These days, many plan sponsors are looking to exit the defined benefit (DB) world – largely for the following reasons:
- they want to cut benefit funding and administration costs, as market volatility and low interest rates drive up solvency deficits and make planning more difficult;
- to achieve better planning and budgeting by making pension liabilities more predictable for purposes of financial reporting;
- changes in the accounting rules;
- to reduce regulatory complexity and limit the risks associated with their current DB plans; and
- to align local business decisions with those of international affiliates or parent corporations.
There are a host of options available to plan sponsors who are contemplating exiting their existing DB arrangements; however, when weighing these options, sponsors will have to pay mind to the many hurdles they may face when restructuring, namely, collective bargaining agreements, plan terms, pension standards legislation, and employment laws.
In this four part series I will examine these hurdles as they relate to the following ways in which a DB plan can be "restructured":
- plan termination/wind-up;
- closing the DB portion of the plan to new entrants and establishing a defined contribution plan for new hires;
- implementing a soft 'freeze' where no more future accruals are permitted under the DB plan, but earnings increases, as they pertain to previously accrued pension benefits, are recognized;
- implementing a hard 'freeze' where everything is closed off and all future service and earnings are transferred to the new plan/component; and
- amending the plan to reduce/eliminate ancillary benefits provided under the existing plan terms.
Regardless of the way in which a company pension plan is restructured, it is key for employers to communicate these changes to their pension plans clearly and in a way in which their membership can understand.
Stay tuned for Part II of the plan restructuring series, which will address the specific issues relating to the first option - plan terminations/wind-ups.
James advises on legal issues relating to federally and provincially regulated pension and employee benefit plans.
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.
