How to deal with DC pensions in an M&A transaction

In the course of a merger or acquisition, there are a number of balls to juggle, not the least of which are the changes to employees’ benefits packages.

Last month, Benefits Canada looked at one of the more complicated scenarios: how to deal with defined benefit pension plans in the wake of a merger or acquisition. What are the key considerations when it comes to defined contribution plans?

Read: How to deal with DB pensions in an M&A transaction

The issues are simpler when it comes to defined contribution plans, but it’s important to remember how much they can vary, says Kenneth Burns, a partner at Lawson Lundell LLP in Vancouver. “In terms of a pension culture, there can be as much of a difference between two merging employee groups with DC plans than there is with a DB and a DC. The richness of the benefit and the importance of the benefit in the overall compensation of employees is a factor.”

Indeed, when the acquisition of a business includes its employees, they’re a very important asset. “From a human resources perspective, if you want those employees, you want to make sure that every aspect of their worry that might come out of being acquired is satisfied . . .. You want to provide accurate information to them about what your philosophy is as far as pensions are concerned,” says Burns.

Making the switch

When General Electric Co. acquired a division of French multinational Alstom in November 2015, it also took on a number of defined contribution plans. For non-unionized employees, the company transitioned the Alstom plans over to the design and provider of its own plan, so that as soon as new employees moved to the GE payroll, they also became plan members.

“The next phase is to move the existing assets they had from their provider to our provider and to change the investment options to be the same as our investment options, so that allows the employee to only have one place to have to go and the same decision-making options,” says Diana McNiven, manager of compensation and benefits at GE Canada. The third phase, she notes, will be applying to the regulators for approval to actually merge the plans so they sit with the provider under a single registration number.

Read: Pensions: Travelling the long, winding M&A road

“[Defined contribution plans] are ones [where] you can move people to the new plan design and take advantage of the new payroll and new contributions. . . . It’s a lot simpler plan to administer,” says McNiven.

While the merger of defined contribution plans is generally less risky, the buyer should still be cognizant of the requirements for good governance under the Canadian Association of Pension Supervisory Authorities’ guidelines, says Kent Lum, an associate partner with Aon Hewitt’s retirement practice. The issues include provider selection, investment options, the monitoring process and the review and replacement of record keepers.

“The plan sponsor or administrator is making certain decisions for those DC members,” he says. “So if the plans have been governed well and there is good documentation on the governance process and structure and there are policies in place, a DC to DC is a lot simpler when you’re assuming a plan.”

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While the timing of such a transaction may mean working with the current vendors or record keepers during the early stages of a transaction, that doesn’t absolve the buyer from conducting due diligence, he adds. “So during the transition and the initial phases, it may be OK to use the existing vendors, but over time, proper due diligence should be conducted in selecting those vendors.”

Jennifer Paterson is the managing editor of Benefits Canada.

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