Does your Multi-Employer Pension Plan Deserve a Gold Star?
Last month, the Financial Services Regulatory Authority of Ontario (FSRA) released new guidance on Leading Practices for Defined Benefit Multi-Employer Pension Plans (DB MEPPs). These leading practices were developed based on FSRA’s observations during their review of DB MEPPs in 2020.
While these leading practices do not have the force of law, FSRA encourages DB MEPP trustees and their advisors to consider their governance, risk management and communication practices, and to compare and contrast them with the identified leading practices. While you’re at it, you might as well take all your medicine and review the applicable CAPSA Guidelines to make sure that the pension plan is reflecting all the latest best practices (note that this is not as daunting as it seems as not all the CAPSA Guidelines are applicable).
Remind me, what’s a DB MEPP?
A DB MEPP is a pension plan to which two or more, usually unrelated, employers contribute. In addition, three main characteristics typically distinguish a DB MEPP from the more common Single Employer Pension Plan:
- Board of Trustees – DB MEPPs are administered by a Board of Trustees, whose members are typically appointed by the participating trade unions and/or employers.
- Fixed Contributions – the contribution rates to a DB MEPP are fixed and are typically set during the collective bargaining process.
- Accrued Benefits can be Adjusted – Benefits for past and/or future service may be adjusted upward or downward by the Board of Trustees to balance the benefits with the contributions and asset levels.
DB MEPPs belong to a class of pension plans that sit somewhere in the middle of the spectrum which includes Defined Benefit pension plans at one end and Defined Contribution pension plans at the other. Most people call these best-of-both-worlds pension plans Target Benefits Plans (TBPs). Other examples of TBPs include Jointly Sponsored Pension Plans (e.g. the Ontario Teachers Pension Plan and the CAAT Pension Plan), and Shared Risk Plans in New Brunswick. Quebec, often the pension plan design trailblazer, recently passed legislation which will allow TBPs in the single-employer context.
Leading Practices for DB MEPPs
In summary, the following are the eight leading practices for DB MEPPs according to FSRA:
- A comprehensive orientation policy to on-board new trustees.
- Trustee education policies to support trustees in fulfilling their role as plan fiduciaries.
- A trustee succession plan to ensure continuity on the Board of Trustees and good plan administration.
- Plan enrolment policies and procedures that support members remaining connected with their pensions.
- An investment policy that considers industry leading practices relevant to how the plan assets will be invested and how trustees will resolve conflicts of interest, shall they arise.
- A risk management policy that integrates funding and benefit policies and outlines the material risks facing the pension plan along with a plan to either mitigate or respond to these risks.
- Plain language communication for plan beneficiaries as to the nature of their pension plan such that they can make informed decisions. This includes clearly explaining the potential and likelihood for benefit adjustments.
- Regular, on-going dialogue between the trustees, advisors and key stakeholders involved in the plan supports awareness, collaboration, and operational effectiveness.
FSRA’s guidance provides more details on the why’s and how’s for each of the above practices – and as we all know, the devil is in the details. Thankfully, FSRA notes that each DB MEPP is unique, and the Board of Trustees will need to address these practices within the constraints of their plan.
One area that’s not directly addressed by the leading practices outlined above revolves around making sure that the DB MEPP’s critical service providers (i.e. actuaries and third-party administrators) are fulfilling all their responsibilities on a cost-effective basis. This could involve periodic external reviews of the work performed by these services providers, including performing audits on the accuracy of the membership data.
Boards of Trustees are also well advised to regularly test the market to make sure that the fees they are paying their service providers are reasonable – plus, sometimes switching actuaries and/or third-party administrators can provide a fresh set of eyes to confirm that everything is operating as it should.
What’s on the Horizon?
Now that they’ve published this guidance, FSRA will start formally benchmarking all Ontario DB MEPPs against these leading practices. Each Board of Trustees will be provided with a confidential scorecard on how their plan’s policies and procedures compare to other DB MEPPs. FSRA will also publish aggregated results (to preserve confidentiality) so everyone can see how the MEPP sector is performing.
While we’re on the topic of DB MEPPs, the industry is still waiting for the Ontario Government to finalize the new funding framework and other legislative changes for DB MEPPs. The last we heard was a public consultation back in early 2018 – now, there’s been some world events that have distracted all of us, so some forgiveness on missed deadlines is certainly appropriate – but Ontario is falling behind. The new rules for Commuted Values from Target Pension Arrangements are still not allowed to be applied in Ontario, and the ability to establish a single-employer TBP would certainly be welcome in Ontario – especially if there was a mechanism to convert past DB benefits to target benefits. Hopefully this is not the last time I’m writing about Target Benefit Plans this year.
This new guidance document on leading practices for DB MEPPS is required reading for all Boards of Trustees, and hopefully you will all get a gold star when those benchmarking scorecards are handed out!