Multi-Employer Pension Plans: Myths And Misconceptions
By: Chris Brown, Anthony Devir, & François Parent
Not surprisingly, each jurisdiction in Canada has different rules for multi-employer pension plans. Chris Brown, Anthony Devir, and François Parent, of Osler, Hoskin & Harcourt, LLP; examine some of these differences.
Multi-employer pension plans (MEPPs) are a common pension vehicle in a unionized environment and are touted by many as creating no risk for the employer beyond the negotiated contributions set out in the applicable collective agreement or participation agreement.
It is generally understood that the somewhat magical outcome – where benefits are determined on a defined benefit basis and yet contributions into the plan are determined on a fixed contribution basis – is buttressed by special treatment for MEPPs whereby accrued benefits are reduced if it turns out that the MEPP has insufficient assets to provide the promised pension.
MEPPs are, however, not well understood. In particular, plan members often do not fully appreciate that there is a risk that their benefits could be reduced. When such a reduction does occur, it can wreak havoc, particularly for retirees. The most recent (but far from the only) example involves the Participating Co-operatives of Ontario Trusteed Pension Plan where the benefits under the plan were reduced by approximately 50 per cent as a consequence of a significant shortfall in the assets of the plan (approximately $50 million). This then led to the commencement of a class action proceeding against seemingly everyone connected with the plan including the trustees, plan actuaries, legal counsel advising the trustees, and investment managers.
How do MEPPs operate and are participating employers as safe as they think? This article looks at MEPPs and their treatment in a number of Canadian jurisdictions, focusing on the key issues of the ability to reduce accrued benefits and the different funding rules for MEPPs.
What Is A MEPP?
In broad terms, a MEPP is a plan with two or more non-affiliated participating employers. However, the specific definition of a MEPP in each jurisdiction has subtle differences and some jurisdictions deal better than others with plans where the participating employers are “affiliated,” but they are not all corporations.
The Ontario Pension Benefits Act (PBA) definition of a MEPP excludes plans where all participating employers are “affiliates” as defined in the Ontario Business Corporations Act (OBCA). Under the OBCA, only corporations can be affiliates, so this exception does not apply to non-corporate affiliates such as partnerships. Thus, whenever a non-corporate entity (for example, a partnership) participates in a pension plan with another employer, there is a question as to whether the plan thereby becomes a MEPP for the purposes of the PBA.
The Alberta Employment Pension Plans Act (EPPA) creates two types of MEPPs – a “specified multi-employer plan” (SMEPP) and a “multiunit plan” (MUPP).
A SMEPP is a pension plan administered for employees of two or more employers that is designated by the Alberta superintendent as a SMEPP. Thus, the superintendent has some discretion in determining whether a plan is or is not a SMEPP. The superintendent’s policy bulletin on the issue indicates that a plan will be designated as a SMEPP if it is a Defined Benefit pension plan and has all of the following characteristics:
- union/management sponsored
- collectively bargained
- negotiated contribution
Other plans with similar characteristics may also be designated (for example, a Defined Contribution plan which has all of the other characteristics).
A MUPP is a pension plan administered for employees of two or more employers that is not designated by the superintendent as a SMEPP. However, the Alberta superintendent’s administrative position has been that where corporate affiliates are involved and are effectively controlled by one of the participating employers, neither the SMEPP nor the MUPP designation will apply. Amendments to the EPPA made in 2005 (not yet in force) will require designation of a plan as a MUPP by the superintendent and thus give legislative backing to the superintendent’s administrative position. These amendments will give the superintendent added flexibility to treat a plan with non-corporate “affiliated” employers as a regular pension plan and not subject to special rules, applicable to SMEPPs and/or MUPPs.
One slight downside of the more flexible Alberta regime is that it may not always be readily apparent whether a plan with more than one participating employer will be treated as a SMEPP, MUPP, or a regular plan. This can be important as the distinction between these three plan types can have a significant impact on the funding rules applicable to the plan.
In Quebec, the Supplemental Pension Plans Act (SPPA) definition of a MEPP has an exception for affiliated employers that seems even narrower than Ontario’s exception as it only covers parent companies and their subsidiaries. Moreover, the plan must specifically provide that the participating employers agree that the plan should not be considered as a MEPP.
Funding Rules And Reducing Accrued Benefits
There is a common misconception that Ontario MEPPs are exempt from the general funding rules for ongoing plans and that MEPPs are exempt from the general rule that accrued benefits cannot be reduced. However, these exemptions do not apply to all MEPPs. They only apply if the MEPP is “established pursuant to a collective agreement or trust agreement” or if the MEPP “provides defined benefits and the employer’s obligation to contribute to the MEPP is limited to a fixed amount set out in a collective agreement.”
Moreover, even if an Ontario MEPP is exempt from the general funding rules, this does not mean that an underfunded MEPP can operate with impunity. Rather, the regulatory scheme contemplates that if the actuarial report for the MEPP indicates that required contributions are insufficient to provide the benefits, the MEPP administrator must take such action that will result in the required contributions being sufficient to provide the benefits. Administrators of MEPPs that take no action within the mandated time periods could find themselves exposed to legal proceedings if the MEPP’s funded position deteriorates and benefits must subsequently be reduced.
There is also a misconception that if there is a deficiency on the wind-up of an Ontario MEPP, the PBA requires that accrued benefits be reduced so that the liabilities under the MEPP match the assets. However, the PBA does not contain any such requirement. Rather, the PBA merely says that the general rule that accrued benefits cannot be reduced does not apply to certain MEPPs. Proper steps must still be taken to formally amend the MEPP to reduce the accrued benefits.
Can employers be at risk if there is a flaw in the process by which accrued benefits are reduced? The Ontario superintendent has recently answered this question with an emphatic ‘yes,’ taking the position in relation to a wound-up MEPP that the amendment to reduce benefits was invalid in the particular circumstances of that case, based on the wording of the plan documents and that, as a result, each participating employer was jointly and severally liable for the entire wind-up deficiency in that MEPP. If the superintendent’s position is correct, this will fundamentally alter the MEPP landscape in Ontario as it removes a basic precept about MEPPs – that the participating employer’s liability is limited to what it has agreed to contribute. No more. No less.
In Alberta, a SMEPP is exempt from the usual funding requirements. The EPPAlimits the liability of a participating employer in a SMEPP to the amount that the participating employer is contractually required to contribute. This limitation applies in the context of an ongoing plan, as well as on withdrawal of a participating employer or on plan windup. Whether issues similar to the Ontario situation could arise in Alberta based on what it means for a contribution to be “contractually required” remains to be seen.
Where a SMEPP fails to meet the prescribed tests for solvency funding and a solvency deficiency results, the SMEPP’s actuary must present the administrator with options for remedial action. If there are no other options that will enable the SMEPP to eliminate the solvency deficiency, the EPPA contains an exemption from the general rule against reduction of accrued benefits to permit such a reduction in those circumstances, with consent of, and on any conditions imposed by, the superintendent. Thus in Alberta, the superintendent has a greater role in reductions of accrued benefits than in Ontario.
Proposed amendments to the EPPA Regulation would enable a SMEPP administrator to seek the approval of the superintendent to suspend solvency special payments for up to three years on the conditions that:
- unfunded liabilities will be amortized over not more than 10 years
- annual solvency valuations are filed
- no benefit improvements are made while there is a solvency deficiency
Assuming these changes are brought into force, SMEPP administrators will have added flexibility to avoid having to cut benefits in the face of short-term changes in the solvency position of the plan.
For MUPPs there is, however, no exemption from the general solvency funding rules. In addition, if one of the participating employers has been designated as the administrator (the EPPA permits such designation where all of the participating employers so agree) then if a participating employer fails to make a required solvency deficiency payment, the administrator employer is liable to make all of the defaulting employer’s required payments. This requirement provides a clear disincentive for a single participating employer to agree to act as the MUPP administrator, particularly where it does not have a 100 per cent ownership interest in the other participating employers.
In Quebec, the SPPA does not allow accrued benefits under a MEPP to be reduced. This was confirmed in 2004 in the Intersan case which involved a situation where a Quebec employer withdrew from an Ontario registered MEPP and, because of a deficiency in the MEPP, benefits accrued by the employer’s employees were reduced. The Administrative Tribunal of Quebec ruled that the attempted reduction of accrued benefits was inconsistent with the SPPA and, therefore, not applicable to any affected Quebec members.
What is readily apparent from this brief overview is that there is no uniform body of rules applicable to MEPPs across Canada. A plan could be a MEPP under the laws of one jurisdiction, but not be a MEPP under the laws of another jurisdiction. Also, the ability to reduce accrued benefits to deal with funding deficiencies in a MEPP varies across jurisdictions. These different rules could produce unexpected results for plans with members in more than one province. It is critical that employers participating, or considering participation, in a MEPP ensure that they fully understand the rules that will apply to them. Otherwise, the myth of the MEPP may produce an all too real funding obligation for the employer.
Chris Brown is a partner based in Calgary; Anthony Devir is a partner based in Toronto; and François Parent is an associate based in Montreal; with Osler, Hoskin & Harcourt, LLP
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