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

As I discussed in an earlier post, the Canadian Association of Pension Supervisory Authorities 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 comment period for the paper – which provides helpful guidance to pension plan sponsors and administrators regarding the regulators’ view of best practices for pension plan funding and investment – has been extended to April 30, 2010.

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In January 2010, the Financial Services Commission of Ontario (FSCO) released a consultation paper outlining proposals to streamline the regulatory review process for defined benefit (DB) applications (PDF). The proposals outlined in the most recent paper – an earlier consultation process had taken place in the spring of 2009 – are designed to lead to more accurate and timely processing of applications involving DB pension plans (including applications in respect of surplus withdrawals, wind ups, asset transfers, refunds of employer overpayments and refunds of member contributions).

The paper proposes several solutions to address problems inherent in processing DB applications:

• Incomplete applications: FSCO will create more standardized applications, and a specific process will be followed by FSCO to address non-compliant or incomplete applications. This is a welcome reform, in that FSCO is proposing that meetings or conference calls would be held to discuss incomplete applications. Currently, incomplete applications are often dealt with through an exchange of written correspondence between FSCO and the applicant, which can continue over months or even years.
• Resolution of prior transactions: FSCO will not delay processing a more recent application if a prior pending transaction does not significantly affect the subsequent application. This is also a welcome reform, since FSCO’s current practice is to delay processing an application if a prior application affecting the same pension plan is pending. If the pending application would have no direct bearing on the subsequent application, it makes sense for FSCO to process the subsequent application without delay.

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The Financial Service Tribunal’s decision in Redmann v. Superintendent of Financial Services, (PDF) deals with the retention by pension plan administrators of accurate records relating to the termination of plan members' employment.  (FSCO has also recently recommended keeping pension plan records for an indefinite period in its proposed policy on record retention.) On the oral and written evidence before it in this case, the Tribunal decided against the former employee, concluding that he had received full settlement of his pension entitlement at the time of his termination.

The former employee, Redmann, participated in a defined benefit, non-contributory pension plan for more than ten years. In 1989, the plant closed and the pension plan was wound up. At the time of the wind-up, Redmann was entitled to receive either a monthly lifetime pension or to transfer out the commuted value of his pension. Redmann maintained that he had not requested a transfer of the commuted value to a locked-in RRSP, but rather had elected to collect a monthly pension in accordance with the terms of the plan.

The Tribunal found that there was no evidence which conclusively demonstrated that Redmann had or had not “cashed out” his pension twenty years prior. Notably, and of concern to pension plan administrators, the Tribunal cited its previous decision in Capaldi v. Ontario (Superintendent of Financial Services) (PDF) and the British Columbia Employment Standards Tribunal's decision in Hofer (Re) for the proposition that in the absence of proper records, the Tribunal must make its decision on the “best evidence”, which can include the employee’s records and oral evidence.

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Whenever the U.S. Pension Benefit Guaranty Corporation, the ultimate insurer of participant benefits under U.S. pension plans, re-evaluates the vast scope of its risk exposure, you can be sure that private employers will be subject to increased responsibilities and monitoring. This time, the increased obligation is a proposed new reporting requirement that may turn out to have an impact on every-day, run of the mill business transactions even for employers with well-funded pensions.

Under current rules, plan sponsors are required to notify the PBGC within 30 days of events that are deemed to increase the PBGC’s risk of having to take over an underfunded defined benefit plan. Every transaction that results in a change in the composition of the sponsor’s worldwide controlled group of businesses and every transaction in which defined benefit plan assets are transferred from one controlled group to another involves a potential reportable event, unless a waiver applies, but there are many existing waivers and extensions.

The PBGC proposed towards the end of 2009 to eliminate most waivers and extensions for reportable event filings under Section 4043 of the Employee Retirement Income Security Act of 1974 (ERISA). Under the new proposal (PDF), waivers would be eliminated even for sponsors of well-funded plans that would not increase the PBGC’s risk and for transactions involving foreign entities.

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The Ontario Court of Appeal’s recent decision in Hydro One confirmed that the Superintendent may use a “subset analysis” when assessing the “significance” of plan member terminations for purposes of ordering a partial plan wind-up. The impact of this decision may be limited, however, if the amendments to the Ontario Pension Benefits Act (PBA) wind-up provisions included in Bill 236 are passed.

Currently, s. 69(1)(d) of the PBA gives the Superintendent the discretion to order a partial plan wind-up if a “significant” number of plan members are terminated as a result of a business reorganization. In the past, cases have held that the “significance” inquiry may be conducted on one or both of the following two bases: the absolute number of terminations or a percentage of the total number of active plan members. The Hydro One case considered a third scenario: whether the Superintendent can carry out the “significance” analysis based on the number of terminated members falling within a defined subset of plan members.

In Hydro One, there were different categories of plan members based on whether or not they were represented by unions. The absolute number of terminations was 73. As a percentage, the terminations represented 2% of the total plan membership (4000) and 18% of the category at issue. Based on the latter test, the Financial Services Tribunal held that the number of terminations was significant. (PDF) The Divisional Court upheld the Tribunal’s decision.

The Court of Appeal agreed with the Tribunal and the Divisional Court. Noting that the public policy and remedial objectives of the PBA require it to be given a “liberal interpretation”, and that the term “significant” is not defined under the PBA, the Court found that a flexible and contextual approach should be taken when assessing whether a “significant” number of plan members has been terminated, thereby triggering a partial wind-up order by the Superintendent. Not surprisingly, the Court concluded that a subset analysis was consistent with a the remedial nature of the PBA and the long line of authorities that have considered s. 69(1)(d).

The Hydro One case is likely one of the last disputes over the meaning of “significant” in s. 69(1)(d). The decision will continue to be relevant during the transition period while partial wind-ups are being phased out, but will ultimately be moot. (Under Bill 236, partial wind ups with an effective date prior to January 1, 2012 will be grandfathered, after which partial wind-ups will be eliminated.)

The elimination of partial wind-ups means that employers will no longer be required to distribute surplus out of the plan based on the test in s. 69(1)(d). However, the elimination of partial wind-ups is not a panacea. The trade off is that the other main benefit conferred on Ontario plan members by partial wind-ups – “grow in rights” – must in future be provided to all eligible involuntary terminations (other than for cause).

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Employers trying to comply with one of the most complex U.S. tax code sections can breathe a little easier this week. The IRS has issued relief for certain inadvertent plan language failures under Section 409A of the U.S. tax code that would otherwise trap employers who improperly drafted deferred compensation plans.

IRS Notice 2010-6, issued January 5, 2010, is long-awaited welcome news for employers who encounter minor documentation errors. It even provides a small amount of relief for plans not meeting even basic rules under Section 409A (e.g., that don’t require payment only upon permissible payment events) by limiting penalties that result from documents with certain impermissible plans terms after corrections are made.

The notice addresses the following written documentation errors, among others:

• failure to include the required six-month delay for specified employees;
• interpretations of ambiguous language for payment timing, such as “as soon as practicable” (which may not be treated as a document failure at all);
• payments conditioned on employment-related actions, such as the execution of a non-competition agreement or a release of claims, which may affect the timing of payment;
• impermissible payment periods, such as “within 180 days following separation from service”; and
• impermissible payment events, such as payment “upon an initial public offering” or impermissible discretion to accelerate the timing of payment.

Some corrections can be made without any penalties, others require payments and tax reporting, but all applicable corrections are subject to reduced penalties. In all cases, eligibility for correction requires satisfaction of additional requirements, including that neither the employer nor individual taxpayer is being audited by the IRS, and that all other substantially similar document failures in other non-qualified deferred compensation plans be corrected at the same time.

The new guidance provides a helpful reminder that it is important to skillfully apply knowledge of Section 409A’s detailed rules when drafting deferred compensation arrangements, and it will also assist employers who acquire non-compliant plans in acquisitions.

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The Pension Benefits Amendment Act, 2009 (Bill 236) proposes to extend “grow-in rights” to all Ontario pension plan members whose employment is involuntarily terminated (other than for cause). While this measure was recommended in the Report of the Expert Commission on Pensions (the OECP Report) and comes as no surprise, it is one of the more controversial aspects of the Bill.

Currently, grow-in benefits are only available to members affected by a full or partial wind-up whose age plus years of total service equal at least 55. Such persons are entitled to any early retirement benefits provided under the plan that they would have “grown into” had both the plan and their employment continued until their early retirement date.

The Bill proposes to extend these benefits to all members who are involuntarily terminated by an employer (other than for cause) on and after January 1, 2012. Jointly sponsored pension plans and multi-employer pension plans may elect to opt out of this requirement.

This proposed change is part of a general initiative in the Bill to treat plan members uniformly regardless of the circumstances of their termination (i.e., whether they are terminated in the normal course or as part of a broader program). Such consistency is a worthwhile goal, since it makes little policy sense to provide this benefit to employees terminated in a special situation (e.g., plant shut down or other reorganization) but not those terminated in the normal course. But consistency of treatment among plan members could also have been achieved by abolishing mandatory grow-in rights (for those who had not yet met the eligibility requirements).

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If you are responsible for the day-to-day administration of a pension plan, you should take the time to review a consultation policy on record retention released by FSCO just before the holidays.

Why should you be concerned?

Because the consultation policy imposes new obligations on plan administrators that will affect the day-to-day operations of all pension plans in Ontario. These measures are framed as “recommendations” but since they embody what FSCO considers to be the prudent approach to records retention they are, in effect, requirements. The consultation paper does not differentiate between big and small employers. The expectation seems to be that all plan administrators will comply with the policy.

The key recommendation is a requirement to establish a written record management and retention policy, which must address a prescribed list of items. These items include: the types of plan documents that must be retained and their retention period, where the documents will be stored, how the documents can be accessed, treatment of private and confidential documents, the process for maintaining a back up of the documents, the process for monitoring the documents and many other matters. These issues are also supposed to be addressed in any agreements with custodians and third party administrators.

FSCO’s consultation policy also addresses retention periods. FSCO recommends keeping copies of “general plan records” indefinitely, even after a plan is wound up because there is always a risk that an error was made in the wind up report. FSCO also specifies the information administrators are expected to retain in respect of terminated plan members, and recommends that employers take steps to educate plan members on the need to keep their personal records up to date and to maintain the flow of communication with terminated members.

FSCO is looking for comments on the consultation policy. If you have concerns, comments or questions, you should let FSCO know – FSCO wants to hear from all stakeholders.

The deadline for comments is February 26, 2010.

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