Module 10: Managing Special Situations—Plan Terminations, Surplus in Ongoing Plans and Business Reorganizations Flashcards
Differentiate between the terms “termination” and “wind-up,” and explain the meaning of a partial plan wind-up.
The terms “termination” and “wind-up” are often used interchangeably. However, their technical meaning under the pension legislation in various jurisdictions can be quite distinct.
In some jurisdictions, “wind-up” means the termination of the pension plan and the distribution of assets of the pension plan. In other jurisdictions, “termination” and “wind-up” are defined separately, with “termination” referring to circumstances such as the cessation of crediting of benefits, revocation of its registration or the pension regulator’s declaration of a termination. In those jurisdictions, “winding up” refers to the distribution of the assets of a plan that is terminated.
In some jurisdictions, a pension plan can be partially terminated. The partial termination of a pension plan involves the settlement of the pension benefits of a specific group of plan members.
Partial pension plan terminations are normally the result of the sale or discontinuance of a part of the employer’s business operations or of a significant reduction in plan membership resulting from employee terminations and layoffs.
Québec, Prince Edward Island, Ontario, Alberta and British Columbia do not permit partial plan terminations, and the federal pension legislation does not allow an employer to declare a partial plan termination.
Unless otherwise noted in the specific commentary, assume the use of “wind-up” in the Text has the same meaning as “termination.”
Identify who can terminate a pension plan and describe the rationale behind their respective decisions to wind up.
A pension plan termination may be initiated by the employer that sponsors the plan, the plan administrator or a pension regulator.
Some circumstances that might cause a sponsoring employer to terminate its pension plan include:
(a) The sponsoring employer is party to a purchase or sale of a business, and the purchaser does not provide a pension plan or refuses to take on the existing pension obligation.
(b) The sponsoring employer has undertaken an internal reorganization under which the pension plan is no longer a priority.
(c) The plan has a significant surplus that the plan sponsor is looking to distribute.
The plan administrator may terminate a pension plan in some jurisdictions or when the plan is a multi-employer pension plan (MEPP). In the case of jointly sponsored pension plans (whether MEPPS or not), the plan administrator may terminate the pension plan unless the plan documents authorize some other party to do so.
Some circumstances that might cause a Canadian pension regulator to order the wind-up of a pension plan include:
(a) Cessation or suspension of employer contributions (all jurisdictions) or cessation of accruals (New Brunswick and Ontario only)
(b) All or part of the business of the sponsoring employer has been discontinued (all jurisdictions).
(c) The plan has failed to meet prescribed solvency tests (some jurisdictions only).
(d) The sponsoring employer has declared bankruptcy (some jurisdictions only).
(e) The plan fails to comply with pension legislation (some jurisdictions only).
(f) The business has been sold to an employer that does not provide a pension plan for the affected employees (some jurisdictions only).
(g) If the plan wind-up is in the best interests of members (some jurisdictions only)
(h) In Ontario only, the Chief Executive Officer of the Financial Services Regulatory Authority (FSRA, the pension regulator in Ontario) can order that a plan wind up if the “liability of the Guarantee Fund is likely to be substantially increased unless the pension plan is wound-up,” if there are no active members, or where members of the plan no longer accrue benefits and no employees are permitted to become members of the plan. “Guarantee Fund” refers to the Pension Benefits Guarantee Fund.
Identify the primary source of information used to identify the rights and obligations of stakeholders involved with a pension plan termination.
The documents under which the plan is set up are the primary sources used to determine respective rights and obligations of a pension plan’s stakeholders when a pension plan terminates. If a pension plan termination is being contemplated, anyone who has an interest in the plan—the sponsoring employer, a plan administrator, the funding agent, a regulatory agency, an employee or other beneficiary—should examine the terms of the plan documents that might affect the wind-up.
These documents include the pension plan text and amendments, the funding agreement, any collective agreements, arbitration awards or decrees, employee booklets, statements and other plan member communications—anything that establishes the terms and conditions of the pension promise. The documents will identify the entity that has the right to terminate the plan as well as any circumstances that must be met in order for termination to occur.
Identify the aspects of a pension plan wind-up that are subject to Canadian pension standards legislation.
Canadian pension standards legislation contains requirements regarding these aspects of pension plan wind-up and termination:
(a) Appointment of a replacement administrator
(b) Definition of wind-up date and, if required, wind-up period
(c) Content, preparer and timing of filing of a wind-up report
(d) Timing, content and recipients of a wind-up notice and wind-up statement
(e) Application of special member benefit entitlements
(f) Timing and method of asset distribution at wind-up
(g) Treatment of surplus/funding deficiencies at wind-up.
Identify the usual entity responsible for executing the plan wind-up process and the reasons why a replacement administrator might be appointed.
For a single employer pension plan, the entity or person charged with executing the wind-up process is typically the employer in its capacity of plan administrator. If the pension plan is a MEPP, the entity that made the decision to terminate, likely the plan administrator, will be responsible for the wind-up process.
In some circumstances, the employer is either unwilling or incapable of completing the wind-up that has been ordered by the regulator. Pension legislation in all jurisdictions provides that the regulatory agency may either act as the replacement administrator or (more commonly) appoint a replacement administrator. In most jurisdictions, the appointment of a replacement administrator may only be made in circumstances where the pension plan is to be wound up. Some jurisdictions, however, provide for the temporary replacement of the plan administrator of an ongoing plan if it is in the best interests of the members and other plan beneficiaries.
Replacement administrators are typically appointed in circumstances where the employer is either bankrupt under the Bankruptcy and Insolvency Act or has obtained protection from its creditors under the Companies’ Creditors Arrangement Act, and it appears unlikely that the pension plan will be maintained. In these circumstances, the appointment of a replacement administrator may help limit conflicts of interest and protect benefits of members, retirees and other plan beneficiaries.
Describe the information and special benefit entitlements that members of a pension plan are entitled to receive when the plan is winding up.
As a general rule, all Canadian jurisdictions require that each employee entitled to a pension, deferred pension, refund of contributions or other benefit receive a statement that contains the same information as required in a retirement or termination statement, as appropriate, under the applicable pension legislation. This information would include the employee’s entitlement under the plan and the options available to the employee. In most jurisdictions, it is also necessary to include information about the reduction of benefits due to a funding deficiency or disposition of surplus on the statement, if applicable.
When a partial or full-plan wind-up occurs, affected plan members gain special rights by virtue of the applicable pension legislation. In most jurisdictions, these include:
(a) In jurisdictions that allow partial plan wind-ups, affected members are entitled to the same rights and benefits as if a full wind-up had occurred on the partial wind-up date.
(b) Full vesting of pension benefits accrued up to the wind-up date, regardless of the provisions specified by the pension plan
(c) Portability rights for all members other than pensioners, similar to those provided to members who terminate employment from an ongoing plan
(d) Legislation in some jurisdictions includes provisions regarding early retirement in the context of a plan wind-up. Grow-in rights exist in Nova Scotia and Ontario for members whose age plus continuous years of membership or employment equals 55 or more. Grow-in rights give affected members the ability to receive pensions from the plan as if the plan had not wound up and membership had continued until such time as the member would have qualified for an unreduced or enhanced early retirement pension or a bridge benefit.
Identify the parties who must receive notice of a pension plan wind-up and who determine the content of the notice. Outline the general content requirements for the wind-up notice.
All jurisdictions require that written notice of the wind-up, full or partial, must be given by employers or plan administrators to a number of parties including, as the jurisdiction requires, members, former members, unions that represent members, other plan beneficiaries or any other person entitled to payment from the plan, plan advisory committees, if any, and the appropriate regulator.
The notice must be provided regardless of whether the wind-up is initiated by the employer or administrator or by order of the regulator.
A number of jurisdictions require that the wind-up notice include:
(a) The name of the plan and its registration number
(b) The proposed wind-up date
(c) A statement that each member, former member or any other person entitled to a pension, deferred pension, any other benefit or a refund will be provided with an individual statement setting out entitlements and options under the pension plan
(d) If the plan is contributory, a notice of the member’s right to make contributions in respect of the period of notice of termination of employment under employment standards legislation.
Some jurisdictions require more or less information than that described above. The same information is required regardless of the entity initiating the wind-up.
Describe in general terms the requirements of pension standards legislation regarding the preparation and filing of a wind-up report for a pension plan.
The general requirements for wind-up reports are:
(a) All jurisdictions require the preparation and filing of a wind-up report for a pension plan.
(b) The plan administrator is required to file a wind-up report with the appropriate regulator. For a defined benefit (DB) pension plan, this report will be prepared by an actuary, with the appropriate regulator. If the pension plan is a defined contribution (DC) pension plan or a fully insured plan, most jurisdictions allow certain designated individuals to prepare the wind-up report.
(c) Filing deadlines for wind-up reports range from 60 days to six months from the date of termination of the plan.
(d) A wind-up report must reflect the terms of the pension plan as well as the pension legislation that governs the plan.
(e) Pension legislation specifically identifies what must be included in the report. Generally, all jurisdictions require that a wind-up report indicate the nature of the benefits to be provided to members, former members and other persons; the assets and liabilities of the plan; the method(s) for allocation and distribution of plan assets; and the priorities for determining payment of benefits.
(f) Depending on the jurisdiction, additional information may be required as prescribed in regulations or as mandated by the regulator. Each regulator may require additional information as stipulated in their respective policies and guidelines.
(g) If a wind-up report for a DB plan discloses a surplus, the administrator is required to indicate how the surplus will be dealt with. If this is not provided, a regulator may require a supplemental report dealing specifically with the surplus assets.
Describe the powers held by the pension regulator once the wind-up report has been filed and how objections to the regulator’s decisions are dealt with.
A regulator must approve a wind-up report before any distribution of plan assets can occur. This is especially important when the pension plan that is being terminated or wound up has insufficient assets to fully cover all plan benefits. That being said, regulators will generally permit pensions or any other benefits that were being paid before the notice of proposal to wind up the pension plan to continue to be paid, pending the approval of the wind-up report. Despite this restriction, regulators do have the discretion to approve a payment prior to the approval of the wind-up report.
A regulator has the authority to refuse to approve a wind-up report that fails to comply with the pension legislation that governs the plan. A regulator also has the power to require that a new report be prepared.
Generally speaking, should a regulator refuse to approve a wind-up report or approve a report over the objections of employees, the administrator, employees or any other affected party may have the decision of the regulator reviewed by a tribunal or other adjudicative body as the respective pension legislation permits.
Explain how surplus assets existing at the time of the full wind-up of a defined benefit (DB) pension plan termination are to be handled.
The full termination of a DB pension plan that is in a surplus position will require the assessment of surplus rights in order for the assets to be fully distributed. It is always possible for the employer to pay the surplus to members, either as benefit improvements subject to maximums under the Income Tax Act (ITA) or as cash payments, provided that the plan contains provisions, or is amended to provide those provisions, that specify how this will be done.
If the employer wishes to withdraw the surplus, the consent of the regulatory authority is required. Generally, this consent cannot be given unless the employer is entitled to withdraw the surplus according to the plan terms, but some jurisdictions permit the employer and the members in the plan to reach an agreement as to how the surplus will be distributed, despite the plan provisions.
Describe the liability generally assumed by an employer for funding a defined benefit (DB) pension plan at wind-up and rules for payment of benefits when an underfunded pension plan is wound up.
At termination of a pension plan, all jurisdictions require that the employer fund all amounts necessary to comply with solvency rules up to that date.
When a DB pension plan is wound up and there are insufficient funds to fully provide all member benefits, all jurisdictions except Saskatchewan require the employer to fund any deficiency over a period of no more than five years.
The general rule for the payment of pension benefits when a pension plan is terminated while underfunded is that benefit payments be made in the following order:
(a) All member contributions (with priority in some jurisdictions for member additional voluntary contributions), then
(b) All accrued benefits for which there is no remaining unfunded liability, then
(c) All accrued benefits for which there is a remaining unfunded liability. Most jurisdictions specify that these benefits are to be paid pro rata depending on the funded status of the plan.
Saskatchewan has different rules that deal with each unfunded liability separately and requirements for proportionate reduction of benefits.
Explain how the Ontario Pension Benefits Guarantee Fund (PBGF) protects “covered” pension plan members in Ontario.
Ontario is the only Canadian pension jurisdiction that maintains a guarantee fund in the event that a “covered” single employer defined benefit pension plan is terminated and there are insufficient assets to fund accrued benefits (usually due to insolvency). It does not cover MEPPS, individual pension plans, designated plans, single-employer negotiated cost plans, plans less than five years old from the wind-up date and certain public sector plans.
The PBGF is administered by the Chief Executive Officer of the Financial Services Regulatory Authority (FSRA) of Ontario. It is a self-funded program financed by a levy imposed on employers with pension plans whose members are subject to the PBGF guarantee.
Grossly simplified, the PBGF guarantees the first $1,500 per month in pension benefits that were earned in respect of employment in Ontario.
Certain benefits are not subject to the PBGF guarantee, including benefit improvements granted within the last five years and prospective indexation increases.
Explain how surplus can exist under a defined contribution (DC) pension plan and the options available for its use.
Surplus in a DC pension plan can exist but is usually not significant. Surplus typically is created within a DC pension plan by the forfeiture of employer contributions and related investment earnings by nonvested plan members at the time of their termination of employment. Since pension standards legislation in most Canadian jurisdictions now requires immediate vesting, the frequency of forfeiture creation has been reduced, and the likelihood of surplus within a DC pension plan is low.
When forfeitures do arise, the ITA requires that each forfeited amount and all related investment earnings be either paid to the employer, reallocated to plan members or used to pay administrative, investment or similar expenses incurred in connection with a DC pension plan on or before December 31 of the year immediately following the year in which the amount was forfeited.
Describe how “surplus” is defined in an ongoing defined benefit (DB) pension plan, why it might exist and how surplus is determined when a DB pension plan is terminated.
“Surplus” in a DB plan is the excess of the value of plan assets over the liabilities for the accrued benefits.
To determine liabilities within an ongoing DB pension plan, the plan actuary must make assumptions about future events. Those assumptions rarely, if ever, match perfectly with actual experience. Therefore, when a financial assessment, or “valuation,” of a pension plan is made at a given time, an ongoing DB pension plan will be in either a surplus or a deficit position.
When a DB pension plan is terminated, the surplus consists of that portion of assets not needed to discharge all the obligations for benefits accrued to the termination date according to the plan document, plus any additional benefits that may be required by statute.
Describe how “surplus” is defined in pension legislation.
A pension plan is said to be in surplus when there is more money in the plan than is required to support its liabilities.
All Canadian jurisdictions except Saskatchewan define “surplus” within their pension standards legislation and, in most jurisdictions, the definition agrees with the above statement. In some jurisdictions, there are requirements that certain valuation assumptions be used by the plan actuary when a surplus is calculated. As a result, the legislation of the specific jurisdiction should be consulted when other provisions of the legislation dealing with surplus are examined. Whatever the legislative definition of “surplus,” no surplus is recognized by a regulatory authority unless it is disclosed in a valuation report prepared by a person authorized to do so under the particular pension legislation.
