In an earlier post, I provided an overview of the different ways that some plan sponsors are looking to exit the defined benefit (DB) world. In this post I consider the most drastic and complete way to “restructure” a DB plan – through a pension plan wind up.
There are pros and cons to a voluntary plan wind up by an employer. On the pro side, a wind up is relatively quick, and may be less risky compared to maintaining frozen, legacy DB benefits for decades and continuing the ongoing DB funding risks. On the other hand, wind up and settlement costs can be expensive and exiting a DB plan can be problematic for older, longer service employees.
An employer’s ability to unilaterally wind up a plan is contained in s.68(1) of the Ontario Pension Benefits Act (the PBA) which requires notice to be remitted to any trade union, the Ontario Superintendent of Financial Services, and any person entitled to payment from the pension fund.
Remember that if a plan is collectively bargained, the employer’s ability to wind-up the plan may also be limited by the language in the collective agreement.
If a plan is in a deficit position at the time of the wind up, the employer will be required to fund up the plan over the five year amortization period prescribed for terminal funding. Further, for eligible Ontario and Nova Scotia plan members, these wind up liabilities will include “grow-in” benefits which must also be funded.
Under these grow-in rules, Ontario and Nova Scotia members with age and service totalling 55 or more points at the time of the wind up will become entitled to any subsidized ancillary benefits that may be in the plan, even though such members do not meet the eligibility conditions set out in the plan terms. For example, if the plan includes an early retirement benefit, the member could grow into it, even though he or she is not entitled to it at the time of the wind up. The cost of these grow-in benefits can be expensive, and, therefore, prior to winding up, employers should take into account any grow-in costs that will be triggered.
While changes to the PBA introduced in Bill 236 eliminate grow-in benefits in the context of partial wind-ups, effective July 1, 2012, grow-in will still apply to:
- full plan wind ups; and
- all individual, involuntary employee terminations other than those dismissed for wilful misconduct, disobedience or wilful neglect of duty.
The determination to wind up a plan will largely depend on the funded status of the plan and the employer’s ability to eliminate the plan deficit on wind-up.
Stay tuned for Part III, where I will examine pension plan conversions.