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OECP M&A provisions create new obstacles

Posted by on Feb 1, 2009 in Employee Benefit News, Retirement | 0 comments

By: Sheryl Smolkin

Read this article and comments at HRInsider.ca  

Management-side lawyers say recommendations in the Ontario Expert Commission on Pensions’ report intended to facilitate pension asset transfers in corporate restructuring are badly needed, but in their current form are unclear and unworkable.

Hugh O’Reilly, a partner with labour-side law firm Cavalluzo, Hayes, Shilton, McIntyre & Cornish, says “labour does not speak with a single voice” as to whether people are better off if pension asset transfers take place. “Certain unions have bargained against asset transfers because they were protecting the pension plans from which money would have been transferred. Others were in favour of keeping the benefit together [in the new or merged plan].”


The Transamerica decision

Problems initially arose due to the decision of the 2004 Ontario Court of Appeal in Aegon Canada Inc. vs. ING Canada Inc. (the Transamerica case). The judgment confirmed that when a defined benefit pension plan in surplus based on trust documents (Plan A) is merged with another DB plan that is in deficit (Plan B), the surplus cannot be used to satisfy obligations under Plan B unless there is nothing in the trust documents of Plan A to preclude the transfer.

In response to this ruling, the Financial Services Commission now applies a Transamerica test in both sales of a business and plan mergers.

Osler, Hoskin & Harcourt LLP Partner Louise Greig says, “Pension plans invariably contemplate changes in the employee group covered by the plan. The Transamerica test simply adds additional cost and further delay as employers try to locate historical documents in order to in effect prove a ‘negative,’ and FSCO devotes huge resources to reviewing binders of documents.” As a result, Greig says she hasn’t seen an asset transfer for the last seven or eight years.

“I see this as much more detrimental to employees being transferred because they will not have future earnings recognition for their service under the seller’s plan,” says Fasken Martineau LLP Partner Peggy McCallum.


Proposed consent requirement

Proposed new rules for consent are central to the OECP recommendations intended to accelerate asset transfers.

Recommendation 5-19 states that if funding requirements in 5-17 and 5-18 are met and either a union or two-thirds of active and retired members consent to the surplus transfer, the Superintendent can give an advance ruling approving the transfer. Otherwise, all interested parties must receive 90-days notice before the regulator can process the transaction.

Koskie Minsky LLP Partner Mike Mazzuca acts for unions, employees and multiemployer plans. Although he would prefer consent be required in all cases, he is satisfied with the proposal for enhanced notice provisions.

“I think that would be a good thing from a member’s perspective and ultimately a good thing from a corporate restructuring perspective because it would deal with issues up front instead of keeping them hidden so they have to be dealt with later,” he says.

But management-side lawyers say the opportunity to expedite the transaction based on stakeholder consent in the recommendations is largely illusory.

“This is one of the only sections in the report that seems to be pro-business. That said, it’s cumbersome,” says Hicks Morley LLP Partner Elizabeth Brown. “I don’t have a problem with the notice provisions generally, but requiring consent of the union or two-thirds of members before you get a green light is unworkable. Very often there isn’t that kind of time when working on a transaction.”

“Obtaining consent in advance is completely impractical for all sorts of commercial confidentiality and other reasons. You can’t talk to unions or retirees about something you are thinking of negotiating,” agrees Stikeman Elliott Partner Gary Nachshen.

McCallum says, “The primary problem is the Recommendation ‘takes the purchaser out of the equation.’ The purchaser would not want to agree to an asset transfer on consent of the union or the seller’s members and retirees.” She also believes it could be very disturbing to retirees to be asked for consent to a transaction that really has no potential impact on their benefits.

“Why would you seek consent if you are not going to get it anyway? Why not just give notice? I think it puts the superintendent in an awful position,” she adds.


Future status of trust law

In addition, several lawyers noted that it is unclear whether Recommendation 5-19 would fully override trust law or simply add another layer of complexity.

Citing page 105 of the report, which says: ‘If they or union consent, and if there are no other legal impediments, the regulator should be able to provide advance ruling approval,’ Greig comments, “Arthurs doesn’t appear to explicitly get rid of the trust analysis because otherwise, what legal basis would there be for unions, active members and retirees for coming to a consensus?”

“You have to assume trust law will be overridden because if you don’t, they’ve done nothing,” says Torys LLP Partner Mitch Frazer. “But I share Louise’s view that if you can’t make the assumption, this whole exercise is pointless.”

Even if trust law would be expressly overridden by recommendation 5-19, Goodmans LLP Partner Jana Steele suggests, “A better fix would have been to say this is a business deal, and as long as members’ benefits are protected and there is no clear prohibition in the documents against this type of plan transfer or merger, there should be legislation that facilitates it.”


Funding requirements

Another source of contention is the requirement in Recommendations 5-17 and 5-18 of the OECP Report that both the original plan and derivative or merged plans be funded to 105% before surplus can be transferred.

McCallum says, “Before Transamerica for the most part we had 20 years of asset transfers on the sale of a business. The buyer and seller would each have actuaries, and if the plan was in surplus, they would either negotiate for transfer of a pro rata share of assets or a transfer of assets at least equal to the liabilities. The superintendent made sure statutory requirements were met, and it worked.”

“The formula for the amount that had to be transferred was very complicated, but basically the focus was on benefit security for members of the transferred plan,” says Greig. “If Arthurs is recommending a financial test, I agree with that, but I don’t agree on the test. It’s too onerous.”

For Nachshen, the 105% funding requirement is a further example of “topping up” in the Recommendations. He is particularly concerned that implementation of these provisions could result in additional undesirable fallout for the DB system as a whole.

“If there is one area where single-employer DB plans continue to be created it is in this sort of spin-off plan. To some extent it’s a zero sum game because you just take people from one plan and put them in another, but at least you are continuing coverage with the new employer. If all these recommendations come to pass, I’m not even sure we will get these replacement or mirror plans.”



Achieving “a fine balance”

Koskie Minsky Partner Murray Gold was one of four expert advisers to Commissioner Harry Arthurs. Speaking as part of a panel at an Ontario Bar Association Pension & Benefits Section meeting, Gold said:

“The idea of this report was too create a balanced panel with a neutral Commission. There are clearly real underlying sensitivities regarding these issues. If you focus too narrowly on specific elements of the report, you do not have space to trade to create a balance. If what you do is perceived as favouring one side or the other, you run a grave political risk. So my guess is that whatever happens with this report – whether it is implemented in full or in stages – each chunk will have to be balanced enough to say you lost this but you got that. Otherwise we’re back in the soup.”


OECP recommendations


Where plans are to be split, OECP Recommendation 5-17 will allow transfers of surplus, providing the liabilities of the original plans and derivative plans are fully funded (including the 5% security margin).

Similarly, according to Recommendation 5-18, surplus can be assigned to a merged plan, providing the members of the original plan remain in the new merged plan and that the merged plan itself is fully funded (including the 5% security margin) as of the date of completion of the transaction.

Recommendation 5-19 requires that notice of the proposed transaction be given to active members, retirees and any unions representing members. If the union or two-thirds of actives and retirees approve the deal, the regulator may without further delay, issue an advanced ruling approving the transaction.

In the absence of approval from the union, organization or plan beneficiaries, the sponsor must give 90-days’ notice to all interested parties and to the regulator. After expiry of the 90-day notice, the regulator should process the proposed transaction in the normal manner.

Finally, Recommendation 5-20 says that notwithstanding 5-18 and 5-19, a sponsor may, with the consent of the superintendent, use surplus from the original plan to fund a new plan into which it has been merged, or from which it is derived, provided that (a) if the original plan continues in force, its security margin is maintained; (b) the new plan is funded at not less than 100% from its inception by sponsor contributions, if necessary; and (c) the security margin in the new plan is funded within five years.



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