Anonymised, illustrative composite. Section 80 of Ontario's Pension Benefits Act sets a default that operates whether or not anyone acts, and a transfer route that works only if several people do several things in order. The parties drafted the second and got the first.
At a glance
A manufacturer sold one of three divisions for $31,000,000. Of the seller's 640 defined benefit plan members, 128 worked in the division and took employment with the buyer, which sponsored a defined benefit plan of its own with a different benefit formula. The seller's plan carried a going-concern surplus of $4,100,000 at its last filed valuation, and the price had been negotiated on the express basis that the seller kept all of it. Among the closing deliverables the purchase agreement listed evidence of the transfer of the plan assets attributable to those members. It carried no regulatory-consent condition and no long-stop.
Eleven days before closing the seller's administrator was asked for the transfer instructions and answered that it could not give any. Nothing had been filed: no employers' agreement in the form the Act contemplates, no application, and so nothing for the regulator to consent to. The transaction did not fail. It closed on the statutory default rather than the negotiated arrangement — a different outcome from the one that was priced, and the difference fell mostly on the seller.
The default is in s.80(4). Where the original employer's employee who is a member of the original plan becomes the successor employer's employee and a member of the successor plan, “he or she continues to be entitled to the benefits provided under the original pension plan in respect of employment in Ontario or in a designated jurisdiction to the effective date of the sale of the business without further accrual”.
As a balance sheet, that means the seller keeps the accrued liability for 128 people it no longer employs, frozen at closing, with the valuations, filings and funding obligation that go with it — $38,000 a year of administration on its own actuary's estimate, before any move in the discount rate touches the liability. The buyer had budgeted for 128 members joining its plan with assets behind them and received 128 joining with none.
Service credits still travel. Under s.80(4)(b) the member “is entitled to credit in the successor pension plan for the period of his or her membership in the original pension plan, for the purpose of determining eligibility for membership in or entitlement to benefits under the successor pension plan”, and under s.80(4)(c) to credit in the original plan for later service with the successor. Eligibility travels; the accrued benefit does not.
Section 80(3) is routinely over-read. Where a member of the original plan becomes the successor employer's employee and a member of the successor plan, “his or her employment is deemed, for the purposes of this Act, not to have been terminated by the change of employer”. For the purposes of this Act — the Pension Benefits Act. It says nothing about employment standards continuity, a separate test under ESA s.9 with its own thirteen-week cut-off, and nothing about common law notice.
The exception is s.80(5): if the successor employer assumes responsibility for the accrued benefits under the original plan, clause (4)(a) does not apply and “the successor pension plan is deemed to be a continuation of the original pension plan with respect to any benefits or assets transferred”. That is a commercial assumption of liability, not something closing mechanics deliver by themselves.
Moving the money is a further step with three gates. The employers may, not must, enter into an agreement under s.80(6) “to transfer assets from the original pension plan to the successor pension plan in connection with this transfer of responsibility”. Then an application: under s.80(11) “The administrator of either pension plan or such other person as may be prescribed may apply for the Chief Executive Officer's consent to the transfer of assets from the original pension plan to the successor pension plan.” Then the consent: s.80(10) provides that “The Chief Executive Officer's prior consent is required to authorize the transfer of assets from the original pension plan to the successor pension plan.”
Two of the criteria in s.80(13) are where the commercial surprises live, and both are commonly mis-stated. Paragraph 4 is conditional: it bites only “If the pension benefits and other benefits to be provided under the successor pension plan for the transferred members are not the same as the pension benefits and other benefits provided for them under the original pension plan”, and then requires the commuted value under the successor plan to be no lower than under the original, adjusted for payments made in connection with the transfer. It is the buyer's plan-design decision that triggers it — and s.80(8) confirms that the same benefits are not required: “Clause (6) (a) does not require the successor pension plan to provide the same pension benefits and other benefits for the transferred members that were provided for them under the original pension plan.”
Paragraph 6 is unconditional, and it is the one that repriced this deal: “If the original pension plan has a surplus as of the effective date of the transfer of assets, the amount of assets to be transferred must include a portion of the surplus determined in accordance with the regulations.” The size of the portion is a regulatory calculation, not a negotiation; what the criterion fixes is that it is not nil. A price built on the seller keeping the whole of a $4,100,000 surplus was built on a position the Chief Executive Officer cannot consent to.
The transaction closed on the s.80(4) default and the transfer was pursued afterwards, on an application by the buyer's administrator under s.80(11). The surplus allocation was renegotiated between the employers' agreement and the filing, because the seller could not deliver what the purchase agreement promised. What nobody could reverse was the eighteen weeks between closing and consent, in which 128 members held a frozen benefit in one plan and a fresh accrual in another.
Nothing, if the application had been on the closing checklist. The gate that mattered was neither expensive nor contentious: s.80(13) para 3 requires only that “The administrators of the two pension plans must have agreed upon the manner of determining the amount of the assets to be transferred, and the applicant must give the Chief Executive Officer notice of their agreement.” Two actuaries agreeing a method, filed. The cost of not starting was the surplus renegotiation, a frozen liability through the gap, and a closing condition waived because it could never have been satisfied. See pricing the difference between a share and an asset deal for how the same question looks on a share purchase, where the sponsor does not change and none of this arises.
The tell was the drafting. A closing deliverable in the passive voice — the Plan Assets shall be transferred on Closing — with no named applicant, no consent condition and no long-stop. Every obligation that depends on a regulator has an applicant, a filing and a waiting period. When none of the three appears, nobody has looked up how the transfer happens.
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