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

With the introduction of Bill C-9 – this year’s budget bill – on March 29th, the federal government is beginning to move forward on a number of the pension reforms that it had announced last fall.

For instance, Bill C-9 contains the increase to the Income Tax Act pension surplus threshold from 10% to 25% of actuarial liabilities (as discussed in our March 25, 2010 post). Bill C-9 also includes a number of significant amendments to the federal Pension Benefits Standards Act (the PBSA), although many of these will require amendments to the Pension Benefits Standards Regulations (PBSR) before they can be fully implemented.

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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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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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It is common knowledge that pension legislation was drafted with defined benefit pension plans in mind and does not deal adequately with defined contribution pension plans.  Until recently, the only regulatory guidance for DC plan sponsors was the CAPSA Guidelines for Capital Accumulation Plans (PDF) (CAP Guidelines).  Now DC plan sponsors will have another resource - the Disclosure Guideline for Defined Contribution Pension Plans (PDF) (OSFI Guidelines). 

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