There are three options for structuring a pension plan conversion, according to a presentation in Toronto earlier this morning.
At the Recent Developments in Pension and Employee Benefits Law seminar hosted by Blakes, Jeremy Forgie and Deron Waldock—both of whom are partners at the firm—explained the three most frequently used options: new hires only, voluntary conversion and mandatory conversion.
The new hires only approach means that they will begin accruing defined contribution(DC)benefits while existing defined benefit members will continue to accrue defined benefit(DB)benefits. The beauty of this approach, said Waldock, is that it’s the least risky from a legal perspective.
In the case of a voluntary conversion, existing DB members are given the choice of continuing to accrue DB benefits and may or may not be given the option of converting their past service DB benefits to a DC account balance while new hires will accrue DC benefits.
He said the legal risks are generally the same as the new hires only approach because DB members have the option to continue to accrue DB benefits. However, past service conversion elections involve additional administration, employee communications and are subject to regulation under pension benefits legislation.
The most advantageous option from a financial perspective is the mandatory conversion but “it certainly is the riskiest of the three options,” added Waldock. In a mandatory conversion, DB benefit accruals are frozen and either left in the plan or annuities are purchased. Existing plan members and new hires must accrue DC benefits for future service.
It is also the most disruptive from an employee relations perspective and could trigger a member challenge.
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