With current market conditions and a low interest rate environment creating sustainability-related concerns for sponsors of defined benefit ("DB") pension plans, the "de-risking" of pension plans has been top of mind for many pension plan sponsors. For public sector pension plans sponsored by a single employer (and other prescribed plans) in Ontario, there is an opportunity to reduce cash flow and balance sheet volatility in respect of DB pension liabilities through converting into a jointly sponsored pension plan (a "JSPP").
On July 1, 2020, the Workplace Safety and Insurance Board (the "WSIB") and the Ontario Compensation Employees Union ("OCEU") converted WSIB's $3.5-billion defined benefit, single employer pension plan ("SEPP") to a jointly sponsored pension plan that is now administered by a Board of Trustees.
This SEPP to JSPP conversion is the first of its kind in Canada, having been implemented by way of plan amendment (as opposed to a transfer of the plan's assets into an existing JSPP, which is the other method through which a pension plan sponsor can reap the benefits of a JSPP structure). The WSIB JSPP is now listed as a JSPP under the Pension Benefits Act (the "PBA"), together with a number of Ontario's largest pension funds, such as the Ontario Teachers' Pension Plan, the Colleges of Applied Arts and Technology Pension Plan (the "CAAT Plan") and the Ontario Municipal Employees' Retirement System. The assets of the WSIB JSPP continue to be invested by the Investment Management Corporation of Ontario ("IMCO"), an arm's-length organization that provides investment management services to broader public sector entities in Ontario. IMCO has managed the plan's assets since 2017.
Osler's pensions and benefits team, led by Paul Litner and Jon Marin, advised the administrator of the JSPP — a Board of Trustees composed of appointees selected by both WSIB and OCEU — on the conversion.
Why convert to a JSPP?
JSPPs in Ontario have proven to be an effective means of delivering pensions and are a collaborative way (as between unions and employers) to preserve DB pensions through a combination of joint governance and risk sharing. The Ontario JSPP model has been described as one of the best pension models in the world: it has been praised for upholding high standards of transparency, accountability and ethical conduct and for achieving sustainable funding levels (even during global financial crises) through risk sharing and well-defined funding policies.1
De-risking through a JSPP has the potential to offer employers and members more predictable pension costs on a go-forward basis, relieving plan sponsors of certain solvency and wind up funding obligations. The JSPP funding and governance structures support the long-term sustainability of a DB pension by having both employers and members share responsibility for the plan's funding. The joint governance structure means employees have a say in decisions affecting their retirement income.
In addition to single employer JSPPs (of which the WSIB pension plan is one), many Ontario JSPPs are also multi-employer pension plans ("MEPPs"), which are pension plans established and maintained for employees of two or more unrelated employers. Ontario has recently seen a number of SEPPs merging into JSPP MEPPs by way of a transfer of the Plan's assets into the JSPP. One JSPP MEPP — the CAAT Plan — has actively participated in expansion, with more than 30 new employers joining the CAAT Plan to date (Osler has helped some of its clients in the CAAT Plan onboarding process).
Process of converting to a JSPP
In Ontario, before a single-employer plan can convert to a JSPP, two-thirds of active members must approve the proposed conversion, though bargaining units can consent on the behalf of their members. The employer must also satisfy a series of notice requirements and submit an application to the Chief Executive Officer of the Financial Services Regulatory Authority of Ontario ("FSRA"), the pension regulator, for consent to the conversion of the plan. To obtain FSRA's consent, the employer must be able to demonstrate how the plan will meet the requirements of a JSPP prescribed by legislation, and that it has obtained the requisite approval from members. As JSPPs are exempt from certain of Ontario's solvency funding rules, the PBA's regulation must be amended to establish the plan's solvency-exempt status, necessitating coordination between the plan's sponsors and the Ministry of Finance. Finally, once the conversion has become effective, the plan's administrator must satisfy regulatory reporting requirements relating to the conversion.
In addition to satisfying legislative and regulatory requirements, converting an SEPP to a JSPP by way of plan amendment requires significant operational preparation to establish the new entity that will assume the responsibilities of the pension plan administrator on the conversion date. The WSIB JSPP began by appointing the initial Board of Trustees, hiring a Chief Pension Officer and retaining professional advisors well in advance of the planned conversion date. The Chief Pension Officer then hired additional staff and engaged various third parties to provide essential services to the organization, such as IT and payrolling services. The extensive operational up-start process is unique to conversions that occur by way of plan amendment (as opposed to conversions that occur through asset transfers from single-employer plans into an existing JSPP).
For more information on JSPPs and other de-risking options, contact any member of Osler's Pensions and Benefits Group.
1 See, for example, the World Bank Group's 2017 report: The Evolution of the Canadian Pension Model: Practical Lessons for Building World-class Pension Organizations [PDF].
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.