FTR Now

Pension Asset Transfers Made Easier

· 16 min read By: Natasha D. Monkman, Andrea D. Yau, Terra Klinck

FTR Now

Pension Asset Transfers Made Easier

Date: February 20, 2014

Long-awaited amendments to the Ontario Pension Benefits Act (“PBA”) regarding the transfer of assets between pension plans became effective on January 1, 2014. New supporting Regulations under the PBA[1] (the “Asset Transfer Regulations”) also came into force on January 1, 2014. This FTR Now provides a high-level overview of the new asset transfer regime.

The new legislative regime governs five separate pension asset transfer situations:

  • Section 80 – Transfers upon the sale of a business
  • Section 80.1 – Transition, transfers upon the sale of a business
  • Section 80.2 – Transfers upon a change of trade unions, MEPPs
  • Section 80.3 – Transfers between certain public sector pension plans[2]
  • Section 81 – Adoption of successor pension plan

The PBA and Asset Transfer Regulations do not address asset transfers from single-employer plans to jointly sponsored plans or the conversion from one to the other, which continue to be awaited following the Ontario government’s 2013 Budget commitment (discussed in our FTR Now, “Ontario Tables Its 2013 Budget“).

HISTORICAL CONTEXT

Historically, pension plan mergers and the transfer of assets and liabilities between plans were quite common in sale of business situations as well as in the non-sale context. This changed as a result of the Ontario Court of Appeal’s 2003 decision in Aegon Canada Inc. and Transamerica Life Canada v. ING Canada Inc. (“Transamerica“).

In Transamerica, the Court of Appeal held that following a merger of two defined benefit (“DB”) plans where the terms of the original trust of one of the pre-merger plans prevented any part of the capital or income of the fund from being diverted to any purpose other than the exclusive benefit of the beneficiaries of the plan, surplus assets derived from that plan could not be used to fund liabilities relating to the other pre-merger plan. Following the decision, the Superintendent of Financial Services (“Superintendent”) imposed very restrictive conditions on the transfer of assets and liabilities between DB plans, practically placing a moratorium on asset and liability transfers between DB plans. In the sale of business context, the result was that employees were required to leave their DB accrued benefits in the vendor’s pension plan and future service benefits accrued in the purchaser’s pension plan. This often resulted in a lower overall pension amount for affected employees and more complex administration for both pension plans.

In 2008, the Report of the Expert Commission on Pensions (also referred to as the “Arthurs’ Report”) concluded that the existing impediments to asset transfers were inappropriate and recommended that the pension asset transfer rules be changed. Draft pension reform legislation was subsequently introduced in December 2009 (Bill 236, Pension Benefits Amendment Act, 2010). Amendments followed in Bill 120, The Securing Pension Benefits Now and for the Future Act, 2010, and Bill 173, Better Tomorrow for Ontario Act (Budget Measures), 2011, clarifying the new procedures further. Proclamation of the PBA amendments was delayed pending release of supporting regulations. As noted above, these PBA amendments and the supporting PBA Asset Transfer Regulations became effective January 1, 2014.

The new rules govern applications for asset transfers made after January 1, 2014.

PBA SECTIONS 79.1 & 79.2 – GENERAL RULES

New sections 79.1 and 79.2 of the PBA set out the ground rules for all asset transfers. No asset transfers are permitted unless allowed under sections 21[3], 42[4], 80, 80.2, 80.3 or 81 of the PBA or the transfer satisfies the prescribed requirements and the Superintendent has consented to the transfer of assets.

Section 79.2 generally provides that when assets are transferred in accordance with the PBA and the Asset Transfer Regulations, the transferred assets form part of the pension fund for the successor plan and cease to be identified as assets of the original plan. This provision addresses the common law concern raised in Transamerica outlined above.

Historically, the Superintendent would not approve asset and liability transfers between DB plans unless the successor plan provided an identical benefit formula for past service. This has been changed. Section 79.2 of the PBA provides that the successor plan is not required to provide identical pension benefits for transferred members in order for an asset transfer to be approved by the Superintendent. However, DB assets must be used to provide DB benefits under the successor plan[5].

In addition, the Asset Transfer Regulations prohibit an asset transfer if the accrued benefits of an employee would be reduced under the successor plan in circumstances that would not be permitted under the original plan. This effectively prohibits the transfer of assets from a single employer pension plan to a multi-employer pension plan (“MEPP”) that permits the reduction of accrued benefits.

Section 79.2 of the PBA also introduces the concept of member consent to an asset transfer. If a member consents to the transfer of pension benefits to the successor plan, the administrator of the original plan is afforded a discharge of liability on transferring the assets in accordance with the PBA and the Asset Transfer Regulations. This is a new discharge provision not previously provided to plan administrators.

SECTION 80 – ASSET TRANSFERS UPON SALE OF A BUSINESS

DB ASSET TRANSFERS

Pension asset and liability transfers often arise in the context of corporate transactions. Historically, the Superintendent’s “Policy Statement No. 2” set out the detailed requirements that needed to be met in order to obtain Superintendent approval to a transfer of assets in the context of sales of business[6]. Under the new PBA regime, the detailed requirements are set out in the PBA and the Asset Transfer Regulations. As was the case under the prior regime, Superintendent consent is required, but the PBA now provides that the Superintendent shall consent to the transfer if specified criteria are satisfied.

The Asset Transfer Regulations establish the effective date of a transfer under section 80 of the PBA as the effective date of the sale of business to the successor employer. An asset transfer application (which includes information prescribed in the Asset Transfer Regulations) must be filed with the Superintendent within nine months of the effective date of the transfer. For sales of businesses that occurred prior to January 1, 2014 for which an asset transfer has not yet been applied for, the Financial Services Commission of Ontario (“FSCO”) has advised that the Superintendent will treat January 1, 2014 as the effective date of the transfer for purposes of filing an asset transfer application under the new regime[7]. The Superintendent can extend the deadline for the application, on request, in accordance with the PBA[8].

The original employer and the successor employer must enter into an agreement to transfer to the successor employer the responsibility for providing pension benefits under the original plan for transferred members, former members, retired members and other persons entitled to benefits (“Transferred Beneficiaries”) and to transfer the assets in connection with the transfer of benefits. Section 80 contains a general requirement that the administrators of the two pension plans must agree on the manner of determining the amount of the assets to be transferred. However, the Asset Transfer Regulations now set out the prescribed formula for the purposes of calculating the amount to be transferred to the successor plan.

If the agreement requires the consent of Transferred Beneficiaries, the agreement must give all applicable Transferred Beneficiaries the opportunity to consent to the asset transfer. Consent must be obtained in accordance with prescribed conditions.

Arguably, the most important change to the asset transfer rules is that, with respect to DB plans, the successor plan is not required to provide DB identical pension benefits for the transferred members that were provided under the original plan (but a DB to DC transfer is not permitted). However, the commuted value of the benefits determined as of the effective date of the asset transfer cannot be less than the commuted value of the benefits under the original plan (adjusted for any payments from the original plan to a prescribed retirement savings arrangement or directly to the members). The Asset Transfer Regulations require that the commuted value of Transferred Beneficiary’s benefits be determined as if there was a termination of employment on the effective date of the transfer of assets and as if an activating event had occurred on that date for the purposes of grow-in rights (i.e. the commuted value must include the value of section 74 rights if the member has 55 age plus service points).

The Asset Transfer Regulations also require that the amount of a Transferred Beneficiary’s accrued basic pension benefits under the successor plan (i.e. without regard to the value of ancillary benefits) must equal at least 85% of the amount of his or her basic accrued pension benefits under the original plan. This provision will effectively prohibit asset transfers in cases where the basic pension formula in the successor plan is significantly lower than the benefit pension benefits under the original plan.

When applying for consent to an asset transfer both pension plans must file valuation reports, as of the effective date of the asset transfer, which comply with specific requirements. The Asset Transfer Regulations specify that at least one of two funding conditions must be satisfied after the asset transfer:

  • the successor DB plan has a solvency ratio of 0.85; or
  • the solvency ratio of the successor DB plan is not reduced by more than 0.05 below the solvency ratio of each of the original plan and the successor plan before the transfer.

If an asset transfer results in a new going concern unfunded liability or a new solvency deficiency in the successor plan, special payments must be made following the normal PBA funding rules.

If the original plan has a surplus as of the effective date of transfer, the amount of assets to be transferred must include a portion of the surplus determined in accordance with the Asset Transfer Regulations.

DEFINED CONTRIBUTION (“DC”) ASSET TRANSFERS

Superintendent consent is still required prior to a transfer between two DC plans, but, as with DB plans, the Superintendent shall consent to the transfer if specified criteria are satisfied. If an asset transfer is sought between two DC plans, the rules are far simpler. A transfer under section 80 will be acceptable provided that the balance in each Transferred Beneficiary’s DC account in the successor plan shall not be less than the balance held in the original plan.

Section 80 of the PBA and the Asset Transfer Regulations include a number of notice and filing requirements applicable to both DB and DC asset transfers that arise and must be complied with before, during and following the application process.

SECTION 80.1 – TRANSITION, TRANSFERS UPON THE SALE OF A BUSINESS

As outlined above, there has effectively been a moratorium on most asset transfers between DB pension plans for almost a decade. Section 80.1 of the PBA opens up a “window” within which the administrators of certain pension plans affected by past divestures/sales of businesses may enter into pension asset and liability transfer agreements with the administrator of a successor plan in respect of the prior business divesture. Section 80.1 applies to employees participating in the following pension plans prior to a divesture: the Healthcare of Ontario Pension Plan, OMERS Primary Pension Plan, Ontario Public Service Employees’ Union Pension Plan, Public Service Pension Plan, VON Canada Pension Plan and the Workplace Safety and Insurance Board Employees’ Pension Plan. As a result, section 80.1 is applicable to broader public sector entities whose employees participated in the above-noted plans prior to divestures. The transfer window will be open from January 1, 2014 until June 30, 2015[9]. The following arrangements are permitted under section 80.1:

  • agreements authorizing eligible transferred employees who continue to be employed by the successor employer and eligible former employees who were employed by the successor employer but terminated membership in the successor plan after May 18, 2010 to elect to transfer the value of their accrued pension benefits to the successor plan; and
  • agreements providing for the transfer to the successor employer of the responsibility for providing pension benefits for all or any transferred members.

Like section 80, section 80.1 does not require the successor plan to provide identical pension benefits that were provided under the original plan.

A section 80.1 asset transfer can be effected without the consent of the Superintendent provided the transfer agreement is filed with the Superintendent and certain statutory and prescribed requirements are met. Section 80.1 does not authorize individuals to elect to make the transfer if, before May 18, 2010, they terminated employment or began receiving a pension from either pension plan.

SECTION 80.2 – ASSET TRANSFERS UPON CHANGES IN TRADE UNIONS, MEPPS

Section 80.2 applies in the discrete circumstances where a trade union representing a group of members of a MEPP ceases to represent the members and a new trade union is certified as their bargaining agent, resulting in the group becoming members of another pension plan. Section 80.2 specifies that the administrator of the original MEPP shall transfer to the successor MEPP all assets and liabilities respecting those members who have elected under the portability provisions to transfer their entitlements to the successor MEPP. If the members of the original MEPP are not entitled to make an election to transfer their accrued pension benefits, the administrator shall transfer to the successor MEPP all assets and liabilities attributable to the members determined as prescribed.

While section 80.2 came into force on January 1, 2014, no separate regulations have been enacted.

SECTION 81 – ADOPTION OF SUCCESSOR PENSION PLAN

DB ASSET TRANSFERS

New asset transfer rules have been established relating to asset transfers where a successor plan has been established for a group of employees and the employer ceases to make contributions to the original plan. This provision applies when, for example, an employer who maintains multiple pension plans merges these plans into a single plan. If section 81 applies, the original plan is deemed not to be wound up and the successor plan is deemed to be a continuation of the original plan. Under the new asset transfer regime, the successor plan is not required to provide identical pension benefits that were provided under the original plan.

Historically, the detailed requirements that needed to be met in order to obtain Superintendent approval for an asset transfer to a successor plan were set out in FSCO policy. Under the new regime, the detailed requirements are set out in the PBA and the Asset Transfer Regulations. As was the case under the prior regime, Superintendent consent is required, but the PBA now provides that the Superintendent shall consent to the transfer if specified criteria are satisfied.

The effective date of a transfer under section 81 of the PBA is the effective date of the amendment to the original plan or the successor plan, as applicable, that purports to effect the transfer of assets. An application (which includes information prescribed in the Asset Transfer Regulations) must be filed within nine months of the effective date of the transfer. If a successor plan was adopted prior to January 1, 2014, FSCO has advised that the Superintendent will treat January 1, 2014 as the effective date of the transfer for the purposes of new asset transfer applications[10].

Similar to the new section 80 (sale of business) rules, the new asset transfer rules regarding adoption of a successor plan provide the following:

  • The administrators of the two pension plans may agree upon the manner of determining the amount of assets to be transferred and are required to give the Superintendent notice of their agreement. Again, however, the amount to be transferred must be calculated in accordance with the prescribed formula.
  • If the benefits to be provided under the successor plan for Transferred Beneficiaries are not the same as those provided under the original plan, the commuted value of the benefits provided to Transferred Beneficiaries under the successor plan cannot be less than the commuted value of the benefits under the original plan determined as of the effective date of the asset transfer (adjusted for any payments from the original plan to a prescribed retirement savings arrangement or directly to the members).
  • The amount of accrued basic pension benefits under the successor plan must at least be equal to 85% of the accrued basic pension benefits under the original plan.
  • If an asset transfer results in a new unfunded liability or solvency deficiency in the successor plan, special payments must be made.
  • If the original plan has a surplus as of the effective date of the transfer, the amount of assets to be transferred must include a portion of the surplus determined in accordance with the Asset Transfer Regulations.

The funding conditions under section 81 are different than the conditions under section 80. Under section 81, at least one of two funding conditions must be satisfied after the asset transfer:

  • the successor DB plan has a solvency ratio of 1.00; or
  • the solvency ratio of the successor DB plan is not reduced by more than 0.05 below the solvency ratio of each of the original plan and the successor plan before the transfer.

DC ASSET TRANSFERS

As with section 80 asset transfers, if an asset transfer is sought to be made to a DC successor plan, an asset transfer will be acceptable to the Superintendent, for the purposes of providing consent to the transfer, if the balance in each Transferred Beneficiary’s DC account in the successor plan is not less than the balance held in the original plan.

As with section 80 asset transfers, section 81 of the PBA and the Asset Transfer Regulations include a number of notice and filing requirements that arise and must be complied with before, during and following the application process.

CONCLUSION

The Asset Transfer Regulations and the associated PBA asset transfer rules are a welcome change to the Ontario legal landscape – the new regime will allow employers to proceed with pension asset and liability transfers where appropriate. Employers who were waiting for the new rules before filing an application for prior transactions should take action immediately to meet the six month filing deadline. Please contact any member of our Pension, Benefits & Executive Compensation Group if you have any questions or require further details.

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[1] See O. Reg. 308/13, Asset Transfers Under Section 80.1 of the Act, and O. Reg. 310/13, Asset Transfers Under Sections 80 and 81 of the Act, and O. Reg. 306/13, which contains several corresponding amendments to the PBA Regulations.

[2] Section 80.3 did not come into force on January 1, 2014 and we continue to await its proclamation and any related regulations. Section 80.3 is not discussed in this FTR Now.

[3] Section 21 of the PBA recognizes reciprocal transfer agreements between pension plans.

[4] Section 42 of the PBA requires plan members to be offered portability transfer options upon termination of employment and membership.

[5] See section 79.2(4) of the PBA.

[6] Issued under the old Section 80 of the PBA.

[7] In December 2013, FSCO published “Questions and Answers” regarding the new rules on its website, in which it identified the Superintendent’s position regarding the deemed effective date for sales of business occurring prior to January 1, 2014.

[8] Section 105 of the PBA permits the extension of deadlines for a maximum of 60 days and, if the Superintendent is satisfied that extraordinary grounds exist and that no person will be unduly prejudiced, for further periods.

[9] The Ontario government has proposed to extend the window to June 30, 2016 in Bill 151.

[10] See FSCO’s Questions and Answers (discussed above).

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