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

As indicated in our previous post on Bill 236 (the Pension Benefits Amendment Act, 2010), the provisions that address surplus withdrawal on full or partial wind-up have come into force. There is still some controversy, however, surrounding how the Financial Services Commission of Ontario (FSCO) is interpreting the new provisions.

On September 20, 2010, FSCO released a Q&A to address questions in this regard.
In short, FSCO’s Q&A states that, when making an application to withdraw surplus from a pension plan, an employer is required to do one of two things:

(a) demonstrate entitlement to surplus under the historical terms of the plan and obtain the agreement of 2/3 of the members (or the agreement of the collective bargaining agent) and 2/3 of the former members and others entitled to payments under the pension plan;

or

(b) obtain the consent of all the members, former members and other persons entitled to payments under the pension plan.

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Plan fiduciaries have a responsibility to make sure that the plan is not overpaying for services, but until now it has been difficult for them to get the information necessary for them to evaluate and compare fee arrangements. In July, the U.S. Department of Labor issued final regulations requiring mandatory disclosures of fees received by pension plan service providers and their affiliates to the fiduciaries who hire them.

These regulations give fiduciaries leverage and actually require them to obtain detailed information about direct and indirect fees. Although they are not effective until July of next year, the regulations will apply to all pension plans – not just to 401(k) plans – and to all arrangements in existence on the effective date. The increased transparency required by the regulations could potentially lead to lower fees for all U.S. pension plans.

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The St. Marys Cement and United Steelworkers Local 9235 decision by a labour relations arbitrator may provide some comfort to employers who sponsor collectively bargained pension plans, since the arbitrator in that decision held that an employer’s ability to amend a pension plan is not necessarily restricted simply because the pension plan is incorporated by reference into a collective agreement.

This decision arises from a grievance concerning the company’s decision to unilaterally convert its pension plan from a defined benefit plan to a defined contribution plan.

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The complexity and frequency of U.S. qualified plan amendments makes occasional drafting errors hard to avoid, but correcting good faith errors without jeopardizing plan qualification has always been harder than you think. Although there are official programs to easily fix many common plan mistakes, the IRS has always been suspicious of correcting “scrivener’s errors” because it could undermine the rule that the terms of qualified plans must be in writing. As a result the IRS has never permitted them to be self-corrected. And although the IRS’ formal correction program has some flexibility to permit amendments to correct scrivener’s errors, spokesmen for the program say that they rarely grant such relief. The IRS looks not only at whether a plan was operated as intended but at whether participants reasonably relied on the error, whether the amendment would discriminate in favor of highly compensated employees and whether benefits would be cut back.

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Sponsors of defined benefit (DB) pension plans transitioning to a defined contribution (DC) platform would be well advised to carefully consider how they communicate the change to their employees. The claim made by plan members in Dawson v. Tolko Industries Ltd. confirms the potential legal pitfalls associated with programs offering members the option to move from a DB to a DC structure.

While the case has yet to be tried on its merits, an interim decision recently released offers additional lessons on the limitations of relying on releases provided by plan members as a defence against plan member claims.

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