New pension asset transfer rules governing single-employer pension plans (SEPPs) came into effect in Ontario on Jan. 1, 2014. The Ontario government recently released a consultation paper proposing that the existing rules are also applied to plan mergers involving two or more multi-employer pension plans (MEPPs).
The government notes that, by merging, some smaller MEPPs may benefit from the economies of scale that a larger plan may have, such as a larger asset pool for investment purposes and the potential for reduced administrative costs. This raises the question of what the experience has been with the current asset transfer rules so far.
The experience with the new Ontario rules to date suggests that, while they have increased the administrative costs of such transfers for employers, they represent a highly workable approach and have introduced greater certainty into the process for both pension plan administrators and plan members.
By focusing on the current asset transfer rules as they apply to defined contribution plans, I will demonstrate how the rules have improved the process for pension asset transfers in Ontario.
When do the asset transfer rules apply?
The asset transfer rules apply to any transfer of assets and liabilities from one pension plan to another, when pension plans are affected by such events as corporate reorganizations and divestitures, including pension plan mergers.
The current Ontario asset transfer rules apply to any asset transfer applications involving a SEPP filed with the Financial Services Commission of Ontario on or after Jan. 1, 2014. They also apply to any Ontario members of a multi-jurisdictional pension plan to which the new agreement respecting Multi-Jurisdictional Pension Plans applies.
What do the current asset transfer rules require?
The current asset transfer rules continued the framework for the consent of the superintendent to transfer assets. However, the legislation and regulations now mandate certain procedures, standards and timelines that must be met before the superintendent can consent to the transfer. Specifically, the rules set out specific criteria for the calculation of the amount of assets to be transferred, as well as specific funding and notice requirements.
Generally speaking, asset transfer applications must now be filed with the superintendent within nine months of the “effective date” of the asset transfer (in the case of corporate divestitures, this will generally mean the effective date of sale). The rules also require notices to the members, former members, retired members and/or other plan beneficiaries who are affected by the proposed transfer, as well as any trade union representing affected members, no later than six months of the effective date of the asset transfer.
The asset transfer rules also require that the commuted value of a transferring member’s pension benefits accrued under the original plan be maintained in the successor plan, although (notably) the member’s pension benefits may be different under the successor plan.
However, in the case of former members, retired members and other beneficiaries who are affected by the transfer, their pension benefits cannot be reduced and must be replicated under the successor plan. In addition, transfers are not permitted if the successor plan would allow accrued pension benefits to be reduced in circumstances that were not allowed in the original plan.
For defined benefit pension transfers, the rules now contain a prescribed formula for calculating the amount of assets to be transferred to the successor plan, which must include a proportionate amount of surplus, if any, under the original plan. Finally, asset transfers may (but do not have to) be structured so that a member’s consent to the transfer is required.
How does the process for transferring DC pension assets differ under the new rules?
Apart from the new timelines for transmitting notices and for filing the asset transfer application, the most significant difference in the current asset transfer rules affecting DC asset transfers is in the area of disclosure to members.
Under the old asset transfer regime, disclosure to affected members was mostly a generic form of notice from the original employer that contained no member-specific information relating to the transfer. Under the current rules, affected members receive notices from both the original and successor plan administrators (although these notices may be combined).
More importantly, they receive a detailed form of notice relating to the transfer, which includes information in large part similar to the information they receive on an annual statement. The notice provides information on members’ transferred pension benefits at the effective date of the asset transfer. In addition, the notice from the successor employer must indicate any change in employer or employee contribution rates under the successor plan.
This type of expanded disclosure makes great sense from the perspective of the plan member in the context of an asset transfer since it clarifies for the member exactly what (and how much) is being transferred from the original employer’s plan to the successor employer’s plan and what, if anything, is changing in the successor plan.
The notice to any trade unions representing affected plan members is also enhanced. In addition to the information regarding contribution rates under both the original and successor plans, the notice to the trade union must contain a list of the members represented who are affected by the asset transfer.
Finally, the current rules impose the responsibility for complying with the transfer rules on the administrators of both the original and the successor plans. Rather than a detailed report on the transfer of DC assets, the administrators of both plans must now file certifications with FSCO confirming their compliance with the legislation and regulations in respect of the transfer. They must also indicate the total amount of DC assets to be transferred, in addition to a copy of the employer’s agreement relating to the transfer. A statement must be also be filed with FSCO once the asset transfer is completed. Finally, any trade unions involved must receive copies of the application for the asset transfer filed with the superintendent.
The impact of the new asset transfer rules
While the current asset transfer rules may have increased the administrative costs of such transfers for employers, the asset transfer process has no doubt been facilitated by the new rules in Ontario. The experience with DC asset transfers has demonstrated that the rules are workable and comprehensible from both the employer and the plan member perspective.
The prescriptive approach to determining the amount of a DB asset transfer introduces greater certainty into the asset transfer process, while the strict timelines for applications ensures that such transfers do not drag on for years after the event that gives rise to the transfer.
Finally, the expanded disclosure to members and others affected by the asset transfer ensures transparency to all involved, including their trade union representatives. Given that such asset transfers have an important impact on the members whose benefits are being transferred to a new plan, this enhanced notice is an important component of the new regime.