When most people think of pension plans, they think of single-employer pension plans which an employer might provide to its workers. While the types of benefits can vary, single-employer plans have one thing in common. Once an employee’s employment ends, so does their ability to accrue benefits in that plan.
Single-employer pension plans made a lot of sense when most people expected to work for the same employer for their entire career. That is no longer true. In today’s job market most employees expect to work for multiple employers before they retire.
One solution to this problem is the multi-employer pension plan (“MEPP”). While such plans are not new – some of Canada’s earliest private-sector pension plans were MEPPs – they are well suited for today’s increasingly mobile workforce since they allow workers to change companies but continue to accrue pension benefits. MEPP members often don’t terminate their active membership until no contributions have been received for them for 24 months.
As their name indicates, MEPPs are pension plans to which more than one employer contributes. Service with all participating employers is combined to provide the member with one pension at retirement. MEPPs are generally established through collective bargaining so their contribution rates are fixed by collective agreement. These fixed contributions make MEPPs attractive to employers since their pension costs are stable and predictable. Employers that contribute to a MEPP are not responsible for any funding shortfall.
Public service employees often participate in MEPPs. For example, OMERS and the Ontario Teachers’ Pension Plan both receive contributions from multiple employers. However, such MEPPs are subject to their own legislation. This article will focus on private-sector MEPPs.
MEPPs are administered by boards of trustees, at least half of whom must be member representatives. While many MEPP’s are administered by boards comprised of both employer and member representatives, an increasing number are administered by only member representatives.
MEPPs are common in the construction industry, the nursing and retirement home industry, the entertainment industry, and the retail sector, all of which have many smaller employers and a highly mobile workforce. There are also some MEPPs that are not limited to workers in any specific industry. More than one million Ontarians are MEPP members.
MEPPs enable smaller employers, who would otherwise be unable to provide a defined benefit pensions to their employees, to do so. MEPPs enjoy the advantages of the administrative efficiencies and economies of scale gained when many employers contribute to a single MEPP.
There are both defined contribution (“DC”) MEPPs and defined benefit (“DB”) MEPPs (“DB MEPPs”). In a DC plan, contributions are invested, typically in a separate account for each member. Upon retirement, the contributions and the investment earnings on them are used to buy a pension for the member from an insurance company.
In a DB plan, pensions are based on a formula, often linked to the contributions received for the member or the member’s years of plan membership. DB pensions are normally paid by the pension plan.
DB MEPPs are actually target benefit plans since the contributions they receive are fixed. That makes the benefits they provide contingent on available funding, so benefits can be reduced. Of course, few private sector DB pensions are truly guaranteed as the pensions promised by a single employer DB plan are dependent on the financial viability of the employer. A DB MEPP’s ability to pay benefits does not depend on the economic fortunes of any single employer. DB MEPPs have many employers, so the insolvency of any single employer is much less likely to hurt the plan’s long-term viability.
The average DB MEPP in Ontario has about 14,500 members. The average single employer DB plan in Ontario has less than 850 members. Centralized administration reduces the per capita costs of running a pension plan.
The large size of DB MEPPs also reduces the investment fees they must pay, since the fees charged on every dollar invested normally decrease as the assets being managed grow. The 74 DB MEPPs registered in Ontario have total assets that almost equal the total assets of the more than 1,300 single employer DB pension plans in Ontario. Lower investment management fees and the pooling of other expenses leaves more money available to pay pensions.
Like all pension plans, DB MEPPs are complicated. We have a dedicated team of pension lawyers in Toronto and Ottawa to assist trustees, unions, employees, pensioner groups and individuals with their pension issues. If you have any questions or concerns about how a MEPP is being administered, don’t hesitate to contact us.