The United Way Greater Toronto introduced a defined benefit pension plan in 1965 and moved to a hybrid plan in 1990.
While the DB side was fully paid by the employer, the defined contribution component allowed employees to contribute up to four per cent of their annual salary with a 50 per cent employer match.
“[It] allowed us to share risk with employees, so it actually met our principles and our goals, but it was expensive,” says Rahima Mamdani, vice-president of people and culture at UWGT. “And it meant that we were doing all of the administration for both a DB and a DC plan, so it was pretty labour intensive as well. It was also hard for employees to understand.”
These factors were top of mind when, in 2018, the Colleges of Applied Arts and Technology pension plan and the OPSEU Pension Trust made new DB plans available for employers in Canada’s broader public sector, charitable and nonprofit industries.
After some consideration, the UWGT chose the CAAT’s DBplus, which now also includes members like the Canadian Press, Community Living Toronto, Postmedia Corp. and Torstar Corp. According to Mamdani, DBplus offered the type of pension benefit the UWGT wanted for its staff.
Since 2014, Ontario has allowed single-employer plans to merge into larger jointly sponsored pensions, but the development of options like DBplus and OPTrust Select has accelerated the number of smaller employers joining larger plans. With more plan sponsors considering pension mergers, what do they need to know before taking the leap?
One key benefit for smaller pension plan sponsors merging with a JSPP is a reduction in administration, governance and liabilities. “Once they go into these plans, there’s very little, if any, governance they’re responsible for, other than making contributions into the plan,” says Gord Lewis, president of Proteus Performance Management Inc. “It’s greatly simplified, which can be a huge benefit to some organizations.”
For the City of Toronto, administration was a key concern when it transferred four closed DB plans into the Ontario Municipal Employees Retirement System in 2019. “As the owner of those plans, you always maintain financial liability for the plans,” Hatem Belhi, director of pensions, payroll and employee benefits at the city, told Benefits Canada in February. “By moving that to OMERS, we get out of that future liability. . . . It really allows us to focus on other things other than pension administration.”
However, a plan sponsor’s administrative responsibilities don’t completely disappear once it joins a JSPP, says Jordan Fremont, a partner on the pension and benefits team at Bennett Jones LLP. While the JSPP takes over the lion’s share of administration and liabilities, employers still manage issues around plan enrolment, ensuring employees receive necessary pension communication and dealing with employee classification changes that have implications for their plan member statuses. Employers are also charged with making sure the new plan is capturing the correct earnings basis for plan members, and addressing issues around leaves of absence, termination or employees leaving their jobs.
“Any employer that has their own plan would confront these issues themselves, but they would have some flexibility dealing with their own plan than when dealing with a third party and that third party’s rules and regulations,” says Fremont.
Keeping benefits consistent
Another big consideration for plan sponsors is the difference between their current offering and what a JSPP would provide for their members.
That was a key concern for the UWGT. When its joint union-management committee and a subcommittee of the organization’s finance, audit and risk committee decided DBplus was the way to go, it was because the plan would provide a pension benefit in line with the organization’s own offering.
Under DBplus, the UWGT is contributing six per cent of employees’ salaries into the plan, while staff are contributing four per cent this year, with an increase to five and six per cent in the next two years. “That gradual phase-in allowed people who weren’t at the max [DC contribution] to not be hit with this big contribution increase in the first year,” says Mamdani.
When Community Food Centres Canada, a charitable organization that operates nine food centres across the country, joined OPTrust Select in May 2019, it was able to significantly increase its retirement offering. Previously, the organization had no formal pension or retirement savings plan for its roughly 30 employees, instead providing staff with three per cent of their gross pay at the end of the year that they could put toward whatever they chose.
Since joining OPTrust Select, both CFCC and its employees contribute three per cent to the plan. “It is a huge benefit to have even a relatively modest but reliable income supplement to your [Canada Pension Plan] and [old-age security benefits] when you’re older,” Kathryn Scharf, the organization’s chief operating officer, told Benefits Canada last year.
Where a jointly sponsored plan provides the same or better benefits as a single-employer plan, the comparison between offerings is less complicated. However, if the new plan means a cut in member benefits, plan sponsors have to be aware of any contractual obligations that would affect a merger and be prepared for the possibility of constructive dismissal claims, cautions Fremont.
“It’s possible a move from a rich plan to a less rich plan . . . might be considered a [fundamental adverse change to employment]. In those cases, employers would have to be mindful they could face such claims from employees, and the exposure they would have is for the differential in compensation, which is hard to determine in a pension context.”
They must also communicate clearly with employees about why it would be valuable for them to take the lesser benefit — for example, if the organization is in an industry with challenges around financial stability or its balance sheet is facing a debilitating burden from its pension liabilities.
The view from the top
So what are JSPPs looking for in their applicants? In short, a clear picture of the organization’s financial state and the makeup of its workforce.
According to Dani Goriachy, chief risk officer at the OPTrust, applicants to OPTrust Select are required to provide three years of audited financial statements and a broad, anonymized overview of its employees that includes date of birth, gender, whether they’re part or full time, a high-level overview of salary history and their service in the employer’s pension plan, if one exists.
Next, the JSPP would look at whether the employer’s plan would challenge its sustainability. OPTrust Select performs what it calls a net benefit test, which compares the present value of an employer’s future benefits to their future contributions. “There’s a range that’s acceptable and so far, to date, most applicants have been acceptable,” says Goriachy.
One area where an employer may stumble is if it has a history of turnover, he notes. “In a DB pension plan, you do leave money on the table when an employee turns over. We have to provide them with a commuted value, but it’s not the same thing as having a lifetime pension in the plan. We want to make sure we’re helping with retirement security, not hindering it.”
The CAAT also reviews whether a prospective plan’s assets would make it a cost- and risk-neutral addition to DBplus. However, Derek Dobson, chief executive officer and plan manager, says it has allowed a couple of plans to merge without the necessary assets. Instead, the CAAT facilitates an amortization schedule to pay the gap over time. “We’re trying to be really flexible in helping these employers and members end up in a sustainable pension plan.”
Once the CAAT has completed its preliminary assessments, it works with employers to determine the appropriate contribution rate to provide equivalent benefits to employees. From there, the fund completes a cost analysis and presents applicants with a fixed-price cost of entry to take back to their boards for approval. “It gives them a lot of assurance that, when they’re going to their board, they have a locked-in cost well in advance of the effective date,” says Dobson.
Each merger process will look different. For employers sponsoring a group registered retirement savings plan or DC pension, the process is simpler. Employees will join the JSPP on a go-forward basis, with the new plan sending buyback forms that provide them with options for converting their capital accumulation plan account balances into DB years of service.
The buyback quote is personalized for each member, based on their years of service with their employer, says Goriachy. Employees have the option of purchasing all of their service, some of it or none. Those who choose to buy their service back can either pay it in one lump sum and receive a full tax deduction; amortize the payment over 10 years, which comes with interest; or transfer their existing balance from their previous plan.
“[When we designed OPTrust Select], we were thinking of how to make sure we enhance retirement security, not just for a new entrant coming into the plan who’s going to earn a lot of years of service in the plan,” he says. “We wanted to make sure we make a difference for those on the cusp of retirement. They can change all of their RRSP money into a DB overnight — or a large portion of it. [This] takes away all of the worry about, ‘How do I take my money out and how do I make sure I don’t outlive my money?’”
DC plan sponsors will also be required to consider whether to windup their pension if some employees don’t move their funds to the new JSPP.
On the other hand, DB plans have regulatory hurdles to clear. In Ontario, members must vote in favour of the merger — at least two-thirds of active members must consent and no more than one-third of inactive members can write in to voice their dissent.
For that reason, it’s crucial for plan sponsors to communicate clearly, and work in partnership with their unions where relevant, to achieve member buy in, says Fremont. “There’s no guarantee that you’re going to get the consents you need to make that process succeed. . . . You need to come up with a compelling story to make employees want to buy into that process.”
For the UWGT, its union’s support was crucial, says Mamdani. During its last round of bargaining, the Canadian Union of Public Employees Local 343 agreed to draft language that would allow for the organization to change its pension partway through the collective agreement if both parties agreed. “That was a really important move that we made. Otherwise, we wouldn’t have been able to move the pension when we did.”
The company — which has been part of DBplus since Jan. 1, 2020, but was still waiting on the transfer of its assets at press time — also hosted two in-person education sessions with representatives from the CAAT, as well as a webinar, to help employees understand the new plan.
Employers should be prepared for all of the work involved in that process, such as managing lists of employees, members and deferred members, handling the pension vote and manually scanning each vote, says Mamdani.
But, she adds, it’s worth it. “We actually had a 99 per cent positive vote. It was a really good result from our staff, and the union was very positive about it as well.”
Kelsey Rolfe is an associate editor at Benefits Canada.