employees who may have originated from different legacy organizations and enables the simplification of employee communications and benefits administration.
  • A plan merger may also present an opportunity to modify (for both the past and future service of active members) a complex or problematic provision from one of the original pension plans and substitute another benefit of equivalent value.
  • Financial management of the plan is facilitated, since on completion of the merger all assets in the plan are available to cover all benefits provided by the original plans. This includes the ability to use DB surplus in one of the original plans to fund both employer DB and DC contribution requirements in the merged plan.
  • A plan merger may be more affordable now than in recent years. The solvency ratio of most pension plans improved significantly in 2013 as a result of strong equity market returns and an increase in long-term interest rates. In some cases, the improvement was sufficient to increase the plan’s solvency ratio to 100% or more. If two or more plans are combined and the merged plan has a solvency ratio of 100% or more as of the merger effective date, no additional employer contribution will be required in order to meet the solvency ratio test under the new rules.

While there are one-time administrative and implementation costs associated with merging plans, a number of good reasons now exist for an employer that sponsors two or more Ontario-registered pension plans to consider a plan merger. In fact, employers should view a plan merger as yet another opportunity to better manage their pension risk.

Gavin Benjamin is senior director of retirement at Willis Towers Watson. He has worked in the industry for more than 20 years. These are the views of the author and not necessarily those of Benefits Canada or the author’s employer.
Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com

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See all comments Recent Comments

Tommy:

Over the years numerous union employees working at the Municipal Property Assessment Corporation “MPAC” have previously and repeatedly written the government and various parties about their unfair and unjust split pension situation as a result of a past government divestiture and pension decisions not of their own making or choice. As they have always indicated, in any avenue of resolution for such perspective pensioners its obviously very important to ensure continuation of their existing entitlement to the post-retirement health and dental insured benefits associated through their past OPS service and credit in the OPTrust Plan.

While Bill 236, the Pension Benefits Amendment Act, 2010, received Royal Assent in May 2010, it only allows for a one-way transfer of assets to the successor employer’s plan… and were divested employees to consolidate their service under the successor employer’s plan “OMERS” their eligibility for insured benefits under the original Provincial plan “OPTrust” would be discontinued. The Province has advised MPAC on previous occasions that they would not extend the insured benefits to retirees who no longer meet the eligibility criteria. In fact, four years ago in June of 2008 the Minister of Government and Consumer Services had written the Chair of MPAC’s Board of Directors about just such a pension transfer scenario, advising in part “If divested MPAC employees withdraw or transfer their OPS pension assets and thereby terminate OPS pension entitlement status, they will forfeit access to future post-retirement insurance coverage.”

The ultimate test of the regulatory system governing pension plans is how well it works in practice. With respect, under the circumstances it seems to me this only pension transfer option inherently comes with what amounts to an illogical, unfair and hefty penalty being imposed on such workers/perspective pensioners… the forfeiture of their existing entitlement to postretirement
health and dental insured benefits associated through their previous OPS employment and credit in the original plan “OPTrust” ! As such, this is not a viable option for most and, in fact, I wonder if the Superintendent would even actually consent to such a transfer knowing individuals might be so directly or indirectly detrimentally impacted.

Sunday, April 20 at 9:37 am | Reply

R. Johnston:

Absolutely. It is neither fair or reasonable these employees / pension plan members, who were denied portability of their pensions through no fault of their own, be adversely affected for the rest of their lives.

Reforms to the Pension Benefits Act need to allow eligible employees to transfer / consolidate their existing pension benefits and ancillary benefits and other non – pension post-retirement benefits that they currently have [associated with either or both the original and successor plans] to the one original OPS plan “OPTrust”. More specifically, Section 80.1 (4) and (9) of the Act needs to be updated to include authorizing eligible employees to elect to transfer the value of their accrued pension benefits under the successor pension plan to the original pension plan.

Many affected employees with pensions split between the OPTrust and OMERS plans wish to consolidate their pensions in OPTrust and retire. They simply want fair pension treatment and to rightfully retire one day without unfair financial or post-retirement insurance coverage worries.

Saturday, April 26 at 11:17 am

Helen:

Yes, over the years many affected MPAC employees with split pensions have previously written the Ontario Government regarding amendments to the the Pension Benefits Act (PBA) and provided constructive comments about the draft regulations that were being proposed.

Those with 10 or more years service / credit in the original OPS plan (OPTrust) stressed the obvious need that a fair and viable resolution should ensure continuation of their existing entitlement to the post-retirement insured health care benefits. These post-retirement insured health care benefits are separately provided by the government (not the Plan).

I understand, however, that the recently announced new asset transfer regulations only allow for a one-way transfer of assets to the successor employer’s plan. In fact, interesting enough six years ago the Minister of Government and Consumer Services had already written about the consequences of just such a pension transfer scenario, saying in part “If divested MPAC employees withdraw or transfer their OPS pension assets and thereby terminate OPS pension entitlement status, they will forfeit access to future post-retirement insurance coverage.”

With respect, am I to understand that the election of the only pension transfer option under the new asset transfer provisions still comes with what amounts to an illogical, unfair and hefty penalty… the forfeiture of their highly valued post-retirement insured health care benefits separately provided by the Ontario Government. As affected stakeholders had repeatedly pointed out to the Ministry of Finance, this is not a realistic or viable option for many. Is this, in fact, really just another cost savings measure by the government on the backs of hard working Ontarians.

Indeed, it is disappointing the Ontario Government apparently has still not addressed the long outstanding split pension / post-retirement insured health care issues…

Saturday, April 26 at 9:54 am | Reply

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