The Trouble With Tribbles (and Sale of Business Pension Transfer Rules)
August 5, 2016
Ontario has had new sale of business pension transfer rules (the Transfer Rules) since January 1, 2014. The Transfer Rules are found in section 80 of the Pension Benefits Act (Ontario) (the PBA) and the Asset Transfers under Sections 80 and 81 of the Act regulation (the Transfer Regulation).
The Transfer Rules were meant to facilitate the transfer of assets and liabilities from a vendor’s to a purchaser’s pension plan within a sale of business context by being more prescriptive as to what the Superintendent of Financial Services (the Superintendent) requires in order to consent to such a transfer. Prior to 2014, the Superintendent had greater latitude as he or she could refuse consent if, in his or her view, the transfer failed to protect pension and other benefits. However, as with any regime which depends on a set of rules rather than the exercise of discretion, the Transfer Rules’ lack of flexibility may frustrate employment law and reasonable commercial considerations.
The Case of Plan Members on Leave
In a typical sale of business assets, during the due diligence phase and in order to negotiate the asset purchase agreement, the purchaser will want to know a number of particulars about the business’s employees, including how many of them are on approved leaves such as maternity, paternity, short and long term disability leaves. The purchaser may not be inclined to hire immediately employees on such leaves (Inactive Employees), particularly long term disability leaves, since these individuals are not and may never be in a position to provide it services.
In addition, such individuals will typically be in receipt of disability benefits under the vendor’s group benefits program, as well as benefiting from coverage for other group benefits, and may do so without need for further premiums (in which case they are said to qualify for waiver of premium benefits.) Where they so qualify, they are the vendor’s insurer’s liability. Beyond the fact that, absent a collective bargaining obligation, no employer would hire someone who is not available for work, in many circumstances it would also make no sense for the vendor to terminate their employment in order that they be hired by the purchaser since that may disentitle this group of employees from continuing to receive disability benefits and other benefit coverage under the vendor’s group benefits program, and it may not be possible for the purchaser to provide them with equivalent benefits and coverage under its group benefits program.
However, the purchaser may be agreeable to hiring such an employee if and when he or she was to become able to provide services within a certain period of time after the transaction closes. Typically, the period negotiated by the vendor and purchaser for the transfer of Inactive Employees is between twelve and twenty-four months (the Final Hire Date). This allows the purchaser access to valuable employees who, although initially incapable of providing services, may be able to do so within a reasonable period and protects the vendor from the risks associated with having to terminate such employees’ employment, upon their return, for lack of available work or having to provide statutory entitlements to employees whose employment contract may become frustrated due to disability.
Thus, the agreement to hire Inactive Employees who become ready to work within a period of time after the sale of the business, as agreed to by the vendor and purchaser, is beneficial for the vendor, the purchaser and, obviously, the employee. Alas, where an Inactive Employee is also a member of a defined benefit pension plan and the vendor and purchaser wish to transfer pension assets and liabilities from the vendor’s to the purchaser’s defined benefit pension plan, the Transfer Rules make this happy state of affairs difficult.
When is a Rule Not a “Good Thing”
A quick review of the Transfer Rules reveals that there is little “wiggle room” or obvious way to add liabilities as of a date after the effective date of the transfer, such as in respect of Inactive Employees hired by the purchaser after this date.
Although it is true that subsection 79.1(1) provides that a transfer of assets between pension plans may not occur unless the transfer is authorized under section 80 “or (b) the transfer satisfies the prescribed requirements and the Superintendent has consented in advance to the transfer”, it is not clear what paragraph (b) means and when it might be triggered to allow for a transfer which the Superintendent appears to still have discretion to approve. It is difficult to believe that paragraph 79.1(1)(b) could be used to deal with the post-closing transfer of Inactive Employees since almost all sales of business will involve such transfers.
Setting aside paragraph 79.1(1)(b), the Transfer Rules contemplate a very linear scenario as follows:
- The effective date of the transfer (the Effective Date) is the effective date of the sale of the business.
- A transfer application must be made to the Superintendent in order to effect a transfer. It must be filed within nine months after the Effective Date. The nine month deadline may be extended by the Superintendent for an additional sixty days if there are reasonable grounds to do so or even longer if the Superintendent is satisfied that no one will be unduly prejudiced.
- The contents of the transfer application are prescribed under Schedule 1 of the Regulations and include an actuarial valuation report for each of the transferring and recipient plans, containing the information that would be required to be provided in a triennial actuarial valuation report, but as at the Effective Date.
- A notice, containing the information set out in Schedule 3 of the Regulation (a Member Notice), must be given to transferred members, former members, retirees and others within six months after the Effective Date. The Member Notice includes information required to be provided in annual statements regarding the transferring plan, but determined as at the Effective Date. Given this, the actuarial valuation for the transferring plan must, for all intents and purposes, be substantially complete by the time the Member Notices are to be provided. However, if the information in the Member Notices changes substantially after they are provided, updated Member Notices must be provided “within a reasonable time after the administrator becomes aware of the change”.
- Unlike the timing for the submission of the transfer application, there is no way of extending the time period to provide Member Notices.
- The actual transfer must be completed within 120 days after the date the Superintendent consents.
- Within sixty days after the transfer is completed, both plans must file a statement certifying the transfer and an actuarial cost certificate.
What To Do
Another Transfer Application?
In response to a question sent to FSCO’s Contact Centre, FSCO suggested that, for every non-active employee returning to work after the Effective Date, an asset transfer application would have to be submitted.
In order for a transfer application to be submitted, there must be an Effective Date, and in order for there to be an Effective Date, there must be a sale of a business. However, even the most imaginative interpretation of the return to work of an Inactive Employee cannot conceive of such an event constituting a sale of a business. Therefore, the only logical interpretation of FSCO’s response is that there must be one or more additional submissions in respect of the same Effective Date for Inactive Employees available for work. This raises a number of questions:
- Assuming that each Inactive Employee returns to work on a different date, is there to be an additional transfer submission for each?
- Is there to be a new or revised actuarial valuation report for each of the transferring and recipient plans?
- Although there should be no difference in the information required to be provided in the Member Notices, is there to be a new Member Notice with respect to the second (or third or fourth) transfer application? If so, how can the six month requirement for the distribution of Member Notices be respected where the return to work happens more than six months after the Effective Date?
- If the Inactive Employee becomes available for work later than nine months after the Effective Date (or longer if the Superintendent extends the time period by which the transfer application must be filed), how can an additional transfer application be made?
A Non-Reciprocal Reciprocal Transfer Agreement?
It has been suggested that a reciprocal transfer agreement (an RTA) may be used in these cases. However, FSCO, in its response, rejected this method and, in our view, was right to do so.
The PBA defines an RTA as “an agreement related to two or more pension plans that provides for the transfer of money or credits for employment or both in respect of individual members.” The PBA also requires that a certified copy of an RTA be filed, and that the RTA satisfy such requirements as may be prescribed, although nothing has yet to be prescribed.
RTAs are commonly thought of as providing for the potential transfer of employees in both directions. Although it is true that in some RTAs, the flow of employees is almost always in one direction, it is doubtful that an agreement, entitled as being ‘reciprocal’ for the express purpose of transferring liabilities and corresponding assets with respect to a returning Inactive Employee in the context of a sale of a business, would be constitute a valid RTA. Vendors and purchasers should be careful in filing and relying on such a document for these purposes.
Can We Pretend?
It might be possible to work within these rigid rules by including the employees on leave as part of the transfer group and then backing out those who do not return to work by the Final Hire Date. However, this technique would require the following:
- The parties would have to agree to provide these non-active employees with a Member Notice. Since the Member Notice requirements do not prohibit adding additional content, the Member Notice to these individuals would also indicate that the information provided is only valid if the employee is available for work and accepts the purchaser’s offer by the Final Hire Date.
- The parties would have to agree to include these employees in the actuarial valuation report submitted with the application, and to submit a revised actuarial valuation report as soon as possible after the Final Hire Date. In fact, the Transfer Rules do refer to “subsequent revisions” to the application and to “any subsequent valuation reports”. Presumably, this is to accommodate, for example, true-ups with respect to the actual return of assets to be transferred.
This technique suffers from a couple of major issues.
First, the Transfer Rules require that the actuarial valuation reports be prepared as of the Effective Date and identify the portion of the liabilities relating to pension and ancillary benefits for which responsibility is transferred to the recipient plan. Implicitly, this means that the liabilities are determined as of the Effective Date and do not include any liability accrued after that date. Therefore, anyone returning to work before the Final Hire Date would, in fact, cease accruing service in the vendor’s plan and begin accruing service in the purchaser’s plan as of the Effective Date even though, technically, their employment would not have terminated as of that date. To counteract this inconsistency, the vendor could terminate these members’ employment as of the Effective Date and, if they do not become available for work by the Final Hire Date, rehire them retroactively and provide them with past service entitlements. However, this would likely negatively impact their group benefits coverage for the period between the Effective Date and the Final Hire Date.
Second, it would only work if the Superintendent does not grant his or her consent to the transfer before the Final Hire Date (although the reference to “any subsequent valuation reports” could conceivably apply even after such consent but before the completion of the transfer within the 120 day period following the consent.)
One way to avoid some of these issues would be to “transfer” Inactive Employees who do not become available for work by the Final Hire Date back to the vendor via an RTA, but the issue of the RTA’s validity and the group benefits complications would remain.
How About a Section 81 Transfer?
Another technique that could be explored is the spinning off by the vendor of a new pension plan for those employees which it believes will be hired by the purchaser. The new plan would then be assumed by the purchaser and, for a while thereafter, plan members (and associated assets and liabilities) could transfer in both directions, members of the new plan whom the purchaser does not in fact hire, back to the vendor and the original plan, and employees who, despite having been kept back in the original plan, are in fact hired by the purchaser (such as Inactive Employees who become available for work before the Final Hire Date), to the purchaser and the new plan.
Obviously, dealing with Inactive Employees should not be this difficult. Should a transfer of Inactive Employees prove unworkable despite the mental gymnastics touched upon above or other creative approaches, we are then left with the unhappy situation where an Inactive Employee who is fit to return to work within the time frame negotiated by the vendor and purchaser, would be hired by the purchaser and provided with a pension plan, but without benefit of a transfer. He or she would then be treated differently from the active business employees as, particularly in a final average defined benefit plan, he or she would not be kept whole.
A gap such as this presents risks. In this case, the vendor who has sought to protect itself from having to provide pay in lieu of notice of termination by ensuring equivalent employment may be exposed.
Please do not hesitate to contact Lorraine Allard at 416-601-7948 or any member of our Pensions, Benefits & Executive Compensation Group with any questions you may have concerning this PBA interpretation and application issue or other questions or issues related to pensions, benefits or executive compensation.
 Ontario Regulation 310/13.
 One reason for a prescriptive approach is to put an end to the uncertainties created by the Court of Appeal of Ontario’s decision in Aegon Canada Inc. and Transamerica Life Canada v. ING Canada Inc.  CarswellOnt 4879;  OJ No 4755 (QL); 179 OAC 196 and its interpretation by the Financial Services Commission of Ontario (FSCO).
 Please note that the analysis is different for unionized employees. There may also be human rights law considerations in these cases, but these are beyond the scope of this article.
 Defined contribution pension plans do not present the same issues as, even if the Inactive Employee does not become employed by the purchaser until some time after the transaction, and his or her pension account will not be transferred along with everyone else’s for the reasons explored in this article, he or she may still be able to transfer such account to the purchaser’s plan on a voluntary basis assuming the purchaser’s plan allows such transfers.
 Section 3 of the Regulation.
 Section 105 of the PBA and section 5 of the Regulation.
 It is not this article’s purpose to delve into the details of the actuarial transfer reports and other details of the transfer application.
 Section 16 of the Regulation.
 This has been confirmed in a Q&A available on FSCO’s website. See http://www.fsco.gov.on.ca/fr/pensions/asset_transfers/Pages/asset-trans-faq.aspx.
 Section 15 of the Regulation.
 Section 6 of the Regulation.
 Subsection 1(1) of the PBA.
 In respect of all plans subject to the reciprocal transfer agreement.
 Subsection 9(2) and section 21 of the PBA.
 The court in Mortson v. Ontario Municipal Employees Retirement Board, 2004 CanLII 34519 (ON SC) did comment that, in an RTA “service may be credited in accordance with reciprocal rules on which the parties have agreed”, suggesting that it is the transfer rules rather than the flow of employees, which are reciprocal. However, the validity of the nature of the RTA was not the issue, the parties having agreed that the Multi-Lateral Portability Agreement is an RTA.
 Subsection 5(5) of the Regulation.
 Paragraph 1(1) 3. of Schedule 2 of the Regulation.
For further information on this article, please contact [email protected].
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