There are other ways to restructure your defined benefit plan to decrease future costs that are typically less drastic than the conversion to defined contribution or plan wind-up options discussed in my previous posts.
For example, plan amendments to:
- eliminate or reduce ancillary benefits such as unreduced (or partially reduced) early retirement and bridge benefits;
- change ancillary benefit eligibility criteria (age and service requirements);
- change the future service defined benefit formula (e.g., reduce the percentage, narrow the scope of pensionable earnings or change to career average);
- reduce or eliminate indexation on future service accruals (including a change to ad hoc indexing); and
- increase member contributions.
Can Accrued Benefits be Reduced?
Typically, plan amendments that purport to reduce accrued benefits are void under pension legislation, other than for multi-employer pension plans and other special plans (e.g., jointly sponsored pension plans). However, for federally regulated plans, s. 10.1(2)(a) of the Pension Benefits Standards Act, 1985 provides that the Superintendent may approve an amendment which has the effect of reducing accrued benefits. OSFI’s July 2012 Instruction Guide ”Authorization of Amendments Reducing Benefits in Defined Benefit Pension Plans“ outlines what the Superintendent will consider when faced with an application for a “reducing amendment”. Specifically, the Instruction Guide provides that, among other things, the amendment power in the pension plan text and any supporting documents must allow for a “reducing amendment” and the amendment must have been instituted in accordance with those documents. Please see our previous post on reducing benefits in federally regulated defined benefit pension plans for further discussion.
Any of the above-noted restructuring options, however, must be done on a prospective basis and, in Ontario, they are also subject to s. 14 of the Ontario Pension Benefits Act (PBA) which prohibits an employer from amending a plan to reduce accrued benefits. In addition, s. 14(1)(c) of the PBA prevents an employer from amending a plan to reduce or eliminate an ancillary benefit for which a member or former member has met all the eligibility requirements necessary to exercise the right to receive payment of the benefit. For example, if a plan member retires and as part of the pension plan, is entitled to receive a dental benefit until death, that dental benefit cannot be removed as the member has met all the requirements necessary to entitle him or her to it.
While the above restructuring options (and those discussed in parts I-III of this series) are possible subject to the terms of the plans and any collective bargaining considerations, an employer must always remember that communication with members is key to reducing the risks associated with making such changes.