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

Yesterday’s Budget announcement by the Ontario government included its “vision” for further pension reform – with the emphasis being on changes to the funding of defined benefit plans.

Ontario began its reform of the pension system late last year with the introduction of Bill 236, which it described as the “first stage” of a multi-step process to reform the province’s occupational pension system. With the tabling of Budget, the government began taking steps towards the next stage by setting out three principles upon which the pension reform will be based: 

• funding should be required for all benefits that a pension plan provides;
• risk and responsibility should be shared among stakeholders; and 
• funding rules should match benefit and governance structures.

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Following through on its announcement last fall, the federal government has recently tabled a Notice of Ways and Means Motion, which includes amendments to the Income Tax Act increasing the pension plan surplus threshold from 10% to 25%.

These amendments, which will apply to all registered pension plans, whether federally or provincially regulated, beginning with 2010 current service contributions, will allow employers to accumulate greater surpluses in their plans. The theory is that in doing so employers will be encouraged to contribute more to their plans, thereby increasing benefit security and reducing funding volatility.

While many in the pension industry have been lobbying for these changes to the tax rules for some time, the willingness of employers to take advantage of these amendments may be influenced by their perceived ability (or lack thereof) to access such surplus under current provincial pension standards legislation. The so-called “asymmetry issue” (where those responsible for funding deficits are not given equivalent access to surplus) is an issue that can only be fully resolved by legislative reform, which is still pending across Canada.

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The recent decision of the Saskatchewan Court of Queen’s Bench in McNaughton v. Saskatchewan Government and General Employees’ Union is the first case to my knowledge where the plan members obtained an injunction to prevent the plan sponsor from implementing a contribution increase, pending receipt of approval from the Canada Revenue Agency (the CRA).

The plan at issue in this case was sponsored by the Saskatchewan Government and General Employees’ Union (SGEU), who proposed to increase the employee contribution rate to 54.25% of employee earnings.

The plan included 35 active members who had historically made contributions of 9% of earnings to the plan (employee contributions were matched by SGEU). In order to fund a plan deficiency disclosed by an actuarial valuation as at December 31, 2008, SGEU made a series of increases to the amount of employee contributions under the plan. After increasing the employee contribution rate to 19.6% on November 5, 2009, SGEU notified plan members that it intended to amend the plan and further increase the rate to 54.25% effective January 14, 2010. The pension plan’s active members sought an injunction to restrain SGEU from implementing the rate increase until the CRA approved the plan amendment.

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The recent Ontario Superior Court of Justice decision in Re Indalex has confirmed that the “deemed trust” provisions of the Ontario Pension Benefits Act do not apply to funding deficiencies on plan wind up. Dismissing the “deemed trust” claim, the Court followed the precedent established by previous courts in decisions such as Re Ivaco Inc. and Usarco.

Indalex Ltd. obtained creditor protection under the Companies’ Creditors Arrangement Act (CCAA), and was able to obtain debtor-in-possession (DIP) financing pursuant to the terms of the initial order. A sale of Indalex’s assets was subsequently approved by the Court, and the Monitor was directed to make a distribution to the DIP lenders from the proceeds of the sale. At the sale approval hearing, two groups of pension claimants opposed the sale and claimed that assets equal to the funding deficiencies in two Indalex pension plans were deemed to be held in trust and should be remitted to the plans.

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One topic that has gripped North American companies since the recession began is the scrutiny of executive compensation. In response to this increased attention on executive compensation arrangements, employers have turned to self-reflection on difficult questions. Are incentive programs causing executives to take undue risks when making business-related decisions? How will an organization’s decisions regarding executive compensation be perceived if reported in the media? How should companies respond to significant decreases in the value of stock options? Should companies be able to re-negotiate executive bonus contracts in certain circumstances (e.g., where there is an impending insolvency)?

In a recent podcast, Osler partner Sandra Cohen of our New York office discusses the changing landscape of executive compensation and the outlook for 2010.

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In allowing Rio Algom’s appeal of a 2008 Ontario Divisional Court decision, the Ontario Court of Appeal has laid to rest the question of whether a pension plan sponsor can be ordered by a court to wind up its pension plan. The Court of Appeal stated that “it is plain and obvious that the court does not have the authority to order Rio Algom to commence wind up proceedings under the PBA.”

In 2006, Alexander Lomas, a retired Rio Algom employee, commenced litigation against his former employer alleging that Rio had made improper amendments to its pension trust intended to provide the company with surplus ownership and contribution holiday rights contrary to its trust, contractual and fiduciary duties. The main purpose of the litigation was to force a surplus distribution to plan members - so Mr. Lomas took the position that if his claims succeeded, the court should order the wind up of the Rio pension plan to facilitate such distribution. However, when the Supreme Court of Canada (SCC) released its June 2006 decision in Buschau v. Rogers Communications Inc. (Buschau) Mr. Lomas had a problem. Buschau held that the courts do not have the authority to order pension plans to be wound up at the instigation of plan members, primarily because applicable pension legislation confers exclusive wind up jurisdiction on the pension regulators and on the employer sponsoring the plan.

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True or false? If you adopted a 401(k) plan offered by a U.S. prototype vendor, you can leave compliance entirely up to the vendor. You may be surprised to know that the answer is “false”.

An easy way to quickly adopt a U.S. tax-qualified savings plan, “prototype 401(k) plans” are marketed by mutual fund families, financial institutions and insurers and have become a popular way for U.S. employers to adopt 401(k) plans without being responsible for satisfying complicated and changing legal requirements. Or so the employers who adopted these plans assumed based on marketing material from the vendors.

However, there is no such thing as a tax-qualified retirement or savings plan that runs itself correctly without employer involvement. Even if the vendor promises to create required reports and filings for the plan, you are still responsible for compliance with some plan documentation requirements and for correct plan operations.

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The Minister of Finance recently announced proposed amendments to the Income Tax Act creating a new vehicle, called an employee life and health trust (EL&H trust), through which employers can provide certain group benefits to their employees and former employees in a tax effective manner.

While many of the rules in the proposed amendments regarding EL&H trusts are similar to existing law and policy for health and welfare trusts (H&W trusts), there are a number of interesting new provisions, including the following: 

• Clearly setting out the timing for claiming a deduction for employer contributions to an EL&H trust in respect of employee benefits to be paid in a future tax year. Specifically, the portion of any pre-funding that relates to benefits payable in a future tax year may only be deducted in that future tax year.
• Permitting an EL&H trust to treat employee benefit payments as expenses and apply special rules to allow the carryback and carryforward of losses where the trust's expenses for a particular year exceed its revenue. (Under the current rules for H&W trusts, benefit payments in excess of the trust’s income for the year are treated as distributions of trust capital with no other income tax impact.) 
• Specifically addressing employer contributions to an EL&H trust by way of a promissory note and prescribe the timing for claiming deductions for payments of principal and interest under the note.

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The Canadian government recently tabled its budget for 2010, which proposes significant changes to the way in which both employees and employers are taxed in Canada on stock options, including:

• elimination of the deferral for public company stock options;
• restrictions on the deduction for the cash out of stock options; and
• special relief for tax deferral elections.

For more information on these changes to the taxation of employee stock option plans, see the Osler Update: Budget Briefing 2010. 

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Many compensation and pension actions require the approval of a company’s board of directors, or a committee of the board, and for good reason. Employers should not skimp on the finalization of corporate approval via signed and dated board or committee resolutions.

U.S. Case in Point: A federal judge in New York recently denied enhanced retirement benefits to the CFO that would have been due to him under the terms of an amended SERP because the board resolutions from seven years before his retirement seem to have never been finalized. The court ruled against the executive seeking benefits, despite the undisputed facts that the board had agreed “in concept” to the SERP enhancements and that two other executives had been paid out under the amended plan terms. The reason? Under the terms of the SERP, only the Board could amend the plan and the Board never formally approved the amendments.

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Later this month, the Supreme Court of Canada will hear an appeal from the British Columbia Court of Appeal’s decision in Withler v. Canada. The issue in Withler is whether a supplementary death benefit under a pension plan that is reduced for every year the plan member’s age exceeds a specified age violates the right to equality under section 15 of the Charter.

If the Supreme Court overturns the Court of Appeal decision and rules that this death benefit is discriminatory and contrary to the Charter, public sector plans which use age-based criteria to calculate certain benefits could find themselves facing a similar Charter challenge. Similarly, an adverse ruling by the Supreme Court could potentially be used in the private sector as a new basis to argue that the use of age-based criteria in pension plans violate provincial and federal human rights legislation.

The Withler case arose as a class proceeding, which was initiated by the surviving spouses of deceased members of the Public Service Superannuation Act (the PSSA) and Canadian Forces Superannuation Act (the CFSA). The spouses received a supplementary death benefit (SDB) upon the death of the member, the amount of which differed depending on the age of the plan member. Provisions in the PSSA and the CFSA permitted a 10% reduction in death benefits for every year the plan member exceeded age 65 (for the PSSA) or age 60 (for the CFSA). The surviving spouses argued that the reduction provisions constituted age discrimination, contrary to s. 15 of the Charter.

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A recent decision from the Ontario Human Rights Tribunal has confirmed that an early retirement package which was offered to employees who met certain age requirements did not contravene the Ontario Human Rights Code.

In Kovacs v. Arcelor Mittal Montreal, the employer decided to close a plant as a part of a filing under the Companies’ Creditors Arrangement Act. The employer had negotiated an early retirement package with its union. To be eligible for the negotiated early retirement program an employee had to satisfy one of the following requirements: (i) have 30 or more years of service; (ii) be older than age of 55 with 15 or more years of service; or (iii) be at least 52 years of age but less than 55 years of age with 25 or more years of service.

Mr. Kovacs, an employee at the closing plant, did not satisfy any of the eligibility requirements since he was 47 years old and had only 27 years of service. He launched a human rights complaint, arguing that he had been subject to discrimination on the basis of age.

The Tribunal noted that early retirement plans, which may contain eligibility requirements based on age, are common in unionized workforces and that they provide “superior benefits to older, long service employees; individuals who may experience greater difficulty in obtaining alternative employment if permanently laid-off.”

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