Module 9: Addressing Special Provisions—Multi-Employer Pension Plans Flashcards
Describe how MEPPs evolved.
Historically, workers employed in industries such as construction, entertainment, clothing, food and service, trucking, graphic communication and hotels were excluded from employer-sponsored pension plans. Unique to these industries was the fact that most individuals did not stay with one employer long enough to qualify for benefits the employer may have offered.
Worker mobility made providing pensions costly in terms of the benefits that would have to be offered and the administrative costs associated with providing these benefits. These barriers, along with the demand by the affected workforce for retirement occupational pension plans, led to the establishment of MEPPs within the private sector.
More recently, governments and quasi–public sector agencies have adopted the concept of MEPPs in order to provide pension benefits to public sector unions, while at the same time controlling the inherent risks and costs associated with traditional pension plans.
Briefly describe the 3 types of MEPPs.
Classic MEPPs: These are traditional MEPPs that have been established by trade unions (or otherwise through the collective bargaining process) in industries such as construction. Classic MEPPs tend to be classified as either defined benefit (DB) plans or target benefit plans in which the pension benefit is based on a formula that gives the employee a fixed dollar amount per month for every year of employee service or for every hour worked. Employer contributions are generally fixed by a collective agreement for the duration of the agreement.
Public sector MEPPs: These are MEPPs that are established by governments, agencies, boards, commissions, municipalities, universities, schools and hospitals as well as certain social services and other organizations that are funded through government transfers. Many of these MEPPs are established by statute and are very large DB plans, including the Ontario Teachers’ Pension Plan (OTPP), the Ontario Municipal Employees Retirement System (OMERS), the British Columbia Public Service Pension Plan and the Manitoba Civil Service Superannuation Fund. These MEPPs tend to be career average or final average earnings plans, much like single employer DB plans.
Cooperative MEPPs: These are MEPPs established to achieve administrative efficiencies and economies of scale. Cooperative MEPPs are different from classic MEPPs in that there is an absence of an underlying collective agreement. Historically they have arisen as a result of affiliations within industries, religions or other associations. More recently there has been an appetite for plan amalgamations that cross traditional boundaries.
Describe the unique advantages of a MEPP to employers and plan members.
Benefits of pooling and shared administration costs: MEPPs offer smaller employers and their employees access to investment and consulting advice that would be cost-prohibitive if they were to offer individual plans.
Employers’ obligations to contribute: Employers contributing pursuant to the terms of a collective agreement can be pursued by the union if there is a failure to either make contributions or remit them on a timely basis.
Ownership of funds: As a consequence of the collective agreement and/or trust agreement, there is less ambiguity with respect to who owns MEPP funds.
Recognition of mobility of the workforce: MEPPs recognize and address the problem of the absence of a long-term employer-employee relationship, which is normally needed to qualify for pension benefits, by aggregating pension credits earned during employment with various employers within the industry.
Outline the disadvantages of a MEPP to employers and plan members.
Recordkeeping: Because members of a MEPP tend to work with a number of participating employers over the course of their employment in a particular industry, the administrator must track each member’s service with an employer. Recordkeeping can become complicated if certain participating employers are late in making contributions.
Risk sharing as a result of joint governance
Implications of an unfunded liability or solvency deficiency: Some jurisdictions do not require funding of a MEPP’s unfunded liability or solvency deficiency. As a result, it is possible that benefits for both future and past service may be reduced.
Incidence of fraud: Historically, it was relatively easy for criminally minded persons to become trustees. There have been incidents of fraud and personal enrichment, although their incidence and the ability to engage in both have been greatly reduced over the past 25 years.
Outline the general definition of a MEPP under pension standards legislation.
While pension standards legislation in each jurisdiction provides its own definition of a MEPP, a MEPP may be generally defined as a plan to which two or more, usually nonaffiliated, employers in the same industry contribute. Employees who may work for several employers within the industry for relatively short periods of time are members of such plans, with the result that an individual employee’s pension benefit entitlement is based on the aggregate of pension credits earned while employed with various employers, as if the employee had worked for only one employer.
Outline criteria that must be met for a registered plan to be considered a MEPP under the Income Tax Act (ITA).
Under ITA, a registered plan is considered a MEPP if, at the beginning of the year, it is reasonable to expect that at all times during the year, no more than 95% of the active plan members will be employed by a single participating employer or by a group of related participating employers.
Describe how ITA defines a specified multi-employer pension plan (SMEPP).
A SMEPP is a particular type of MEPP that is administered by a board of trustees or similar body that is not controlled by participating employers.
Outline criteria established under the Income Tax Act (ITA) that must be met in order for a MEPP to qualify as a SMEPP.
In order to qualify as a SMEPP, a MEPP must be administered by a board of trustees or similar body that is not controlled by participating employers and must fall into one of three categories:
(1) The MEPP satisfies a number of conditions, including, but not limited to, the following:
It is reasonable to expect that at least 15 employers will contribute to the plan in respect of the year or that at least 10% of the active employees will be employed in the year by more than one participating employer.
Employer contributions are fixed by a collective bargaining or similar agreement and are not dependent on the financial experience of the plan.
All or substantially all of the participating employers in the plan are not exempt from tax under Part I of ITA (including labour organizations, municipalities, Crown corporations and registered charities).
Contributions made by each employer in the year are determined, in whole or in part, by reference to the number of hours worked by individual employees of the employer or some other measure that is specific to each employee.
The administrator has the power to determine the benefits to be provided under the plan whether or not that power is subject to the terms of a collective bargaining agreement.
(2) The Minister of Revenue designates a plan to be a SMEPP.
(3) A plan that was a SMEPP in the preceding year continues as a SMEPP in a subsequent year, even though one of the conditions in the first category is no longer satisfied.
In order for a plan to remain a SMEPP, total contributions to be made each year must reasonably be expected not to exceed 18% of the total compensation of plan members.
Describe an adverse plan amendment and explain the rationale for exempting a MEPP from the requirement for advance notice of such amendments.
An amendment is adverse if it would take away a right or obligation of a member, former member or any other individual entitled to payment from a pension plan. Pension legislation typically requires notification of adverse amendments to members, sometimes in advance of registration of the amendment.
In some provinces, the requirement of advance notice may be dispensed with by the appropriate regulator in certain circumstances, including where the amendment pertains to a MEPP established by a collective agreement.
Describe the approach taken by provincial pension regulators regarding funding of DB MEPPs.
Given the fixed contribution nature of most MEPPs, the purpose of an actuarial valuation is not to set the contribution rate but rather to determine whether the negotiated contributions are sufficient to meet the minimum contributions required by legislation. In general, the contribution rate must be sufficient to cover the expected cost of benefits and an orderly funding of any deficit. Contributions greater than the minimum are permitted, but if a valuation reveals that contributions are insufficient, additional action such as reducing accrued or future benefits is then required.
Legislation regarding MEPP funding has been evolving in recent years, and funding rules are in various stages of development across jurisdictions. Generally speaking, there has been a shift away from full funding on a solvency basis to a greater emphasis on the going concern basis, often with additional provisions for adverse deviation. In some cases, MEPPS have been provided a permanent exemption to funding benefits on a solvency basis; not surprising given that temporary relief from solvency funding has historically been provided by a majority of jurisdictions.
In general, employers contributing to a negotiated-cost MEPP are not required to remit special payments if there are funding shortfalls. Any contribution required to fund a deficit under the plan is part of the required contributions. If a contribution insufficiency is identified, it is the duty of the administrator to take action, which may include proposing to the regulator a course of action that will be taken and which may or may not include a reduction of accrued benefits.
Funding requirements vary from province to province and can also vary by the type of MEPP (e.g., jointly sponsored, target benefit, etc.)
Describe the unique features of MEPPs relating to member termination of employment, and outline how Canadian pension jurisdictions attempt to accommodate those features.
MEPP members may frequently terminate employment without terminating participation in the plan. Termination of membership for MEPPs is typically triggered when a member works less than a specified number of hours with all participating employers during a certain length of time. As well, members may change employment and be covered by a different MEPP but, under the terms of a reciprocal agreement, their pension contributions are sent back to the original plan. As a result, portability provisions applicable under single employer pension plans might cause a premature transfer of benefits out of the MEPP.
Certain jurisdictions have made attempts to accommodate these unique features of MEPPs by defining when membership is terminated and portability rights are triggered.
Explain how pension credits and pension adjustments (PAs) are determined for a MEPP.
Pension adjustments (PAs) for a defined benefit or target benefit MEPP that is not a SMEPP are in most cases determined in the same manner as for a DB provision of a single employer pension plan. However, when a member worked for two or more employers in the year, or worked part-time or less than a full year, the ITA requires that each employer prorate both the benefit earned and the $600 offset in the pension adjustment formula by the portion of the year worked with that employer.
PAs under a DC MEPP are calculated in the same way as a single employer pension plan.
If a MEPP qualifies as a SMEPP, it is allowed to report PAs using the rules that apply to DC pension plans. As a result, a member’s PA is equal to the total contributions made in the year by the employer and member. This rule recognizes two characteristics of many SMEPPs, whereby many members work for a number of different employers during the year and the benefits earned can change by action of the trustees. Both of these characteristics would make it difficult for employers to determine PAs under the defined benefit formula.
Explain how past service pension adjustments (PSPAs) and pension adjustment reversals (PARs) are determined for MEPPs and SMEPPs.
Generally, PSPAs and PARs under MEPPs are determined in the same way as for single employer pension plans, unless the MEPP is also a SMEPP.
Under a SMEPP, a PSPA only arises when a member makes a contribution in respect of a post-1989 past service benefit. The PSPA is equal to the member’s past service contribution made in a particular year. It includes any contributions the member made that are conditional on certification of the PSPA. A PSPA must be certified by the Canada Revenue Agency (CRA) before the related benefit can be paid to the member.
A PAR is not determined when a member terminates membership in a SMEPP. Pension credits are deemed to be zero.
Outline the distinguishing characteristics of a classic MEPP.
(a) MEPPs are generally administered by boards of trustees, usually comprised of equal representation from the union and participating employers.
(b) Employer contributions are fixed by the most recent collective bargaining agreement between the participating employers and the union. As a result, trustees normally have no power to increase contributions. Traditionally, only employers have been required to contribute to classic MEPPs, but the requirement for employee contributions is becoming more prevalent.
(c) In some provinces, the funding rules applicable to single employer pension plans also apply to MEPPs in determining the minimum amount of funding. Given the fixed contribution nature of MEPPs, this requires the actuary to demonstrate to the pension regulator that the scheduled contributions are sufficient to cover the minimum amount of required contributions.
(d) Some jurisdictions offer MEPPs temporary exemptions from solvency funding, and others exempt MEPPs from solvency funding entirely if certain other funding criteria are met.
(e) MEPPs can only offer a targeted pension amount rather than the fixed pension amount available under a single employer pension plan. If a MEPP’s negotiated contributions are insufficient to cover the minimum required amount of contributions under the funding rules of the jurisdiction, trustees are normally allowed to reduce the plan benefits. The pension amount for members of a MEPP is then dependent on the financial position of the plan and may be reduced or increased from year to year or valuation to valuation.
(f) A member of a MEPP can work for more than one participating employer during a single year or period in order to qualify for membership. Membership may also be drawn from more than one local of a particular union. Service is often based on hours of work, and the MEPP may operate on an hour banking system to compensate for periods of low employment.
(g) Benefit formulas for MEPPs may vary in the same way that benefit formulas vary among single employer pension plans in that MEPPs include final or average salary plans, flat dollar plans and defined contribution plans. It is possible that different benefit levels may apply to different locals or groups of members within a single MEPP.
(h) Funds in a MEPP generally belong to the members and, as a result, the complications of ownership of surplus that arise in single employer pension plans are eliminated in MEPPs. Trust agreements must also specify conditions governing the funds when the plan is wound up or terminates with any remaining funds used for the benefit of existing members and former members.
(i) MEPPs offer many smaller employers and their employees access to a pension plan supported by professional advisors, with a more sophisticated investment structure and at a lower cost than would be available to those small employers through a single employer pension plan.
Outline the information typically included in a trust agreement for a MEPP.
The trust agreement for a MEPP typically includes:
(a) A declaration of the purposes of the trust
(b) Authorization for the trustees to receive contributions and hold assets in order to fulfill the purposes of the trust
(c) Identification of subsidiary documents necessary to carry out trust purposes—principal of which is the pension plan text that governs the distribution of benefits from the pension fund. The trust agreement may recognize other documents or agreements that oblige an employer to make contributions to the plan.
(d) Authorization for the trustees to operate the pension fund, including the scope of trustees’ powers and duties in that regard
(e) Identification of the party that has the power to amend the plan (including to increase or reduce benefits) consistent with its purposes. Either trustees or the settlors of the trust (i.e., the union and employers) will hold this power.
(f) Authorization for the trustees to delegate certain activities and responsibilities to subcommittees, agents or professional advisors
(g) Terms relating to removal, resignation or replacement of trustees
(h) Requirements regarding frequency of meetings, quorum, audits, etc.
(i) Procedures for breaking trustee deadlocks.
