Client Advisory. New Rules for Ontario Pension Plan Asset Transfers Take Effect on January 1, Background

Transcription

1 Client Advisry New Rules fr Ontari Pensin Plan Asset Transfers Take Effect n January 1, 2014 December 18, 2013 Summary Spnsrs f Ontari registered pensin plans will sn be able t take advantage f lnganticipated legislative refrms that simplify and standardize the asset transfer prcess. The Ontari gvernment has prclaimed the Pensin Benefits Act (PBA) asset transfer prvisins int frce and has filed the necessary regulatins, bth effective January 1, Many asset transfers relating t the sale f a business and plan cnslidatin r redesign have been n hld pending these final regulatins. Ontari plan spnsrs can nw assess the ptential impact f the new asset transfer rules n their apprach t plan re-design and defined benefit (DB) plan derisking strategies. Backgrund As part f the refrm t the Ontari PBA, majr changes t the PBA asset transfer prvisins were passed in three separate bills. These amendments applied t asset transfers that were either between separate emplyers plans because f a sale, assignment r ther dispsitin f a business (sectin 80) r between plans f the same r related emplyer (sectin 81). Other changes applied t multi-emplyer plans and certain public sectr plans. The asset transfer prvisins were nt prclaimed int frce as they required regulatins t implement them. Draft regulatins were released in July After a perid f public cnsultatin, the final regulatins have nw been filed and the PBA prvisins have been prclaimed int frce, bth as f January 1, The Financial Services Cmmissin f Ontari (FSCO) currently limits the ability f plan spnsrs t transfer assets between plans because f its interpretatin f the Ontari Curt f Appeal decisin in Aegn Canada Inc. and Transamerica Life Canada v. ING Canada Inc. (Transamerica). Specifically, if any f the pensin funds invlved in an asset transfer are subject t a trust, then the language f the trust must be reviewed t determine whether it is pssible t cmmingle assets fllwing the asset transfer.

2 Key Features f the New Asset Transfer Framewrk PBA Amendments The PBA amendments will change the asset transfer apprval prcess in several ways. Sme f the mre significant changes are nted belw: The new prvisins are mre prescriptive with less discretin given t the Superintendent f Financial Services (Superintendent). Nw, the Superintendent must apprve asset transfer applicatins which fllw the mandated prcedures and standards. It appears that this change is intended t vercme the difficulties related t trust law that arse in the Transamerica case. Hwever the new prvisins d nt explicitly verride trust claims s it is nt yet clear whether the new prvisins have cmpletely eliminated challenges t an asset transfer based n trust law. The successr pensin plan is nt required t reprduce the same benefits that a transferred member had earned under the riginal plan. Hwever, the cmmuted value f the member s benefits in the successr plan must be cmpared t the cmmuted value f the member s benefits in the riginal plan and, if the cmmuted value in the successr plan is less, the difference must be paid t the transferred member ut f the riginal pensin plan. The ability t alter benefits n transfer nly applies t active members. The benefits f retired r deferred members included in the transfer cannt be altered as a result f the transfer. Additinal cnditins respecting successr plan benefits are prescribed by regulatin, as discussed belw. A prprtin f any surplus in the riginal plan must be transferred t the successr plan. Regulatins The new Regulatin (O.Reg. 310/13) sets ut the details regarding asset transfers under PBA sectins 80 and 81. The Regulatin is divided int three main parts setting ut general prvisins, requirements fr DB asset transfers and requirements fr defined cntributin (DC) asset transfers. Fr all asset transfers, the regulatins: Define the effective date f the transfer as the date f the relevant sale r plan amendment; Specify the cntent f ntices be issued t parties affected by the transfer; Set ut, in a series f schedules, the infrmatin required as part f an applicatin fr apprval t transfer the assets; and Set ut specific timelines, as indicated belw, fr the varius steps in the prcess: six mnths frm effective date f asset transfer t send ntice t members, frmer members, retired members and ther persns entitled t benefits; nine mnths frm effective date f asset transfer t send the asset transfer applicatin t the Superintendent; and 120 days after Superintendent s cnsent t cmplete the asset transfer. New Rules fr Ontari Pensin Plan Asset Transfers Take Effect n January 1, 2014 I 2

3 The Superintendent has the authrity t extend these deadlines. Fr asset transfers invlving DB plans, the regulatins: Specify the frmula used t determine the asset amunt t be transferred. This effectively requires the transfer f a prprtinate amunt f the assets (based n the slvency rati f the riginal plan), including a prprtin f any surplus that exists; Set ut a minimum slvency test that must be satisfied befre a transfer will be authrized: fr sectin 80 (sale f a business) asset transfers, either: the slvency rati f the successr plan after the transfer must be at least 85%; r the slvency rati in the successr plan after the transfer cannt drp mre than 5% frm what it was befre the transfer and cannt be mre than 5% belw the rati f the riginal plan. fr sectin 81 (nn-sale) asset transfers, either: the slvency rati in the successr plan after the transfer must be at least 100%; r the slvency rati in the successr plan after the transfer cannt drp mre than 5% frm what it was befre the transfer and cannt be mre than 5% belw the rati f the riginal plan. Where a member s accrued lifetime pensin amunt will be reduced by the transfer, that reductin is limited t 15% (this might ccur fr example, where the lifetime pensin decreases because the successr plan prvides mre valuable ancillary benefits); and Will nt allw a transfer if the successr plan can reduce accrued benefits in circumstances that had nt been permitted in the riginal plan (this wuld, fr example, prevent a transfer frm a single-emplyer plan t a multi-emplyer plan, a target benefit plan r certain jintly spnsred pensin plans). Fr asset transfers invlving DC plans, the regulatins state that the asset transfer will nt be authrized if the DC accunt under the successr plan is less than it was under the riginal plan. Imprtant Changes frm Draft Versin The final versin f O.Reg. 310/13 includes several changes frm the riginal draft versin. Fr example, there is n lnger a requirement that a successr plan allw a transferred member the ptin t buy back service if the member is credited with fewer years f service in the successr plan after the transfer. The frmula with respect t the amunt that must be transferred in a DB transfer has been changed t include a deductin f any benefit payments frm the riginal plan t transferred members made between the effective date f the transfer and the date that assets are actually transferred. New Rules fr Ontari Pensin Plan Asset Transfers Take Effect n January 1, 2014 I 3

4 The final regulatins als clarify that any required deficit amrtizatin cntributins in respect f the benefits that will be transferred must cntinue t be made t the riginal plan until assets are actually transferred. As well, the timelines have been extended in the final versin and there have been changes t the cntent required in the ntices. Public Sectr Asset Transfers Under Sectin 80.1 Sectin 80.1 f the PBA was als prclaimed int frce effective January 1, It prvides transitinal measures allwing certain public sectr plans t negtiate agreements that enable eligible emplyees, whse emplyment was transferred because f gvernment-initiated restructuring befre January 1, 2014, t elect t transfer their pensin benefits frm their frmer t their current pensin plan. The apprach is similar t the apprach used fr sme past transfers f Ontari gvernment emplyees t the federal public service. It is als similar t the apprach taken in many reciprcal transfer agreements fr individual member transfers. The new Regulatin fr Sectin 80.1 (O.Reg 308/13) lists the fllwing plans that can arrange a transfer under sectin 80.1: Healthcare f Ontari Pensin Plan; OMERS Primary Pensin Plan; Ontari Public Service Emplyees Unin Pensin Plan; Public Service Pensin Plan; VON Canada Pensin Plan; and Wrkplace Safety and Insurance Bard Emplyees Pensin Plan. The Regulatin als sets ut further details abut these agreements. Hwever, it is cnsiderably less prescriptive than O.Reg 310/13. This will allw greater flexibility fr the prescribed public sectr plans as cmpared t private sectr emplyers. Fr example, there is n requirement that the successr plan meet a minimum slvency rati, nr is there any limit n the change t a transferred member s accrued lifetime pensin as part f the transfer as lng as the value is preserved r paid t the transferred member. Hwever, all transfers must be in place befre the date n which sectin 80.1 will be repealed. Currently, this date is July 1, 2015 under the PBA. Hwever, amendments have been intrduced t extend that date t July 1, If transfer agreements are negtiated, eligible emplyees will include thse emplyed by the successr emplyer n January 1, 2014, r thse whse emplyment with the successr emplyer r whse membership in the successr pensin plan ended n r after May 18, 2010 but befre January 1, In general, the prescribed plans have flexibility t negtiate the parameters f their transfer agreements. New Rules fr Ontari Pensin Plan Asset Transfers Take Effect n January 1, 2014 I 4

5 Certain ntificatins must be prvided t eligible emplyees, unins and/r advisry cmmittees, and spusal cnsent t the transfer must als be prvided fr members already receiving a pensin, if applicable. MEPP Asset Transfers Under Sectin 80.2 Sectin 80.2 has als been prclaimed int frce effective January 1, It addresses transfers when a grup f members in a multi-emplyer pensin plan becme represented by a new trade unin and becme, as a result, members f a different pensin plan. FSCO Cmmunicatins FSCO has issued cmmunicatins, including a Q&A, n the new rules. The Q&A, amng ther things, indicates hw FSCO will apprach issues relating t the timing f an applicatin. Specifically: If an asset transfer applicatin with an effective date prir t January 1, 2014 has already been filed prir t January 1, 2014, then the applicatin will be reviewed using the legislatin applicable befre January 1, If an asset transfer applicatin with an effective date prir t January 1, 2014 is filed n r after January 1, 2014, then the applicatin will be reviewed using the legislatin effective January 1, In that case, FSCO will treat January 1, 2014 as the effective date when it determines the deadlines under the regulatins fr the applicatin and any required ntice. Hwever, if the deadlines are nt then met, the applicatin will be refused. Cmment Plan spnsrs have been waiting fr the new asset transfer regime t be implemented since the amendments were first intrduced in The PBA amendments and accmpanying regulatins are a significant develpment that shuld nw allw plan mergers that were nt feasible in the past. Hwever, it is unclear whether these changes fully address the issues that develped because f FSCO s interpretatin f Transamerica. Mre clarity will be available nce FSCO sets ut its psitin, althugh that may nt be cnclusive if smene subsequently challenges that psitin in the curts. These changes d nt allw an asset transfer frm a single-emplyer plan t a jintly spnsred plan, a multi-emplyer plan r target benefit plan. This means that the cmmitment in the 2013 Ontari Budget t permit such transfers, an imprtant issue fr sme plans in the brader public service, is nt met by these amendments, thugh a separate regulatin is expected. Thse spnsrs wh want t make asset transfer applicatins fr transfers with effective dates befre January 1, 2014 shuld cnsider beginning the prcess nw given that the applicatin must be submitted t FSCO by September 30, The new slvency tests under the regulatins are mre flexible than the current FSCO asset transfer plicies and will ffer greater latitude t accmplish asset transfers while mitigating the need t cntribute additinal amunts t the plans. Flexibility will als be prvided t emplyers because they can nw structure transactins as ptinal transfers where members can elect whether r nt t New Rules fr Ontari Pensin Plan Asset Transfers Take Effect n January 1, 2014 I 5

6 mve their past service benefits frm the riginal t a successr plan. There may als be pprtunities fr de-risking strategies as part f an asset transfer. Fr the prescribed public sectr plans set ut in Regulatin 308/13, the benefits f the new regime culd als be significant. There is, hwever, a limited windw fr effecting transfers fr these six plans, since the effective date cannt be later than June 30, 2015, under current legislatin, r June 30, 2016 if the repeal date is extended as prpsed. Fr mre infrmatin This Advisry is nt intended t cnstitute r serve as a substitute fr legal, accunting, actuarial r ther prfessinal advice. Fr infrmatin n hw this issue may affect yur rganizatin, please cntact yur Twers Watsn cnsultant, r: Rhan Kumar, rhan.kumar@ Simn Laxn, simn.laxn@ Michelle Rival, michelle.rival@ Paul Timmins, paul.timmins@ Abut Twers Watsn Twers Watsn is a leading glbal prfessinal services cmpany that helps rganizatins imprve perfrmance thrugh effective peple, risk and financial management. With 14,000 assciates arund the wrld, we ffer slutins in the areas f emplyee benefits, talent management, rewards, and risk and capital management. Fr mre infrmatin n this Client Advisry, visit. New Rules fr Ontari Pensin Plan Asset Transfers Take Effect n January 1, 2014 I 6