Chapter 9 - Pension & Employee Benefit Plans
All but one Canadian province subscribes to the federal Canada Pension Plan for employees and the self-employed. The province of Quebec provides a similar pension plan, the Québec Pension Plan, for employees and the self-employed in that province. Both plans are statutory social insurance plans and are mandatory. The territorial and provincial governments provide a variety of universal hospital and medical plans [as discussed in this chapter and Chapter 10]. In addition, many employers opt to provide their employees with company-sponsored pension or savings plans and benefit plans.
Pensions and other Savings Plans
Government-Sponsored Pension Plans and Supplemental Income Programs
Both employers and employees are required to contribute to the Canada Pension Plan (CPP) or to the comparable Québec Pension Plan (QPP). These plans provide a basic level of income protection on retirement or disability. They are financed by contributions at each pay cycle that are deducted from an employee’s pay for the employee portion and otherwise remitted by the employer for the employer’s portion. The employer and employee each contribute an equal percentage of salary, up to the “year’s maximum pensionable earnings”, which is established annually by the government. Employees generally become eligible for full benefits at age 65, even if they are still working. The pension may be received as early as age 60 or deferred to as late as age 70. Contributions cannot be made after age 70.
Old Age Security and the Guaranteed Income Supplement are also available to lower-income seniors. The funding for these programs is derived from the federal government’s general tax revenues, not employers or employees. A given province may have additional programs for lower-income seniors.
Company-Sponsored Pension Plans
Many employers provide company pension plans, which may be partially funded by employee contributions. Though private pension plans are not mandatory, if offered, they must be funded and operated according to provincial pension standards legislation (or federal standards legislation for those employees who work in the federal jurisdiction). Pension standards legislation is designed to protect plan members and to generally ensure that adequate funds will be available to pay the pension obligations in the future in the case of defined benefit plans. Each jurisdiction with pension standards legislation also has a pension regulator that oversees the proper administration of registered pension plans. There are generally two main types of pension plans: defined benefit pension plans and defined contribution pension plans. However, many jurisdictions have also introduced a third type of pension plan, target benefit plans.
The jurisdiction of registration for purposes of pension standards legislation is determined based on the Canadian jurisdiction in which the plurality of members is employed. If the plan members are employed in more than one Canadian jurisdiction, then generally either the minimum standards of a member’s province of employment applies (for individual entitlements) or, for many whole plan-related matters, such as funding and investment, the law of the province in which the plan is registered applies. Most Canadian jurisdictions have entered into agreements to govern inter-jurisdictional regulation of pension plans. The most prevalent such agreement is the “2020 Agreement Respecting Multi-Jurisdictional Pension Plans.”
Most pension plans are also registered under the Income Tax Act (Canada) as a “registered pension plan” in order to benefit from favourable tax treatment. Subject to certain limits, the Income Tax Act (Canada) generally permits deductions from income for registered pension plan contributions and permits contributions and investment income in the pension fund to accrue on a tax-deferred basis until the pension income is paid to the member. The Income Tax Act (Canada) also limits the amount of benefits that can be provided to members in a defined benefit plan and the amount of contributions that can be made in respect of members in a defined contribution plan. The Canada Revenue Agency’s Registered Plan Directorate oversees the proper administration of registered pension plans.
Some employers also offer supplemental pension plans, which provide retirement income benefits in excess of the benefit limits under the Income Tax Act (Canada). Such plans are subject to certain tax policy rules but are generally not subject to pension standards legislation. The benefits payable under supplemental plans can be funded or unfunded (i.e., paid out of the employer’s general revenue).
Company-Sponsored Savings Plans and Profit Sharing Plans
Many employers provide group savings plans and profit sharing plans. Group savings plans include registered retirement savings plans and tax free savings accounts. Profit sharing plans include deferred profit sharing plans and employees profit sharing plans. Such plans are generally governed by the Income Tax Act (Canada) and Canada Revenue Agency regulatory policies in order to benefit from favourable tax treatment. They are not subject to pension standards legislation.
Group Benefit Plans
Although physician and hospital services are covered by public plans, not all health and welfare benefits are covered through provincial and territorial health care plans. As a result, employers frequently provide supplemental health, dental, and drug plans, as well as disability and life insurance to active employees and their dependants. Although life insurance and long-term disability benefits are generally insured by third-party insurers, health and dental benefits may be self-insured be the employer. Depending on the plan design, employees may share in the premiums and deductibles payable under such plans.
Fewer employers today are providing benefit plans to retirees. In industries where retiree benefits are still the norm, some employers have retirees pay premiums for their benefits after retirement, subject to any prior binding commitment by an employer to pay the full cost.
Purchaser’s Strategic Considerations
Unionized Environments
In unionized environments, the collective agreement may require the employer to provide a pension or savings plans and benefit plans to unionized employees. This can generally create complications for a purchaser.
For instance, the collective agreement may dictate that a particular pension plan be provided, such as a multi-employer plan that is provided to various unrelated employers through the union. As a result, the purchaser may be forced to make contributions to a pension plan over which it has little or no control.
The collective agreement may also restrict or limit the purchaser’s ability to eliminate or modify the terms of the pension or savings plans and benefit plans without union agreement. As a result, the purchaser may be required to assume or replace a plan that the purchaser otherwise would have excluded or eliminated. That scenario can be particularly problematic in the case of a distressed target acquisition, where a union will likely be more vigilant with regard to the entitlements its members.
Asset vs. Share Purchase
In a share purchase, the legal personality of the target does not change. As a result, if the target maintains a pension, savings and benefit plans, the plans are acquired by operation of law when the shares of the target are acquired (unless the parties agree otherwise). In some cases, the parent company of the target maintains all or some of the plans for its subsidiaries and only the shares of one of the subsidiaries are purchased. As a result the purchaser may need to provide a replacement plans for employees of the acquired subsidiary, subject to the agreement of the parties and labour and employment law considerations.
Asset purchases provide a certain degree of flexibility with regard to the treatment of pension, savings and benefit plans. Often, the target’s plans will be excluded from the acquired assets and liabilities. In such cases, the purchaser may provide replacement plans. However, the nature and value of such plans will be governed by the agreement of the parties (as set out in the terms of the purchase agreement) and other business considerations, such as attracting and retaining the acquired workforce. Alternatively, the purchaser may decide to assume some or all of the seller’s pension, savings and benefit plans for various reasons. For example, the purchaser may not otherwise have operations in Canada and cannot provide or establish replacement plans within the time frame required by the transaction.
Pension Plans in an Asset Purchase
The purchaser in an asset purchase may decide to:
- Assume the seller’s pension plan if it is limited to only its employees
- Provide a new plan on a going-forward basis for future service exclusively
- Provide a comprehensive plan covering both past and future service
The approach agreed upon between the parties will impact the terms of the purchase agreement and possibly result in an adjustment to the purchase price. For instance, where the purchaser assumes the pension plan of the seller, the plan may be underfunded, such that the purchaser assumes the related funding liability. Additionally, where the purchaser decides to provide a replacement plan that covers past and future service, it will be necessary to transfer assets of the seller’s plan to the purchaser’s plan to cover liabilities that were assumed from the seller’s plan. Regulatory consent to the transfer of assets between pension plans must be obtained before any such assets are transferred between pension plans and the parties must cooperate to obtain such regulatory consent. The requirements for regulatory approval of an asset transfer vary considerably across jurisdictions and may result in a funding shortfall that similarly requires a purchase price adjustment.
Due Diligence Process
Before completing a share purchase or an asset purchase in which the pension, savings and benefit plans are assigned to the purchaser, the purchaser will need to obtain and review copies of any relevant pension and benefit plan documentation. The main issues need to be considered at this stage:
- Identifying the types of plans and whether they will transfer to purchaser in connection with the transaction
- Compliance with any regulatory requirements
- Funding and other financial liabilities (including unfunded benefit obligations)
- Maintenance and administration requirements post-acquisition
Timing
Changes to existing pension, savings and benefit plans or the creation of new plans may involve the preparation of new plan documentation, as well as insurance contracts or trust agreements, particularly if the purchaser is required to establish a new plan. For registered pension plans, regulatory approval may be required. It is not uncommon that the work of establishing a replacement plan is completed after the transaction has closed. In such cases, the seller and the purchaser will often agree that the seller will continue providing “transition services” under some or all of the seller plans until the purchaser’s plans are operational. Because group benefit plans are typically governed by an underlying insurance contract, if purchaser is required to provide a new plan, such plan generally cannot be retroactive.