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

The Fiscal Year 2010 Defense Appropriations Act just signed by President Obama extends eligibility for the 65% COBRA premium subsidy through February 28, 2010, as well as the maximum period during which the subsidy is available from nine to fifteen months.  The two month eligibility extension wipes out an interpretation of the law by the U.S. Department of Labor that would have disqualified individuals terminated by December 31, 2009, but who would not lose health coverage until January 1, 2010.

The Department of Labor has explained that individuals who have used up their nine month subsidy and remain eligible will be given additional time to make their payments for the extension period. Eligible individuals who elected to continue paying in full for COBRA coverage after the subsidy expired will be entitled to refunds or credits against future premiums. Employers need to keep an eye out for further guidance on their notice obligations. The Department of Labor website has a COBRA section that is a good place to bookmark for this purpose.

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Plaintiffs have not prevailed in 401(k) plan fee decisions issued on the merits -- up to now.  A recent decision by the Court of Appeals for the Eighth Circuit has overturned the dismissal of challenges to fees paid by the WAL-MART 401(k) Plan (PDF), one of the largest in the U.S.  Coming after a recent agreement by Caterpillar Inc. to settle similar claims (PDF) against it, the WAL-Mart decision is sending shock waves through the U.S. investment and fiduciary communities.

Past cases include the highly-publicized Court of Appeals for the Seventh Circuit decision, dismissing claims against John Deere and Fidelity Investments, and a recent decision by the Court of Appeals for the Second Circuit upholding the dismissal of claims against United Technologies (PDF).

In the past, plaintiffs have argued unsuccessfully that 401(k) plan fees are excessive and that revenue sharing should be disclosed to participants. (Revenue sharing is a common U.S. practice in which plan service providers receive part of the fees paid to other parties, such as the adviser to mutual funds in which the plan participants invest, as payments towards the recordkeeping, custodial or administrative fees paid by the plan.). Plaintiffs also contended that revenue sharing is a form of “kickback” for selecting particular funds under the U.S. prohibited transaction rules, rather than permissible compensation for services rendered. Plan fiduciaries who were initially concerned about their exposure may have become complacent as decisions in favor of defendants were released.

The WAL-MART appeal found that the following were viable claims to be decided by the trial court:

• Whether WAL-MART should have negotiated to use institutional mutual funds instead of retail funds, which typically have higher fees.
• Whether WAL-MART should have avoided funds with 12b-1 fees, which allegedly benefit the fund companies, not the participants.
• Whether WAL-MART was required to disclose its fund selection process and revenue sharing to participants, and whether revenue sharing is an improper kickback.

Other fee cases are also headed to trial, including a major case against Nationwide Financial Services by a class of trustees of 24,000 plans, making the law still highly unsettled regarding permissible fees and the obligations of fiduciaries. In the meantime, plan fiduciaries would be well-advised to pay more attention to this aspect of fund selection, retaining independent advisers if they lack the expertise to make this evaluation themselves and taking care to disclose all direct and indirect fees in communications to plan participants.

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On the eve of what many believe to be the most important political meetings addressing pension matters in Canada in a quarter century, questions persist as to what Canadians can really expect to come out of what has loosely been deemed the “Whitehorse summit”.

The Ministers of Finance from the federal and provincial governments will convene in Whitehorse, Yukon on December 17th and 18th. On the agenda is the state of Canada’s retirement income system and what, if anything, can or should be done about it. Much can be gleaned from the advance positions being taken by many involved in the debate.

At the federal level:

• The minority Conservative government has recently introduced a limited slate of legislative reforms many of which simply bring the federal pension legislation up to speed with its provincial counterparts. Representatives of the federal government have also made numerous “positioning” statements regarding the need for Canadians to take more personal responsibility for their retirement savings, and the government’s intention not to force any measures on the provinces but rather to encourage the provinces to work together and to, potentially, provide new incentives for retirement savings through the tax system;
• The federal Liberals have released the broad outline of their proposal for a supplementary Canada Pension Plan; and
• The federal NDP are pushing for an enhanced Canada Pension Plan benefit and mandatory, self-financing insurance by DB plan sponsors.

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The US Internal Revenue Service has just issued Notice 2009-97 (PDF), extending by one year the deadline to make certain required qualified plan amendments. The operative word here is “certain”. This is not a blanket extension of any amendments required by the Pension Protection Act (PPA) or the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) that would otherwise have been required to be made to most plans by December 31 of this year. A careful reading of Notice 2009-97 indicates that the extension is available only for amendments that:

• Comply with the funding-based benefit limitations that apply to defined benefit plans.
• Apply certain of the new rules to cash balance and other hybrid plans.
• Implement the diversification requirements for 401(k) and other defined contribution plans that invest in employer stock.

The reason for this extension is that the IRS expects to be issuing additional guidance on how to comply with these new requirements, but both defined contribution and defined benefit plans must make additional amendments that are not subject to the extension by the original deadline. These additional amendments include the new interest rates and mortality table used to calculate lump sums in defined benefit plans, new faster vesting for nonelective employer contributions to defined contribution plans, and new requirements to make a qualified optional survivor annuity option (usually a 75% survivor annuity) available.

Plan sponsors who have not yet adopted the PPA and WRERA amendments for which the deadline has not been extended still need to do so, generally before the end of this year. If they do not do so, they will be exposed to penalties under the IRS correction programs or on plan audit.

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The highly anticipated judgment of the Ontario Court of Justice in the Canadian Commercial Workers Industry Pension Plan (CCWIPP) trustee prosecution (PDF) was released on December 7th. The case centered on whether members of CCWIPP’s Board of Trustees, as administrator, and the Investment Committee (a subset of the Board of Trustees) breached their obligations under the Ontario Pension Benefits Act (the PBA) in relation to the investment and administration of CCWIPP funds.

The decision of the Court was a mixed bag for the defendants and for the Financial Services Commission of Ontario (FSCO): members of the Investment Committee were convicted of breaching the quantitative investment rules under the PBA, while the Board of Trustees was convicted of failing to supervise the Committee in this regard.  However, all defendants were found not guilty in relation to the offences of failure to exercise the care, diligence, and skill of a person of ordinary prudence in dealing with pension plan assets.

Increased Vulnerability of MEPP

By way of background, CCWIPP is a multi-employer, defined contribution (DC) pension plan for grocery, food service and production sector employees. At the time of the alleged offences, CCWIPP had assets of approximately $1.1 billion. In 2006, after a FSCO investigation, a variety of charges were laid against the pension plan’s Board of Trustees and Investment Committee members in connection with certain investments made with CCWIPP funds between 2002 and 2003. These investments were made in Caribbean real estate and other business ventures that the Crown alleged should not have been made given their risk.

At the outset of her 124 page decision, Madam Justice Beverly Brown provided an overview of the CCWIPP, noting that it was a multi-employer DC plan, which did not require employers to “top-up” any unfunded liability. Furthermore, as a multi-employer plan, the CCWIPP was not eligible for protection by the Pension Benefits Guarantee Fund, and any losses could result in devastating consequences for members and former members. Justice Brown held that this increased vulnerability of the CCWIPP members should be taken into consideration when interpreting and applying the PBA.

Meeting the Standard of Care

In terms of the standard of care, diligence, and skill expected from pension fiduciaries, the Crown alleged that the defendants did not make thorough, complete and independent investigations before making these investments. The Court noted that pension plan funds should be invested prudently, and that capital should not be placed unduly at a risk of loss. However, the Court also found that pension funds should be invested so that they are capable of generating a suitable rate of return and an element of risk may be appropriate in the circumstances.

The Court noted that although the standard of care for this Board of Trustees and Investment Committee was ordinary prudence (as there was no evidence they had special skills), it is incumbent on a board of trustees or investment committee with only ordinary prudence to obtain advice from consultants or experts to supplement their knowledge.

The Court held that expert evidence was required to provide necessary context to the facts of the case. Such evidence would help it understand pension industry standards on the investment of pension funds in various businesses, and assess what kinds of investments and risk would be appropriate or inappropriate for this pension fund. However, at trial, the Crown failed to adduce any expert evidence.

The Court held that it “simply did not have evidence to assist in reviewing and analyzing this raw material which is put before the court in evidence ... [and was] unable to understand how to apply the prudent person standard to the various transactions”. As such, the defendants were found not guilty in relation to the offences of failure to exercise the care, diligence and skill of a person of ordinary prudence in dealing with pension plan assets.

The Court also rejected the Crown’s argument that the defendants were responsible for demonstrating that they had conducted an appropriate investigation and acted prudently in making their decisions, since such an approach would amount to a reversal of the Crown’s onus to prove the charges. The judge stated, “the question is not whether the administrator can show prudent action, but rather whether the Crown has proven that the decisions were imprudent”.

Compliance with Quantitative Limits Required

Turning to quantitative limits, the Court noted that the PBA does not permit more than 10% of the book value of the pension plan assets to be invested in any one person (among other requirements) in order to limit a pension fund’s exposure to risk. In considering CCWIPP investments in a holding company that invested in Caribbean properties, the Court found that the total exceeded the 10% threshold, and therefore violated the quantitative limit rule under the PBA.  The Court held that the Investment Committee acted as the “administrator” of CCWIPP in making investment decisions, and as such, its members were found guilty of breaching the rule.

According to the Court, the purpose of the rule is to ensure adequate diversification of the investments of the pension plan, and as such, it captures any acts by the administrator which result in the holdings of the plan being in excess of the limitations. The Court also rejected the defence of due diligence, given that there was no evidence that the members of the Investment Committee turned their minds to the quantitative limits.

Delegated Duties Still Require Adequate Supervision

Finally, in terms of delegation by the Board of Trustees to the Investment Committee, the Court held that while delegation of investment of the pension fund is permitted under the PBA, the administrator is obligated to supervise the agent investing the funds in a prudent and reasonable manner. On the facts, the Court found that the CCWIPP Board of Trustees failed to prudently and reasonably supervise the members of the Investment Committee relating to the quantitative limits, and convicted the members of the Board of Trustees of breaching Section 22(7) of the PBA in this regard.

The defendants will be sentenced in January 2010. They are each liable for a fine of up to $100,000.

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On December 9, 2009 the Ontario government announced the first stage of a multi-step process to reform the province’s occupational pension system – the Pension Benefits Amendment Act, 2009 (Bill 236). The next stage is scheduled to be released in the spring of 2010.

It appears that the government is taking its cue from the Arthurs Report released one year ago, and rolling out legislation that provides some fixes to problems that have plagued the Ontario pension industry since the current pension legislation was enacted in 1987. The stated goal of the Arthurs Report was to balance the interests of employees and employers. Bill 236 seems to be tracking the recommendations in the Arthurs Report quite closely. As a result, some changes will be welcomed by sponsors; however, the proposals also contain enhancements for plan members that will increase benefit costs.

Here is a summary of the Bill with some initial thoughts on its key provisions.

1.  Elimination of partial wind ups, introduction of immediate vesting and extension of “Rule of 55” grow-in benefits to all plan members whose employment is involuntarily terminated (other than for cause)

• Partial wind-ups would be eliminated except for those with an effective date prior to 2012 (according to the Technical Notes). Partial wind ups with an effective date prior to 2012 would be grandfathered.
• Starting January 1, 2012, “Rule of 55” grow-in benefits would be extended to all eligible members whose employment is terminated by the employer (other than for cause), in addition to being available on full wind-up of a pension plan. Multi-employer/jointly sponsored plans will be permitted to opt-out of this requirement.
• All accrued pension benefits (past and future) will vest immediately.

2.  Forced annuitization eliminated

• Plan administrators would not be required to purchase life annuities for pension benefits related to partial wind-ups in progress. According to the Technical Notes, to take advantage of this amendment, provision must be made for the distribution of any surplus.

3. Facilitate plan mergers and asset transfers while protecting member benefit security

• Inter-plan transfers would no longer require the replication of exporting plan benefits,but the transfer could not result in a reduction of the commuted value of members’ benefit entitlements.
• Asset transfers between plans would continue to require the Superintendent's consent.
• If the transaction involves the transfer of pension entitlements from one employer's plan to another employer's plan, plan administrators could agree to give individual plan members the option of transferring or not transferring their pension benefit to the successor plan. Bargaining agents could also exercise this choice on behalf of their members.
• Similar to Quebec, a portion of any surplus related to the assets being transferred from the previous employer's plan would be transferred to the successor plan. The amount of the surplus that must be transferred will be prescribed in the regulations.
• Any entitlement to surplus on full wind-up of a plan would remain unless the pension benefits are fully annuitized such that the plan has no continuing obligations. 
• Until July 1, 2013, pension plans affected by past restructurings could enter into agreements that would allow current individual plan members to consolidate their pension benefits in a single plan through an asset transfer based on value. This could certainly benefit members whose pensions are currently split up between two plans; however, the cost of consolidating benefits under one plan could be significant. This could also be noteworthy for plan members in the broader public sector who have changed plans due to privatizations.

4. Increase transparency and access to information for plan members and pensioners 

• Pensioners (retired members) would be defined separately from "former members", and their right to participate in Pension Advisory Committees and receive specified information about their plan would be set out.
• Pension Advisory Committees would be easier to establish, allowing members and retired members to monitor plans on an advisory basis. Cooperation from plan administrators would be required.
• Plans would be required to give all members, including retired members, information about the funded status of the plan.
• Plan administrators and the regulator would be required to provide copies of specified documents, electronically or by mail, on written request.
• With certain limited exceptions, all plan amendments would require advance notice to members, retired members, and former members before registration. This would replace the current "adverse amendment" rules which only require plan administrators to inform affected members if an amendment would reduce future pension accruals or would otherwise adversely affect their pension rights.

5. Enhanced regulatory oversight

• The Superintendent would be granted the power to make interim orders in specified circumstances, for example, to order special valuations when there is evidence that a plan is at risk. The other example given in the Technical Notes indicates this power could be used (after partial wind-ups are eliminated) to order an employer to file a report after an event which significantly reduced membership in a plan. These orders would not be subject to the Notice of Proposal process and could be appealed directly to the Financial Services Tribunal.
• The Superintendent would be granted the necessary power to approve arrangements under the federal Companies' Creditors Arrangement Act and Bankruptcy and Insolvency Act.

6. Improve plan administration and reduce compliance costs

• A number of changes are intended to clarify and assist in plan administration. For example, the filing of specified documents could be waived for certain types of pension plans, and the existing time limit for refunding employer pension contributions made in error would be extended.
• Members would also receive the right in specified circumstances to transfer certain pension monies, for example, excess contributions, small pension payouts, to a registered retirement savings plan or a registered retirement income fund.

7. Surplus sharing settlements not subject to historical plan terms

• On a full plan wind up, employers would have the option of establishing legal entitlement to the surplus or entering into a surplus sharing agreement (similar to the federal system). The Technical Notes indicate that if a surplus sharing agreement is entered into, no review of historical plan documents would be required to obtain regulatory approval, provided the agreement complies with the existing membership consent and certain other requirements. This would eliminate member and sponsor concerns relating to compliance with s. 79(3)(b) of the current legislation where an employer enters into a surplus sharing agreement on a full plan wind up.
• It appears, however, that the “old regime” will continue to apply to surplus distributions on partial wind-ups as long as they last. This is ironic and extremely unfortunate. Arguably the clearest example of a consensus point among member and sponsor stakeholders was the removal of the requirement under s.79(3)(b) that the Superintendent determine that the plan provides for payment of surplus to the employer. Lobby efforts by members and sponsor representatives to address this concern (which has in the past caused expensive delays and added unnecessary uncertainty and complexity to the implementation of surplus sharing distributions) have been ongoing for many years prior to the Arthurs report. This aspect of the reform package is difficult to reconcile from a policy, practice or legal perspective and should be fixed before the Bill becomes law.

8. Phased retirement

• As announced in the 2009 Budget, pension plans would be permitted to offer phased retirement.

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The Ontario government filed Regulation 447/09, extending the surplus sharing regulation (under the Ontario Pension Benefits Act) for two years to December 31, 2011.  In addition, the regulations for Specified Ontario Multi-Employer Pension Plans have been extended for two years to 2012.

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The Canadian Association of Pension Supervisory Authorities (CAPSA) recently published a consultation paper entitled “The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment” (PDF). The paper provides helpful guidance to pension plan sponsors and administrators regarding the regulators’ view of best practices for pension plan funding and investment, including a summary of important legal concepts such as the “prudent person rule”, and a description of the differing roles of the plan sponsor and the plan administrator.

Emphasis on Funding and Investment Procedures

The paper places tremendous importance on the process to be followed by pension plan sponsors and administrators in relation to their pension plan funding and investment activities. A key element of this process is the "prudent person rule", which serves as the guiding principle for all investment decisions, and essentially requires that a pension plan administrator exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person. In other words, the focus is on the methods followed by the administrator, and not simply on the result achieved.

According to the paper, it is essential that plan sponsors and administrators document their funding and investment procedures, as part of overall good governance, and in order to be able to satisfy the regulator in the event of a regulatory review. Evidence of the processes followed by the sponsor and administrator would also assist in putting forward a strong defence, should there be litigation over the pension plan’s funded status or the employer’s level of contributions.

Sponsor vs. Administrator Role: Which Activities Attract Fiduciary Duties?

The paper provides helpful insight into the regulators’ view regarding which aspects of pension funding and investment attract fiduciary duties and which do not. Activities that are required to be carried out by the plan sponsor in its capacity as such do not attract fiduciary duties, and decisions may be made based on the business’ best interests, subject to the obligations of good faith. On the other hand, activities that are required to be carried out by the plan administrator do attract fiduciary duties, and decisions must be made in the best interests of the plan and its members.

Generally, in single-employer pension plans, the employer has a dual role of plan sponsor and plan administrator, and the paper therefore describes which activities are to be performed by the sponsor (e.g., making necessary contributions to the fund) and which are to be performed by the plan administrator (e.g., investing the assets of the fund).

Interestingly, according to CAPSA’s paper, the establishment of a funding policy is a sponsor task. For example, a funding policy might set out the circumstances in which the sponsor will contribute amounts to the pension fund in excess of the minimum recommended by the actuary in the valuation. Prior to the publication of this paper, it was not always clear whether the regulators viewed that function as being part of the sponsor’s duties or the administrator’s duties. I note however that one of the specific issues on which CAPSA has asked for comments is the role of the plan administrator regarding the funding policy.

While not legally binding, the CAPSA paper provides a good summary of the regulators’ views on best practices in the area of pension funding and investment, as part of an overall pension governance strategy. After the consultation process, CAPSA plans to prepare three guidelines: 

• best practices for funding policies;
• best practices for investment policies; and 
• examinations by pension regulators of funding and investment processes.

Comments on the consultation paper will be accepted by CAPSA until January 29, 2010.

The implications of the CAPSA paper will be discussed further at our upcoming pensions seminar on Wednesday, December 9th. 

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