The benefits of merging Ontario pension plans

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.

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.