Ontario : Merger or conversion of SEPPs into JSPPs
On January 20, 2015, the Ontario government released a proposed framework to facilitate the merger or conversion of Single Employer Pension Plans (“SEPPs”) to Jointly Sponsored Pension Plans (“JSPPs”) in the broad public sector. The proposed new regulations follow the 2014 Budget Measures Act (Bill 14) which amended the Pension Benefits Act (“PBA”) to establish the legislative framework permitting these types of mergers or conversions.
The proposed framework is designed to address two specific scenarios: the merger of a SEPP into an existing JSPP, or the conversion of a SEPP into a newly created JSPP.
Principles underlying the framework
Recognizing the important differences between SEPPs and JSPPs, the government developed its legislative amendments based on the following four principles:
- Merger and conversion transactions should be transparent and supported by plan beneficiaries ;
- Accrued benefits should be protected where reasonably possible;
- Transfer amounts should be adequate to fund transferred liabilities; and
- The impact of newly acquired liabilities on existing JSPP members should be minimized.
Contents of notice to plan members
The notice to plan members must address a number of issues explaining the new plan structure. These include:
- a description of the new JSPP governance structure;
- a statement that members or their representatives will have a role in making plan decisions;
- a statement that merger or conversion can only occur if:
- at least two-thirds of the SEPP members consent, and
- not more than one-third of retired members, former members and other plan beneficiaries, as a group, object;
- a consent form with explanations of the consent process, deadline, and a statement that the union may consent on their behalf;
- for mergers, a statement that any SEPP surplus will be dealt with in accordance with the terms of the SEPP and the PBA.
Requirements for superintendent’s consent
The merger or conversion must meet a number of criteria in order to receive the consent of the Superintendent of Financial Services.
The merger or conversion must fulfil the consent conditions described in the notice above.
The commuted value of the pension benefits provided to the members under the JSPP must not be less than the commuted value of their pension benefits under the SEPP, as at the proposed effective date of the merger or conversion. Furthermore, the pension benefits provided to former members, retired members and other beneficiaries under the JSPP must be the same as their pension benefits under the SEPP, as at the proposed effective date of the merger or conversion.
Additionally, a merger of a SEPP into a JSPP requires that the employer enters into an agreement with the sponsors of the JSPP respecting the proposed merger. As of the effective date of the merger, the members cease to earn benefits under the SEPP and begin to earn benefits under the JSPP. Every member is entitled to credit in the JSPP for the period of his or her membership in the SEPP for the purpose of determining eligibility for membership in or entitlement to benefits under the JSPP.
Establishing the effective date
The effective date of the merger or conversion must be after both:
- the date the Superintendent has consented to the merger or conversion; and
- the date the amendments that relate to the merger or conversion have been filed with the Superintendent.
The effective date of the merger or conversion will be the date on which affected members join and begin to contribute to the JSPP. It is also the administrative calculation date for determining commuted values and, on a plan merger, the amount of plan assets to be transferred from the SEPP to the JSPP. Pension Benefits Guarantee Fund (“PBGF”) coverage would end as of the effective date.
Calculating members’ commuted values
The commuted value provided under the JSPP must be calculated as if the member terminated his or her employment on the effective date of the merger or conversion and, unless the amendments to the SEPP and JSPP provide otherwise, without applying grow‑in.
Treatment of SEPP solvency deficits
The proposed framework sets out two different treatments for pre-existing deficits in the SEPP.
In respect of a conversion into a JSPP, special payments for any existing solvency deficit as of the effective date of the merger can be consolidated into a new ten-year payment schedule that starts on the effective date of the conversion.
For a SEPP that merges into an existing JSPP that is exempt from funding on a solvency basis, any pre‑existing going concern and solvency special payments under the SEPP will be cancelled. The rationale is that the SEPP was appropriately funded as of the date of the merger, and any further funding will be on the same basis as other employers in the JSPP.
Amounts transferred to an existing JSPP
For assets being transferred from a SEPP to a JSPP, where the JSPP is exempt from funding on a solvency basis, the transfer amount would be negotiated by the sponsors of each plan within the following parameters:
- the transfer amount must be calculated using going concern methods and assumptions;
- any indexation under the SEPP must be included in the calculation of the transfer amount;
- where the JSPP is less than fully funded on a going concern basis immediately before the merger, the value of the transferred assets cannot result in a reduction of the going concern funded status of the JSPP;
- where the JSPP is more than fully funded on a going concern basis immediately before the merger, the amount or value of assets transferred cannot result in the JSPP being less than fully funded after the merger;
- where there are insufficient assets in the SEPP to satisfy the amount required to be transferred to the JSPP, the deficiency would be paid by the SEPP employer to the JSPP by equal monthly instalments over a fifteen-year period.
Protection of benefits if JSPP winds up
The government has proposed requiring the SEPP employer to back up the SEPP benefits as of the effective date of the merger or conversion if the JSPP is later wound up with a funding deficit.
The employer that sponsored the SEPP (or any successor to that employer) would be required to pay into the pension fund of the JSPP an additional amount sufficient to fully fund the value of the SEPP benefits of the SEPP beneficiaries that had accrued up to the effective date of the merger or conversion. The additional amount paid by the employer would not be used to fund the payment of any other benefits under the JSPP, such as benefits accrued by the SEPP beneficiaries after the merger or conversion date (including additional benefits due to salary progression), or the benefits accrued by any other JSPP beneficiaries.
The merger or conversion of a SEPP to a JSPP constitutes a major change in the pension promise and there are a number of areas of potential comment for stakeholders. The government has identified three areas in particular in which it is seeking feedback:
- the level of consent for merger or conversion;
- the level of protection for benefits already accrued in a SEPP as of the effective date;
- the level of funding a SEPP employer must provide under a merger or conversion.
The Ministry has announced that further consultations will be held once draft regulations are released.
We also note that the proposed framework and eventual regulations could provide some insight into the requirements for SEPP in the private sector, should they eventually be allowed to convert or transfer assets to target benefit pension plans.
Key differences between a SEPP and a JSPP
The main differences between SEPPs and JSPPs include the following:
- SEPPs are generally administered by employers, whereas JSPPs are jointly administered by employee/union and employer representatives.
- SEPPs cannot reduce accrued (i.e., already earned) benefits, whereas JSPPs can reduce them if the pension plan is wound up and has insufficient assets.
- Employers are primarily responsible for funding deficits in SEPPs, whereas both employers and employees are responsible for funding deficits in JSPPs.
- SEPPs are generally required to provide “grow‑in” benefits for eligible members whose employment is terminated by the employer, whereas JSPPs can opt‑ut of providing these benefits.
- SEPPs are generally covered by the Pension Benefits Guarantee Fund (PBGF), whereas JSPPs are not.
The government has requested public comment on the proposed framework by February 27, 2015.