Pension plans must be safeguarded through transactions, says Mitch Frazer in Benefits Canada

January 25, 2007

Pension plans--whether defined benefit (DB), defined contribution (DC), hybrid or multi-employer--are affected by corporate transactions, said Mitch Frazer at the Ontario Club today.

Safeguarding pension plans through transactions is paramount, whether they are share or asset transactions.

In a share transaction, the purchaser buys all the securities and acquires all the corporate liabilities of the selling company. From a pension perspective, Mitch said, due diligence and a focus on representations and warranties are key.

In an asset transaction, the purchaser negotiates for assets and assumes only specified liabilities. (Liability for retired employees remains with the vendor.)

There are three ways to deal with plan members: future service (in which the old plan stops and the new one starts up); assignment and assumption if the fund is decently funded; and asset transfer.

Due diligence issues for both vendor and purchaser include the vendor having to acquire its own history of pension and benefits, and to identify problems and solutions quickly to structure the transaction. The vendor’s representations and warranties must also be accurate.

The purchaser, on the other hand, must consider the funded status of the pension plan and whether it has ever been subject to a trust, merger or asset transfer, Mitch added. The purchaser must also consider if any surplus has been distributed or if a contribution holiday has been taken. In addition, the purchaser must review its pension plan text and amendments, funding agreements, collective agreements and benefit booklets.

These issues may sound onerous within the context of corporate transactions, but Mitch says to look at the basics. “You don’t need to know everything, but you need to keep your eyes open when dealing with pension plans. There are a lot of little pitfalls.”


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