Pensions & Benefits Law : Canada Pension & Benefits Lawyers & Attorneys : Osler Hoskin & Harcourt Law Firm: Post-Employment Benefits & Defined Benefit Plans : Toronto, New York

Executive compensation continues to make headlines in the U.S. To cut through the chaos of a seemingly endless stream of multiple legislative proposals, “Say on Pay” initiatives, and regulatory pronouncements on the topic, here is a brief summary of the two major developments released in the last week alone:

• Following instructions from the G-20 summit, the U.S. Federal Reserve has issued proposed guidelines for incentive compensation (PDF). This applies to banking organizations governed by the Fed, including U.S. operations of foreign banks with a branch, agency or commercial lending subsidiary in the U.S. 
• Special Master Kenneth Feinberg released determinations on 2009 compensation packages for top executives at seven firms, including AIG, Citigroup, Bank of America, Chrysler and Chrysler Financial, that received exceptional governmental assistance from the U.S. government.  As you have no doubt read in the media, he rejected proposals that he thought provided too much cash and he forced executives to take payments in company stock that must be held over the long term.

Even though many employers are not directly affected by these pronouncements, both of these developments will no doubt be of interest to Canadian financial institutions, as well as public companies more generally. In particular, companies that are seeking a framework for analyzing the link between compensation and risk-taking will be studying the principles applied in these announcements:

• Balanced Risk Taking: Sound incentive compensation plans should reward appropriate risk, not excessive risk. Examples of features to make compensation more sensitive to risk are: deferral of payment (and “clawbacks”), longer performance periods, and risk adjustment of awards (i.e., communicate to employees the ways in which awards will be reduced as risk increases).
• Risk Management and Effective Controls: Institute appropriate controls to maintain the integrity of risk management functions; revise arrangements as needed if payments do not appropriately reflect risk.
• Strong Corporate Governance: Provide resources to the board of directors so that it can actively oversee incentive compensation and follow a systematic approach to balanced compensation design.

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The Supreme Court of Canada has granted leave in Burke v. Hudson’s Bay Company.

As you may recall, the case involved the sale of a division of the Hudson’s Bay Company (HBC) and the related transfer of pension plan members, along with assets equal to these members' liabilities, to the purchaser’s new pension plan. The transferred plan members commenced a civil action, arguing that they also were entitled to a pro rata share of the surplus in the HBC plan. Additionally, the transferred plan members sought an order requiring HBC to repay to the fund amounts that had been used to take contribution holidays and to pay plan expenses from 1982 to 1986.

At trial, the judge decided that not including surplus with the transfer of assets to the new plan amounted to a breach of trust, and ordered that a further sum of money be transferred from the HBC plan to the purchaser’s plan. However, the trial judge determined that HBC was entitled to use plan funds for paying plan expenses and taking contribution holidays.

HBC appealed the decision with respect to the transfer of surplus issue, while the transferred plan members cross-appealed the trial judge’s decision that plan expenses may be paid from the fund.

The Ontario Court of Appeal stated that the issue relating to the transfer of surplus could be resolved by determining whether the transferred employees had any entitlement to the surplus based on the plan documents at the time of the sale. Upon review of the plan documents, the Court held that the plan members, including the transferred members, were not entitled to the surplus, and the failure to transfer a portion of the surplus was not a breach of trust.

With respect to the plan expense issue, the Court of Appeal applied its decision in Kerry (Canada) Inc. v. DCA Employees Pension Committee, and held that since the plan text had been silent on plan expenses from its inception until 1985, when the plan was amended to explicitly authorize payment of administrative expenses from the fund, HBC was always permitted to pay plan administration expenses from the fund. Subsequent amendments permitting trustee and fund management fees to be paid from the fund were also valid.

The case is expected to be heard by the Supreme Court in late 2010.

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The following post is a French translation of Michel Benoit's October 27, 2009 post "Pension Reform Proposals Released by Finance Canada".

Le ministre fédéral des finances Jim Flaherty a publié une série de propositions en vue d’améliorer le cadre législatif et règlementaire des régimes de retraite privés assujettis à la juridiction fédérale. Aucune indication n’a été donnée quant à l’échéancier d’adoption des modifications requises à la Loi de 1985 sur les normes de prestation de pension (« LNPP ») et au Règlement de 1985 sur les normes de prestation de pension (« Règlement NPP ») pour mettre en œuvre ces propositions. Celles-ci semblent inclure un lot de mesures pour « contenter tout le monde ». Il n’y a pas d’indice dans le communiqué de presse à l’effet que le gouvernement ait l’intention de solliciter le concours d’intervenants à cette fin.

Le réforme proposée vise cinq objectifs:

1.  Rehausser la protection pour les participants

• Les promoteurs de régimes de retraite seront tenus de capitaliser entièrement sur une période de 5 ans les prestations de retraite à la terminaison du régime. Il est à noter que l’obligation à l’égard de la capitalisation en cas de terminaison sera considérée comme étant une dette non garantie de la compagnie, c’est-à-dire qu’elle sera répertoriée dans la catégorie des créances ordinaires en cas de faillite. Cette modification alignera ainsi la LNPP sur la législation similaire de la plupart des autres juridictions canadiennes en matière de régimes de retraite.
• Les exonérations de cotisations pour les promoteurs d’un régime ne seront permises que si le régime affiche un excédent de capitalisation de 5 % ou plus.
• La bonification des prestations de retraite qui aurait pour effet de réduire le ratio de solvabilité d’un régime à moins de 85 % ne sera pas permise et les promoteurs du régime devront produire annuellement une évaluation actuarielle.
• L’élimination des cessations partielles déclarées par un employeur afin d’assurer que les mises à pied, qu’elles soient volontaires ou non, seront toutes traitées de la même manière.
• L’acquisition des droits à prestation sera immédiate dès le début de la participation au régime. Toutefois, la période d’attente de 2 ans actuellement permise avant le début de la participation est maintenue.
• L’exigence de fournir des informations dans les relevés annuels de participants sera étendue afin de permettre une meilleure compréhension de la situation financière du régime par les participants.

2.  Réduire l’instabilité de la capitalisation

• Une nouvelle norme de solvabilité sera introduite afin de permettre aux promoteurs de régime, d’utiliser les ratios de solvabilité moyen du régime sur une période de trois ans basés sur la valeur marchande des actifs du régime afin de déterminer les montants requis pour capitaliser le régime. Les déficits passés seront consolidés annuellement et la période d’amortissement du déficit de solvabilité demeurera de cinq ans.
• L’utilisation de lettres de crédit sera permise comme solution de rechange aux paiements de solvabilité jusqu’à concurrence d’un maximum de 15 % des actifs du régime.
• Le seuil de 10 % de l’excédent de la caisse prévu dans la Loi de l’impôt sur le revenu sera haussé à 25 % à compter de 2010 pour le coût des prestations pour services courants ce qui permettra aux employeurs d’acquitter des contributions plus importantes. Il est à noter que ce nouveau seuil s’appliquera à tous les régimes de retraite enregistrés qu’ils soient assujettis à la législation fédérale ou provinciale.

3.  Résolution de problèmes propres au régime

Un mécanisme sera disponible pour les promoteurs et les participants d’un régime en cas d’incapacité des promoteurs de s’acquitter des exigences de capitalisation. Ce mécanisme permettra aux promoteurs, participants et retraités d’un régime de négocier un moratoire de courte durée sur les paiements de capitalisation. Toute entente ainsi négociée sera sujette au consentement des participants et des retraités et à l’approbation ministérielle. Cette proposition dériverait semble t il d’une récente entente intervenue entre Air Canada, ses syndicats et ses retraités.

4. Cadre amélioré pour les régimes à prestations déterminées dont les cotisations sont déterminées ou négociées

La LNPP et le Règlement NPP, qui ne traitent pas actuellement de façon adéquate des régimes à cotisations déterminées (« CD »), seront modifiés afin de clarifier les responsabilités et obligations applicables aux employeurs, participants, administrateurs et aux fournisseurs de produits d’investissement de ces régimes. Les régimes CD pourront offrir aux participants l’option de recevoir le paiement de leurs prestations de retraite sous forme de fonds de revenu viager (FRV) permettant ainsi aux participants de bénéficier des investissements faits par le régime de retraite plutôt que d’assumer personnellement la responsabilité de la prise de décision en matière d’investissement.

Le cadre législatif et règlementaire des régimes à prestations déterminées et à cotisations négociées sera amélioré pour y clarifier les obligations de l’employeur et d’inclure expressément le pouvoir du fiduciaire de réduire les prestations accumulées, sujet à l’autorisation du surintendant, concernant la réduction des prestations accumulées.

5. Modernisation des règles relatives aux placements

Des changements longtemps souhaités aux règles relatives aux placements sont proposés, incluant le retrait des limites quantitatives en ce qui a trait aux investissements dans les ressources naturelles et l’immobilier, établissant à cet égard un maximum de 10 % de la valeur marchande des actifs du régime (plutôt que leur valeur comptable) et interdisant les investissements directs dans des actions de l’employeur ou sa dette.

Autres mesures

D’autres modifications techniques sont proposées en vue d’améliorer le cadre législatif et règlementaire de la LNPP et du Règlement NPP afin d’aligner leurs dispositions en accord avec leur interprétation et les politiques courantes.

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Finance Canada Minister Jim Flaherty released a series of proposals designed to improve the legislative and regulatory framework for federally regulated pension plans. No indication was given as to the timing of the amendments to the Pension Benefits Standards Act, 1985 (PBSA) and the Pension Benefits Standards Regulations, 1985 (PBSA Regulations) that will be required to implement the proposals. The proposals contain a host of measures which appear to be designed to provide “something for everyone”. The press release does not mention any willingness on the part of the government to seek further input from stakeholders.

Five objectives are being pursued by the proposals.

1.  Enhanced Protection for Plan Members

• Plan sponsors will be required to fully fund pension benefits on plan termination over a 5 year period . It should be noted that the wind-up funding obligation will be considered an unsecured debt of the company, thus ranking on the same footing as any other unsecured creditor in the event of a bankruptcy. This change brings the PBSA into line with the requirements in most other Canadian pension jurisdictions.
• Contribution holidays by plan sponsors will not be permitted unless the plan has a solvency surplus of 5% or more.
• Benefit improvements which would reduce the solvency ratio of the plan to less than 85% will not be permitted and plan sponsors will be required to file annual actuarial valuations.
• Employer declared partial terminations will be eliminated thus ensuring that employment terminations, whether voluntary or not, will be treated the same way.
• Vesting of benefits will be immediate on commencement of plan participation. However, the 2 year waiting period currently allowed before participation begins will be maintained.
• Enhanced disclosure of information will be required to provide plan members with greater understanding of the plan’s financial situation.

2.  Reduced Funding Volatility

• A new solvency standard will be introduced which will allow plan sponsors to measure their solvency funding requirements using the plan average solvency ratios over the last 3 years based on the market value of assets. Past deficiencies will be consolidated each year and the solvency deficit amortization period will remain at 5 years.
• Letters of credit will be permitted in lieu of actual solvency payments up to a maximum of 15 % of the plan’s assets.
• The 10% surplus threshold under the Income Tax Act will be raised to 25% beginning with 2010 current service contributions thus allowing a greater amount of employer contributions to be made. It should be noted that the increased threshold should apply to all registered pension plans, whether federally or provincially regulated.

3.  Resolution of Plan-Specific Problems

A framework will be available to sponsors and members of plans where the sponsor is unable to meet the statutory funding requirements. The framework will permit all stakeholders to agree to a “workout scheme” that would allow the company to benefit from a short moratorium on deficit payments and the members to agree to change the pension arrangements. Any such workout would be subject to member and retiree consent and Ministerial approval. It would appear that the recent arrangement arrived at between Air Canada and its unions and retirees is the source of this proposal.

4.  Enhanced Framework for Defined Contribution and Negotiated Contribution Defined Benefit Plans

The PBSA and PBSA Regulations, which currently do not adequately address DC plans, will be amended to clarify the duties and responsibilities of sponsors, members, administrators and investment providers. DC plans will also be allowed to pay Life Income Fund-like retirement benefits, thus allowing plan members to benefit from the investments of the pension plan instead of having to personally assume investment decision-making responsibilities.

Negotiated Contribution Defined Benefit Plans will be subject to an improved framework, which will include greater clarity about employer contribution obligations, and explicit trustee authority to reduce accrued benefits subject to Superintendent authorization.

5.  Modernization of Investment Rules

Much needed changes to the current investment rules are proposed including removing quantitative limits on resource and real property investments, determining the 10% concentration limit by measuring the plan’s assets according to market value instead of book value, and prohibiting investments in employer shares or debt.

Other Measures

A number of technical housecleaning measures are also proposed to better align the PBSA and PBSA Regulations with current interpretation and policy.

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Once again the “pension crisis” hits the front page, with The Globe and Mail reporting on federal Finance Minister Jim Flaherty’s announcement that the government is considering changes to the Income Tax Act that would permit pension plan sponsors to contribute more to their pension funds. The proposal described by the Globe would essentially permit sponsors to accumulate larger surpluses in their pension funds, by continuing to allow tax deductions for employer contributions when the surplus grows beyond the threshold currently set out in the legislation.

In the area of pensions as in so many other aspects of Canadian society, the issue of provincial jurisdiction of course comes into play, the Canadian confederation being what it is. Most registered pension plans in Canada are governed not only by the federal Income Tax Act but also by provincial pension standards legislation (except for pension plans of federally-regulated businesses such as banks and railways). Without corresponding changes to the provincial legislation, particularly in Ontario which is home to the majority of Canadian plans, this proposal from the federal government may not in fact achieve its intended goal.

The fact is that under Ontario’s Pension Benefits Act, if a pension plan is terminated in part or in full, then any surplus assets must be distributed from the plan, once all promised pension benefits have been paid out to the members. Even if the employer is clearly legally entitled to the surplus based on the plan documents, if it wishes to keep any part of the surplus for itself, the Ontario legislation requires that the employer obtain the consent of at least two-thirds of the affected active plan members as well as at least two-thirds of the affected “former members”, namely the pensioners. Practically speaking, such member consents are difficult if not impossible to obtain without the employer offering to share a portion of the surplus with the members.

Faced with such a scenario, many employers may be reluctant to continue contributing to a pension plan that is already in surplus, even though it may provide the members with greater security in uncertain economic times, if the employer knows that it will have to give away part of that surplus if the pension plan is ever terminated in whole or in part.

Minister Flaherty’s parliamentary secretary was absolutely correct to state that the government was looking to do what it could, within its jurisdiction. Without more from the Ontario government, however, very few Ontario employers may take advantage of the revised tax rules, if the proposed changes are made to the federal Income Tax Act.

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On October 21, 2009, the Québec government published amending regulations to complement the new measures for funding defined benefit pension plans that were introduced in the Supplemental Pension Plans Act by Bill 30 (PDF) (as amended by Bill 68) (PDF) (the Bill 30 Regulations).

The Bill 30 Regulations include the following:

• provisions providing for the establishment of a reserve to increase benefit security (including the conditions for calculating a provision for adverse deviation);
• clarification of the rules for using letters of credit and the requirements for actuarial valuations; and
• harmonization of the provisions relating to the partition of benefits between spouses in a civil union.

The Bill 30 Regulations will come into force on January 1, 2010. However, some measures such as the provision for adverse deviation must be reflected in actuarial valuations as at December 31, 2008 or later if an employer elects to avail itself of one or more of the funding relief measures introduced by Bill 1 (PDF) and the related regulation (PDF).

Since the Bill 1 regulation has not yet been adopted, the Régie des rentes du Québec announced that the deadline for submitting an actuarial valuation as at December 31, 2008 to the Régie has been extended until December 31, 2009 (instead of September 30, 2009).

Now that the legislative framework for the new funding scheme is largely in place, it will be interesting to see whether it will significantly strengthen the funding of defined benefit plans while slowing the gradual decrease in defined benefit plan coverage.

Traduction en français:

Le gouvernement du Québec a publié, le 21 octobre 2009, un règlement qui complète les nouvelles mesures de financement des régimes à prestations déterminées qui ont été introduites dans la Loi sur les régimes complémentaires de retraite par la Loi 30 (PDF) (telles qu’ajustées par la Loi 68) (PDF) (le « Règlement »).

Le Règlement prévoit notamment les points suivants:

• les éléments qui permettent la constitution d’une réserve destinée à accroître la sécurité des prestations (incluant les modalités de calcul de la provision pour écarts défavorables);
• les exigence en matière d’utilisation de lettres de crédit et d’évaluation actuarielles; et
• l’harmonisation des dispositions relatives au partage des droits entre conjoints unis civilement.

Le Règlement entrera en vigueur le 1er janvier 2010. Toutefois, certaines mesures telles que la constitution d’une provision pour écarts défavorables devront être reflétées dans les évaluations actuarielles dont la date est postérieure au 30 décembre 2008 si un employeur choisit de se prévaloir d’une ou plusieurs des mesures d’allégement prévues dans la Loi 1 (PDF) et son règlement d’application (PDF).

Comme ce règlement d’application n’est pas encore été adopté, la Régie des rentes du Québec a annoncé que les comités de retraite qui doivent remettre une évaluation actuarielle au 31 décembre 2008 ont jusqu'au 31 décembre 2009 (au lieu du 30 septembre) pour le faire.

Maintenant que le cadre législatif du nouveau régime de financement est presque entièrement en place, il sera intéressant de voir si les nouvelles règles renforceront la sécurité des prestations tout en aidant à enrayer la diminution graduelle du nombre de régimes à prestations déterminées.

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With a number of Canadian companies seeking bankruptcy protection over the past few months, it has become apparent that the defined benefit pension plans sponsored by many of these companies are underfunded. As retirees and former employees protest their shrinking pensions, many are left asking how this all happened.

In a recent interview with the CBC, Brett Ledger answers some of the typical questions that people have when such situations arise.

• What caused these plans to be underfunded?
• What responsibility does the government have with respect to these underfunded plans?
• Will individual RRSPs be sufficient to make up for losses in employer funded pension plans?

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As the debate over pension reform continues to spawn considerable discussion in Canada, two noteworthy commentaries on the state of this country’s pension system have been issued within the past week.

On October 14^th, the first Melbourne Mercer Global Pension Index was released. This study, which was produced by the global consulting firm, Mercer, and sponsored by the government of the Australian state of Victoria, ranked Canada's retirement system fourth in the world based on a number of criteria relating to the adequacy, sustainability and integrity of the world’s pension systems. No country received an “A” grade.

The study found that Canada’s ranking could be improved by: (1) increasing the level of pension coverage; (2) ensuring that voluntary retirement savings are preserved for retirement purposes; (3) increasing the pension age as life expectancy continues to increase; and (4) increasing the level of household savings.

Then, on October 17^th, the Globe & Mail newspaper began a week-long series addressing the perceived national crisis facing the retirement system in this country.  The series is slated to discuss the impact of the current recession on pension plan funding; the fight between plan members and creditors over limited assets when plan sponsors become insolvent; the unavailability of pension plans to the self-employed, professionals, and many of those working in small businesses; and, the divergence of views on the best way forward for the system between those in the business of providing pensions and those who believe a new public pension option is needed.

These calls for action come almost a year after expert reports commissioned by governments were published in Ontario (PDF), Nova Scotia (PDF) and Alberta / British Columbia (PDF) (of which I served as co-chair). Each of those reports called for fundamental and meaningful reforms to the pension laws and pension systems in their respective provinces. The reports also encouraged national dialogue on the issues, including calls to pursue greater harmonization of rules across Canadian jurisdictions.

However, little meaningful action has been taken by governments to date.

The aspects of the three reports that have generated the most attention thus far were recommendations that the various governments take steps to establish new pension vehicles that would be broadly available to those currently without an occupational pension plan. Earlier this year, a federal/provincial working group, chaired by Alberta MP Ted Menzies, with participation from Ontario, Nova Scotia, British Columbia, Alberta and Manitoba, was established to study the viability of such proposals (among other issues). That working group is scheduled to report prior to the end of 2009. However, in the meantime, the Premiers of Alberta, British Columbia and Saskatchewan have announced their intention to proceed with development of such a plan unless substantial progress is made towards a national plan before the year is out.

What does all of this mean for the possibility of a pan-Canadian solution to the pension dilemma?

The leadership being shown by the three Western Premiers is commendable and, indeed, necessary. However, three things remain clear.

• First, the time for study and analysis is over. With each passing day, the problems in our system only grow.
• Second, if our federal leaders fail to react to the pressing need on a timely basis, the provinces will pursue their own regional initiatives. This will result in further fragmentation of the patchwork quilt that is the current pension system in Canada.
• Third, concerted leadership at the highest political levels in Ottawa and the provincial capitals will be needed in order for any meaningful results to be produced on a national scale. Time will tell if our elected representatives are up to that challenge.

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Is it permissible to re-open a closed pension plan and thereby quash the hopes of members to access the surplus bottled up in it? The latest decision in the Rogers v. Buschau saga suggests it is.

As some may remember, the sponsor, Rogers Communications Inc., had closed a defined benefit pension plan, registered under the federal Pension Benefits Standards Act (PBSA), to future employees, and attempted to withdraw surplus from the plan.  After a series of appeals, Rogers repaid the surplus into the pension fund, and argued before the regulator that the plan should be amended so that new employees could join. 

The members, undeterred by the Supreme Court of Canada’s ruling that the closed plan could not be terminated under an old common law doctrine (known as the rule in Saunders v. Vautier) requested that the regulator terminate the plan.  The Superintendent refused to exercise her discretion to terminate the Rogers pension plan.  

The members had the Superintendent’s decision reviewed by the Federal Court. The Federal Court of Canada agreed with the members, finding that the Superintendent’s refusal to exercise her discretion was unreasonable.  The recent appeal handed down by the Federal Court of Appeal came to the opposite conclusion. 

The Court noted that the Superintendent based her decision on the premise that the continued existence of a pension plan is a worthy goal and that the objects of the Plan and of the PBSA were better served by using the actuarial surplus in the plan to fund pensions for members of the Plan, including new members, rather than to provide a windfall to the current members of the plan.

Further, the Court of Appeal held that the Superintendent was under no duty to act in accordance with the wishes of the plan members.

The Federal Court of Appeal’s judgment joins a growing list of decisions that can be characterized as “pro-employer” -- in taking a dim view of efforts by members to access surplus funds in the context of internal plan reorganizations where the surplus could continue to be used to provide benefits.

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On October 15, 2009, the Internal Revenue Service announced that there will be no cost-of-living adjustments to U.S. pension limitations for the calendar year 2010. This may come as a surprise to administrators or employees who have become accustomed to annual increases in the qualified plan limitations, as has been the case for most of the prior ten years.  We are pleased that, given the current economic climate, the limitations were not reduced, as some had worried.

Among other things, these limitations restrict the amount of compensation that can be contributed to a defined contribution plan, or the amount that can be considered when calculating defined benefit accruals in a qualified retirement plan. 

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The decision of the Ontario Superior Court of Justice in Re Hawker Siddeley Canada Inc. Pension Plan (PDF) presents an opportunity for employers to expedite the surplus distribution process by allowing surplus attributable to unlocated members and former members to be paid into Court. 

When Hawker Siddeley Canada Inc. wound up its plan in 1996, the plan assets, including surplus, were distributed amongst the employer and the members and former members of the plan. Subsequent to the wind-up and distribution, an additional amount was received by the pension fund, related to certain annuity contracts that had been entered into. These additional funds were also treated as surplus and required further distribution, with a portion payable to the former plan members.

Because of the amount of time that had passed since the wind-up, Hawker Siddeley had difficulty locating a number of the former members. The Company therefore applied to the Court for an order approving the payment of surplus for those missing members into Court.

Given that the Ontario Pension Benefits Act does not provide a mechanism for distributing plan funds to missing members, the Court relied on the holding of the Supreme Court of Canada in Schmidt v. Air Products that where the pension legislation is silent, it is appropriate to apply general principles of trust law. Relying on Section 36 of the Ontario Trustee Act which permits a trustee to pay trust funds into Court, the Court ordered that the surplus funds for the missing members be paid into Court.

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U.S. plan sponsors have so many new requirements to meet that they may not appreciate the significance of new regulations under the Genetic Information Nondiscrimination Act of 2008 (PDF) (GINA), which prohibit most uses of genetic information in underwriting and operating group health plans.

The GINA regulations, which come into effect for most plans on January 1, 2010, were jointly issued by the Department of Labor, the Internal Revenue Service, and the Department of Health and Human Services. They interpret the statute broadly and have a particular impact on the use of health risk assessments in popular wellness and disease management programs.

What is new in the GINA regulations? One item of interest is that GINA’s protected group defines family members of participants to include up to fourth degree relatives and any dependents who could be covered under a plan because of a relationship with the participant. It even includes a fetus or embryo. The regulations also broadly interpret “underwriting” to extend far beyond activities relating to pricing and rating a policy, and state that prohibited underwriting includes providing rewards, such as lower premiums, to individuals who complete health risk assessments that request genetic information about the individual or family medical history.

Participants can sue noncompliant plans for damages of $100 per day of noncompliance or for equitable relief, and there could be monetary penalties up to $500,000 for even unintentional violations of the new rules. 

Plan sponsors looking to avoid unpleasant surprises should take steps to ensure compliance now, particularly for plans that are self-funded and are not run by insurers. Preparing for compliance involves coordinating software, procedures, forms and communications as well as document amendments, and it won’t be possible to do all of this on December 31.

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Much has been written on the Kerry case following its release by the Supreme Court in August 2009. The facts of the case are well known by now. But what salient points from the case should pension administrators and their advisors keep in mind? There are several, and in a nutshell, they are:

• No statutory or common law rule requires a plan sponsor to pay administrative expenses; rather, the plan/trust documents will be determinative.
• Silence in the documents does not imply that the sponsor must pay plan expenses. So long as nothing in the documents requires the employer to pay expenses, “reasonable” and “bona fide” expenses can be paid from the fund.
• “Exclusive benefit” language in a pension plan does not prohibit incidental benefits from accruing to others, including the pension plan sponsor.
• The payment of plan expenses ensures the plan can continue; it is therefore for the “exclusive benefit” of members that the expenses be paid from the fund.
• Expenses must be considered on a case-by-case basis in order to determine whether they are appropriately paid from the pension fund, the implication being that expenses incurred more for the benefit of the sponsor should not be paid from the fund.
• Whether the services being paid for out of the pension fund are provided by third parties or by the sponsor is “immaterial” and “artificial”, if the payment of expenses out of the fund is permitted and the expenses are reasonable and legitimate.
• There is no need for the contribution provision in the plan text to explicitly mention an “actuary” in order to permit actuarial discretion (i.e., taking into account the plan’s surplus position) when determining the required funding.
• There is no reason why a single pension plan can’t have DB and DC components whose members are beneficiaries of the same trust.Members have no right to require surplus funding; while a plan is ongoing they have no vested interest in the actuarial surplus which would prohibit the use of surplus to pay expenses or to take contribution holidays.

Kerry left unanswered one important question: if a pension plan funded through a trust requires the employer to pay the plan’s administrative expenses, can it be amended to permit the expenses to be paid from the fund? If so, is a broad power of amendment sufficient, or must the employer have reserved the power to revoke the trust at the time the trust was established? This issue will have to be decided in a future case.

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The decision of the Ontario Court of Appeal in Richardson Estate v. Mew earlier this year demonstrates a judicial reluctance to interfere with the designation of a beneficiary under a life insurance policy. 

On the facts, Ms. Ferguson, the widow of Mr. Richardson, claimed the proceeds of a life insurance policy that named Mr. Richardson’s former wife as the beneficiary.  Ms. Ferguson and Mr. Richardson married in 1992 after the dissolution of Mr. Richardson’s first marriage of 26 years.  Following the first marriage, Mr. Richardson continued to pay premiums on a life insurance policy with his former wife designated as the beneficiary.

The Court found that the beneficiary designation under the life insurance policy took priority over the separation agreement under which Mr. Richardson and his former wife exchanged mutual releases and renounced all rights in each other’s estate.  Notably, the Court held that general expressions in releases are not effective to deprive a beneficiary of rights under an insurance policy, and that such general language does not amount to a formal declaration within the meaning of the Ontario Insurance Act. 

Although unnecessary to decide the case, the Court of Appeal went on to consider Ms. Ferguson’s argument that she was granted a power of attorney for property by Mr. Richardson, and could have changed the beneficiary designation in her favour before Mr. Richardson’s death.  The Court disagreed, stating that as a fiduciary, Ms. Ferguson could only act for the donor’s benefit, and changing the beneficiary of the policy could not be said to be for Mr. Richardson’s benefit.

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It is common knowledge that pension legislation was drafted with defined benefit pension plans in mind and does not deal adequately with defined contribution pension plans.  Until recently, the only regulatory guidance for DC plan sponsors was the CAPSA Guidelines for Capital Accumulation Plans (PDF) (CAP Guidelines).  Now DC plan sponsors will have another resource - the Disclosure Guideline for Defined Contribution Pension Plans (PDF) (OSFI Guidelines). 

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The Financial Services Tribunal’s decision in Del Grande et al v. Shoppers Drug Mart Inc. (PDF) has added a further layer of complexity to partial wind-ups by allowing employees to seemingly grow into their grow-in benefits.

In this case, the Superintendent of Financial Services ordered the partial wind-up of the Shoppers plan with respect to members who had been terminated over a period of time, as a part of a corporate reorganization. Thus, the partial wind-up, consistent with prior Pension Commission of Ontario  decisions which applied a purposive analysis, was found to have taken place over a period of time. 

An employee who was excluded from the partial wind-up group applied to the Tribunal for a hearing. Shoppers viewed her dismissal as performance-related, and did not include her in the partial wind-up group. The Superintendent was of the view that the employee need not be included, as she did not meet the requirements for grow-in benefits, being the only benefit to be derived from inclusion in the wind-up. (At the time of her termination, the employee was 46 years old and had been employed as a Shoppers’ executive for eight years, and, therefore, could not meet the “55 points test” as of her dismissal date.) 

The Tribunal held that the employee’s continuous service should be determined as of the effective date of the partial wind-up, which was at the end of the partial wind-up period, rather than as of the date of the employee’s dismissal, which occurred during the partial wind-up period. By allowing the employee to continue to accrue service well beyond her termination date, she accumulated enough service to qualify for grow-in benefits, and, therefore, be included in the partial wind-up group.

The Tribunal’s decision flies in the face of previous partial wind-up reports, which have traditionally calculated grow-in benefits as of an employee’s termination date. As a result, this case adds to the already-existing complexity and uncertainty regarding partial wind-up criteria, and threatens to further increase the number of former plan members entitled to grow-in benefits – an entitlement which can be costly to sponsors of Ontario registered pension plans. It will be interesting to see whether the Ontario government will clarify the partial wind-up provisions as a part of the pension reform package expected to be introduced in response to the report of the Ontario Expert Commission on Pensions.

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