Why sponsors might switch to a jointly sponsored pension plan

Single employer pension plans (SEPPs) who want to reduce pension-related financial risk without abandoning defined benefit pensions entirely have started to look to jointly sponsored pension plans (JSPPs).

Clio Godkewitsch, benefits and pensions lawyer at Goldblatt Partners explained this model has gained traction, particularly in Ontario, because it allows for shared governance and cost responsibility between employers and employees, “including design and administration and also the shared costs and funding risks of the plan.”

David Sworn, also a benefits and pensions lawyer at the firm, noted that employers often benefit from increased financial predictability as they require employers to make regular contributions at a pre-determined rate, rather than requiring employers to pay the plan’s current service cost and make any special payments, as in a SEPP.  

“There’s really a much higher degree of cost certainty from the employer’s perspective,” said Sworn.

Over the past 30 years, the JSPP model has become a dominant structure in the public sector. After all, some of Canada’s largest pension plans are Ontario-based public-sector JSPPs.

A 2020 report from Ontario’s pension regulator, the Financial Services Regulatory Authority (FSRA) found that over half of the province’s active pension plan members are enrolled in one of the seven largest JSPPs, which together manage more than two-thirds of Ontario’s total pension assets.

WISE Trust, the pension plan for Workplace Safety and Insurance Board (WSIB) and the Ontario Compensation Employees Union, CUPE Local 1750 (OCEU), was the first in Ontario to fold into the JSPP from an employer-sponsored model in 2020.

While this shared governance model is a key draw, it also represents a fundamental shift in control for employers. Godkewitsch explained that in a traditional single-employer plan, employees have no formal role in administration, design or amendment of the plan.

Sworn acknowledged that this differs from some provinces like Quebec and Manitoba where “there does need to be some employer representation but in the rest of Canada, there’s no legally required role for employees in single-employer plans,” he said.

Despite these governance changes, JSPPs remain rare in the private sector as Godkewitsch noted there’s been little movement beyond public-sector adoption.

“It hasn’t happened much yet,” she said. “There isn’t a lot of experience to draw on, but it seems to be the broader public sector. And that’s perhaps because that’s also where there’s the greatest union concentration.”

Sworn emphasized this could be because Ontario’s legislation has played a role as JSPPs are legislatively defined, unlike in other provinces.

“By legislation, they typically will exist in the public sector,” he said. “There’s some possibility for private sector employers to participate, but they’re far more prevalent in the public sector,” he said.

Financial stability is another key factor driving interest in JSPPs, Sworn explained, pointing to how funding is structured to weather market downturns.

“Concerns about the deterioration of funding are usually addressed well in advance through a pre-established negotiated funding policy,” he said. “In some instances, when the financial position of the plan is less strong, there can be adjustments made to benefits and pay. That would be through pausing or maybe reducing conditional cost of living.”

Godkewitsch added that these adjustments often involve “the ability in a JSPP to pull different levers to respond to funding concerns,” including “reducing benefits or increasing contributions, or a combination.”

Moreover, she described the funding policy as a “very key document” that outlines “how they will manage and respond to different pressure points.”

Whether JSPPs are required to have a funding policy, Ontario JSPPs are required to maintain and file certain documents that create and support the plan, noted Sworn. He explained these need to include the obligations of members and employers in respect of going concern unfunded liabilities and reduced solvency deficiencies.

“We would say that this requires a funding policy even if that term is not explicitly used in the legislation,” he said.

For employers looking to move away from defined benefit (DB) pensions but hesitant about defined contribution (DC) plans, JSPPs could offer a middle ground. Godkewitsch explained they can be an alternative for sponsors who want to get out of the single employer DB pension plan business and be in a more “predictable pension cost arrangement without sacrificing the DB pension arrangement for employees.”

However, there are trade-offs as both Godkewitsch and Sworn highlighted the biggest one: giving up sole control of the plan. Additionally, joint decision-making can also slow down processes, but Godkewitsch acknowledged the benefits outweigh the drawbacks.

“Compromise and joint decision-making will inherently slow things down,” she said. “But I think the end justifies the means. It’s a worthwhile endeavour.”

Godkewitsch underscored the transition from a single-employer plan to a JSPP is not that simple. She explained that it’s a “heavily regulated process” by FSRA who require “very extensive communications required to plan members, actives, pensioners and deferred vested members.”

“There is a consent threshold requirement to demonstrate plan member buy in and most of the process requires expert navigation by professionals to support the parties, both employers and the membership or union,” she added.

Despite these challenges, however, Sworn believes the process is achievable.

“It has been demonstrated recently with newer plans that where there’s a will, there’s a way,” he said. “The other piece is that it is not as burdensome to join a pre-existing JSPP. That happens quite regularly.”

He also acknowledged the value of pension protection is increasingly being recognized, which could push more private-sector employers to consider the model. Sworn emphasized that employees want pension protection and DB pensions to the extent that “joining an existing JSPP provides an option.”

“I can see it being utilized by employers or being looked at by employers in the future,” he said.

JSPPs have not only performed generally well but are notably also considered to be a representative of a high standard of governance, explained Godkewitsch.

“In theory, it should become a more dominant model, but I think it remains to be seen whether the employer desire to get out of the DB pension business altogether is outweighed by the favourable outcomes we see in JSPPs,” she said, adding there’s a tremendous opportunity “to inform employers and SEPPs of the benefits of a JSPP model.”