: SEPP to JSPP Merger and Conversion Framework Regulatory Posting

In 2014, the government amended the Pension Benefits Act (PBA) to create a framework that would facilitate single-employer pension plan (SEPP) mergers with existing jointly-sponsored pension plans (JSPPs) or conversions to new JSPPs.  This framework is limited to Ontario's broader public sector. 

The main differences between these two types of defined benefit plans are that:

  • The employer sponsor is solely responsible for the plan's governance and funding in a SEPP, whereas employer(s) and plan members share responsibility for the plan's governance and funding in a JSPP.
  • While accrued benefits in both SEPPs and JSPPs cannot be reduced while the plan is ongoing, in a JSPP, accrued benefits may be reduced upon wind-up if the plan is underfunded; and
  • JSPPs are not covered by the Pension Benefits Guarantee Fund (PBGF).

It is anticipated that by adopting the features of a JSPP, plans will have greater transparency, be better governed, have a more predictable cost and be more likely to provide sustainable benefits in the long term.  In developing the framework, the government was mindful of the need to minimize the risk to plan beneficiaries as a result of any change to their pensions. 

To that end, specific protections have been created to limit these risks.  First, employer sponsors remain responsible for any funding deficiencies relating to benefits accrued prior to the time of the merger or conversion in the event the JSPP is subsequently wound-up.  Second, the benefits of retirees and other beneficiaries that are transferred to the JSPP must be replicated.  And lastly, as of the effective date of transactions, the commuted value of the benefits of individual SEPP members must be at least as high in the JSPP as it was in the SEPP.

The legislative framework for these transactions cannot be proclaimed without the accompanying regulations.  The government posted a description of the proposed regulations to the regulatory registry for stakeholder comment on January 20, 2015.  Feedback received resulted in a number of changes to the content of the regulations and those changes were incorporated into the draft regulations posted to the regulatory registry on June 26, 2015. 

The two major changes arising from feedback are as follows:

  • the proposed maximum transfer amount in a plan merger is the wind-up liabilities related to the accrued benefits of the SEPP members being transferred into the JSPP; and
  • the proposed earliest effective date of the transfer of assets for a plan merger is the date on which the required consent thresholds have been achieved. 

The draft regulations have been prepared to seek further feedback from stakeholders concerning the content and wording of the regulations that will be put forward to Cabinet later this year. 

In addition, the Ministry of Finance has prepared the following frequently asked questions regarding the proposed rules.

1. What's the difference between a Single Employer Pension Plan (SEPP) and a Jointly Sponsored Pension Plan (JSPP)?

Both SEPPs and JSPPs provide defined benefit pensions that are based on a formula set out in the plan terms.

SEPPs are administered by an employer, whereas JSPPs are jointly administered by employee/union and employer representatives. In addition, responsibility for the governance of the plan and the ability to amend the plan is jointly shared between the JSPP's active members and employer(s), as they jointly bear the responsibility for funding any plan shortfalls. 

For a SEPP, if the plan is underfunded, the employer must make additional contributions to the plan over a period of time to eliminate the deficit.  The SEPP employer also has exclusive power to amend the terms of the plan and can make itself solely responsible for the governance of the plan. 

For a JSPP, if the plan is underfunded, both the employer(s) and the active plan members (but not retired members nor any other plan beneficiaries) must make additional contributions to eliminate the deficit. 

Most SEPPs are covered by Ontario's Pension Benefit Guarantee Fund (PBGF), which is funded by annual assessments paid by the employer and which guarantees payment of a minimum benefit amount from the plan if the plan winds up underfunded and the employer sponsor is insolvent.  JSPPs, however, are not covered by the PBGF.

Below is a table that outlines the main differences between SEPPs and JSPPs:

Defined Benefits based on formula set out in plan terms Yes Yes
Administered by Employers (i.e. funding and governance) Yes No
Jointly Administered by Employee/Union and Employer Representatives (i.e. funding and governance) No Yes
Reduction of Accrued Benefits in Ongoing Plan No No
Potential Reduction of Accrued Benefits on Wind-up No Yes
Employers are solely responsible for funding deficits Yes No
Grow-In Benefits for eligible members whose employment is terminated by employer Yes No
(can opt out)
Pension Benefit Guarantee Fund (PBGF) Yes No

2. Why should SEPPs convert to JSPPs?

It is anticipated that by adopting the features of a JSPP, plans will have greater transparency, be better governed, have more predictable costs and be more likely to provide sustainable benefits.

3. Will employers in the private sector be able to convert their pension plans to become jointly sponsored?

No, the legislative framework for plan mergers and conversions is restricted to pension plans in Ontario's broader public service.

4. I am a retiree; will the amount of my pension be affected by a merger or conversion of my SEPP into a JSPP?

No, the legislation requires that the pensions of current retirees under the JSPP must be at least the same as they were in the SEPP.  In some cases, if the JSPP provides better indexation than the SEPP, these improved terms may be extended to SEPP retirees, subject to the agreement of the employer and JSPP plan sponsors.

5. Can my pension benefits be reduced while the JSPP continues in existence?

Just like for SEPPs, the PBA does not allow the pension benefits of plan beneficiaries to be reduced in an ongoing JSPP.  In the event that the JSPP becomes underfunded, the employer(s) and active members in the JSPP will be required to increase their contributions or reduce future benefits to eliminate any funding shortfall.  Retired members will not be affected by these contribution increases and will continue to be paid the same pension amount.

6. Can my pension benefits be reduced if the JSPP is wound-up?

Yes, while there is the possibility that pension benefits can be reduced if the JSPP is wound-up, the probability of this is remote given that most of Ontario's public sector JSPPs are large, in terms of membership, participating employers and assets under management.

In the unlikely event that a JSPP is wound-up, the assets in the plan would be used to cover the cost of all the pension benefits that had been earned as of the date of wind-up.  If the pension fund does not have sufficient assets to pay all the earned benefits, the legislation requires that the employer that sponsored the member's SEPP prior to the merger pay into the JSPP whatever additional amount is required to ensure that the former SEPP beneficiaries receive full payment of their pension benefits accrued while they were members of the SEPP. As such, it is anticipated that the pensions of SEPP retirees will not be reduced in any way.

7. What consent is required before a merger or conversion transaction can proceed?

An employer's proposal to merge or convert an existing SEPP into a JSPP cannot proceed unless:

  • At least 2/3 of the SEPP's active members consent or have consent provided on their behalf by their union(s); and
  • Not more than 1/3 of the SEPP's retired members, former members and other plan beneficiaries as a group object to the proposed transaction (by returning a signed objection form).

The administrator of the SEPP will be required to provide all the information necessary for plan beneficiaries and trade union(s) to make well-considered decisions as to whether to consent or object to the proposed changes. 

8. Why are retirees only being asked to object instead of providing their consent?

Retirees are being asked to object instead of providing explicit consent because their pensions must be replicated under the JSPP and they will not make contributions towards any future funding deficiencies. They are less likely to experience changes in their pensions than active members and they will be supported by additional contributions from their original employer in the unlikely event that the JSPP is wound up.

Active members on the other hand will have more at stake than retirees and will be consenting to a major change in their pension plan as they will be required to contribute to the funding of any future deficits and have a part in plan governance. Given these new obligations, requiring positive consent seems appropriate.

9. How will I know if the transaction is going to proceed after the consent process?

If the required level of consent is obtained from plan beneficiaries, the SEPP employer must then apply to the Superintendent of Financial Services for consent to the transaction.  When that application is made, the administrator of the SEPP will send each member, retiree and other beneficiary of the SEPP a notice regarding the application and how to get more information about the application. 

10. Will retirees have a role in the JSPP governance structure?

While plan members will share responsibility for the plan's governance and funding in a JSPP, it will be up to the JSPP and its sponsors to determine the role of retirees in the governance structure.

11. What if some money remains in the SEPP after the SEPP's assets and beneficiaries are transferred to a JSPP?

Where a SEPP is to be merged into a JSPP, the employer of the SEPP and the sponsors of the JSPP must negotiate the amount of SEPP assets that will be transferred to the JSPP as part of the transaction.  Any money that remains in the SEPP after the transaction is deemed to be surplus.  That surplus money can then be distributed in accordance with the terms of the SEPP that deal with the ownership and distribution of surplus, and the requirements of the pension legislation. In the event that the plan terms are silent on how surplus is shared, the employer and the members must negotiate an agreement.