Pension plans are often categorized by the benefits they provide – defined benefit (or “DB”) plans provide pension benefits at a pre-determined rate while defined contribution (or “DC”) plans provide benefits based on the amount of contributions and investment returns accumulated in the course of employment. But pension plans can also be categorized in terms of how they are sponsored and governed: Who is responsible for establishing the plan’s terms and the type of pension benefits it provides? Or for overseeing its day-to-day operation and ensuring its long-term sustainability?
This post provides an overview of one model of pension plan governance: the jointly-sponsored pension plan (“JSPP”).
In Ontario, the JSPP model has become increasingly common in the public sector over the past 30 years. Many of the largest pension plans in Canada are Ontario public-sector pension plans. According to a 2020 report by Ontario’s pension regulator, more than half of Ontario’s active pension plan members belong to one of the seven largest JSPPs, which collectively hold more than two thirds of the total assets held by Ontario pension plans.
JSPPs are often large plans with multiple stakeholders, but their sizes range widely. For instance, the Ontario Teachers’ Pension Plan covers over 200,000 active members who are employed by school boards throughout Ontario and represented by various unions, including OSSTF, ETFO and OECTA. By contrast, Ontario’s newest JSPP is WISE Trust, which was the first Canadian single-employer pension plan (“SEPP”) to covert to a JSPP; it covers less than 5,000 active members, primarily employees of the WSIB represented by the Ontario Compensation Employees Union (OCEU, CUPE Local 1750).
Plan governance in traditional employer-sponsored pension plan
In traditional SEPPs, the employer is the sole plan “sponsor.” As such, the employer is responsible for determining fundamental features of the plan, including whether it provides a DB or DC pension and whether it will be funded by the employer alone or by employee contributions as well. The sponsor also decides who is responsible for plan administration, including compliance with pension legislation, prudent investment of pension funds, member enrollment and communication, and remittance of contributions.
Where the employer’s workforce is unionized, plan design elements may be included in the collective agreement. For example, a union might negotiate an employer’s guarantee to maintain a DB plan, or it might negotiate contributions at a fixed rate. A collective agreement might also guarantee a role for employees in plan administration, which isn’t legally required for SEPPs (except in Quebec and Manitoba), or in deciding on amendments to the plan.
Multi-employer pension plans (“MEPPs”) provide a second model for pension plan governance. Doug LeFaive provides an overview of MEPPs here. These plans allow employees to continue to accumulate pension credits when they move between employers and are common in sectors characterized by high workforce mobility. Participation in MEPPs is established through collective bargaining and employees must have at least equal representation in plan administration – in fact, many MEPPs are wholly administered by employee representatives.
JSPPs provide a third model of pension plan governance. As their name implies, JSPPs are characterized by joint sponsorship and an equal role for employers and labour groups in all aspects of plan governance.
In JSPPs, sponsors’ decisions are made jointly by employers and labour groups. This includes appointment of an equal number of board trustees or committee members responsible for plan administration. Joint governance therefore normally involves two jointly appointed boards or committees, one responsible for sponsors’ decisions and another responsible for administration. The allocation of decision-making responsibilities varies among JSPPs, although sponsors are typically responsible for plan design and funding issues, while administers are responsible for the operation of the plan.
Joint governance provides plan members and labour leaders with a voice in determining pension plan design and delivery. It also provides an opportunity to advance the goals of the labour movement where these align with the best interest of plan members. This includes promoting diversity in pension plan governance, fostering greater transparency and member engagement, and encouraging responsible institutional investment policies that consider environmental, social and governance (“ESG”) factors.
The trade off for joint-governance is sharing of plan costs. In most SEPPs, the employer must ensure the plan is fully funded: if a DB plan’s costs increase or deficits arise, the employer must normally make additional payments into the plan. Employee contributions, on the other hand, are typically fixed by the terms of the plan and, in some cases, by a collective agreement.
JSPPs always provide DB benefits and plan members usually contribute at the same rate as employers. Where deficits arise, they are the joint responsibility of members and employers and must be addressed by increasing contributions or, less commonly, by adjusting pension benefits.
Cost sharing is attractive to employers because it typically reduces their pension plan costs. The JSPP model also eliminates the risk that the employer will have to make unexpected special payments into the plan. This is important from the perspective of plan members because the risk of special payments is one reason employers seek to reduce DB benefits or convert to DC plans that are typically less advantageous for plan members. Through cost sharing, the JSPP model helps to ensure members have access to adequate DB benefits over the long term.
Our dedicated pension and benefits lawyers in Toronto and Ottawa provide support for unions and trustees in establishing and managing JSPPs, and assistance to employees and pensioners participating in them. We’re happy to discuss the JSPP model or address questions or concerns about any pension plan.