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

In the last two years, four provinces (Alberta, British Columbia, Ontario and Nova Scotia) and the Federal government have embarked on extensive pension reviews. While the focus of these reviews, for the most part, was on how each jurisdiction’s pension standards legislation could be improved, the reviews also considered increasing pension plan coverage for employees who do not have access to an employer sponsored pension plan. There has been some activity in the new year on this latter initiative, most recently with the release of the British Columbia Ministry of Finance’s consultation paper “Mechanisms for Expanding Pension Coverage and Retirement Income Adequacy in Canada” (PDF).

The consultation paper follows on the heels of the paper of the Steering Committee of Provincial/Territorial Ministers on Pension Coverage and Retirement Income Adequacy, “Options for Increasing Pension Coverage Among Private Sector Workers in Canada”, (PDF) which analyzed two proposals for increasing pension coverage in Canada through a national pension plan, namely: (a) creating a voluntary, defined contribution structure either added as an additional “tier” to the Canada Pension Plan or as a stand-alone plan; and (b) expanding the existing mandatory defined benefit structure of the Canada Pension Plan either by increasing the replacement rate or the upper limit on income on which the pension is calculated or both.

The British Columbia consultation paper also explores two additional options. First, the consultation paper considers modernizing current pension standards legislation to improve flexibility in pension plan design, for example, by permitting an entity that is not an employer, such as a professional association, to sponsor a pension plan. Second, the consultation paper considers amending the Income Tax Act to encourage increased retirement savings under current registered retirement savings vehicles, for example, by allowing individuals to repay amounts withdrawn from registered retirement savings plans in times of financial hardship. The consultation paper further notes that a blended approach, combining two or more of the four options, could be desirable.

The landscape for pensions and retirement savings in Canada may be changing if these recommendations are acted upon. If and when changes are made, it will be necessary to review how existing employer sponsored arrangements integrate into such landscape.

Comments on the British Columbia consultation paper are being sought by April 1, 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 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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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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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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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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Nova Scotia’s private defined benefit pension plans are set to benefit from an extension of the time required to make their plans fully solvent.  

Under the new regulations recently announced by the Department of Labour and Workforce Development, plan administrators will have ten years to fund solvency deficiencies, as opposed to the normal five years, with permission from plan members.  The regulations apply to plans reporting underfunding between December 30, 2008 and January 2, 2011.  The regulations also permit plan administrators to file a new valuation in order to pay previous funding shortfalls over the new ten-year period.

The announcement follows the recommendation of the report of the Nova Scotia Pension Review Panel (PDF) to lengthen the amortization for funding solvency deficits from five to ten years. It also comes on the heels of temporary solvency funding relief announced in other provinces, including Ontario, where pension plan administrators can extend the amortization period to ten years for new solvency deficiencies only, with the consent of members and former members.

The new regulations are not yet available, but are expected to be incorporated into the Nova Scotia Pension Benefits Regulations shortly.

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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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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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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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The Premiers of each of the provinces recently called for a national summit on retirement income, to be lead by the federal government. According to a press release from the Council of the Federation (PDF), the national summit would be conducted by 2010 and would “bring together provinces and territories, the federal government and interested stakeholders and experts to discuss possible options to improve saving options for Canadians and to encourage greater saving.” The Premiers also directed their Finance Ministers to report on possible pension reform options by the end of the year.

In a separate statement, the Ontario government announced the creation of a new Advisory Council on Pensions and Retirement Income (the Council).  The Council, whose members reflect a range of stakeholder perspectives, will provide ongoing advice to the minister on pension reform proposals.

Based on these announcements, the consultation recently initiated by the federal government, and last year’s quick succession of reports released by expert panels appointed by the Ontario, Alberta, British Columbia (PDF) and Nova Scotia (PDF) governments, it appears that much needed pension reform has finally made it onto the agenda of the provincial and federal governments. However, the timeliness and effectiveness of any reform measures instituted by the various governments is yet to be determined.

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