Pension plans, whether defined benefit(DB), defined contribution(DC), hybrid or multi-employer, are affected by corporate transactions, said Mitch Frazer, senior associate with Torys law firm in Toronto, at the Ontario Club today.
Whether it’s a share or asset transaction, safeguarding pension plans through the transaction is paramount. In a share transaction, the purchaser buys all the securities and acquires all the corporate liabilities of the selling company. From a pension perspective, Frazer said, due diligence and a focus on representations and warranties are key.
In an asset transaction, the purchaser negotiates for assets and assumes only specified liabilities.(Liability for retired employees remains with the vendor.)There are three ways to deal with plan members: future service(in which the old plan stops and the new one starts up), assignment and assumption if the fund is decently funded, and asset transfer.
Frazer highlighted several due diligence issues for both vendor and purchaser. The vendor must acquire its own history of pension and benefits, and identify problems and solutions quickly in order to structure the transaction, he said. And it’s critical that the vendor’s representations and warranties are accurate.
The purchaser, on the other hand, must consider the funded status of the pension plan and whether it’s ever been subject to a trust, merger or asset transfer, he said. The purchaser must also consider if any surplus has been distributed or if a contribution holiday has been taken. The purchaser must also review its pension plan text and amendments, funding agreements, collective agreements and benefit booklets.
Although these issues sound onerous within the context of corporate transactions, Frazer says to look at the basics. “You don’t need to know everything, but you need to keep your eyes open when dealing with pension plans. There are a lot of little pitfalls.”
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