On June 25, 2010 the federal government announced that it finalized the amendments to the defined benefit funding provisions and the federal investment rules, which it had released in draft form for comment earlier this year. Most of these amendments to the Pension Benefits Standards Regulations, 1985 come into force on July 1, 2010.
Continue Reading...On May 3, 2010, the federal government released draft regulations, which propose changes to the defined benefit plan funding provisions and the federal investment rules. The proposed changes will directly affect pension plans that are registered under the Pension Benefits Standards Act, 1985 (PBSA) with the Office of the Superintendent of Financial Institutions (OSFI). But don’t stop reading if your plan is not registered with OSFI - the proposed changes to the investment rules will likely impact most pension plans in Canada.
The draft regulations implement a portion of the changes announced by the federal government on October 27, 2009. Other changes to the PBSA announced in the fall were made in Bill C-9, the Budget Bill, which was introduced by the federal government on March 29, 2010. Among other things, Bill C-9 amends the PBSA to require employers to fully fund pension benefits on plan termination, a change which brings the federal pension statute in line with most pension standards legislation in Canada. More amendments will be required to implement the package of proposals announced in 2009.
The draft regulations propose three key changes.
Continue Reading...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.
Continue Reading...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:
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.
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.
Continue Reading...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.
Continue Reading...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.
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
2. Réduire l’instabilité de la capitalisation
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.
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
2. Reduced Funding Volatility
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.
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.
On October 21, 2009, the Québec government published amending regulations to complement the new measures for funding defined benefit pension plans that were introduced in the Supplemental Pension Plans Act by Bill 30 (PDF) (as amended by Bill 68) (PDF) (the Bill 30 Regulations).
The Bill 30 Regulations include the following:
The Bill 30 Regulations will come into force on January 1, 2010. However, some measures such as the provision for adverse deviation must be reflected in actuarial valuations as at December 31, 2008 or later if an employer elects to avail itself of one or more of the funding relief measures introduced by Bill 1 (PDF) and the related regulation (PDF).
Since the Bill 1 regulation has not yet been adopted, the Régie des rentes du Québec announced that the deadline for submitting an actuarial valuation as at December 31, 2008 to the Régie has been extended until December 31, 2009 (instead of September 30, 2009).
Now that the legislative framework for the new funding scheme is largely in place, it will be interesting to see whether it will significantly strengthen the funding of defined benefit plans while slowing the gradual decrease in defined benefit plan coverage.
Traduction en français:
Le gouvernement du Québec a publié, le 21 octobre 2009, un règlement qui complète les nouvelles mesures de financement des régimes à prestations déterminées qui ont été introduites dans la Loi sur les régimes complémentaires de retraite par la Loi 30 (PDF) (telles qu’ajustées par la Loi 68) (PDF) (le « Règlement »).
Le Règlement prévoit notamment les points suivants:
Le Règlement entrera en vigueur le 1er janvier 2010. Toutefois, certaines mesures telles que la constitution d’une provision pour écarts défavorables devront être reflétées dans les évaluations actuarielles dont la date est postérieure au 30 décembre 2008 si un employeur choisit de se prévaloir d’une ou plusieurs des mesures d’allégement prévues dans la Loi 1 (PDF) et son règlement d’application (PDF).
Comme ce règlement d’application n’est pas encore été adopté, la Régie des rentes du Québec a annoncé que les comités de retraite qui doivent remettre une évaluation actuarielle au 31 décembre 2008 ont jusqu'au 31 décembre 2009 (au lieu du 30 septembre) pour le faire.
Maintenant que le cadre législatif du nouveau régime de financement est presque entièrement en place, il sera intéressant de voir si les nouvelles règles renforceront la sécurité des prestations tout en aidant à enrayer la diminution graduelle du nombre de régimes à prestations déterminées.
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.
Much has been written on the Kerry case following its release by the Supreme Court in August 2009. The facts of the case are well known by now. But what salient points from the case should pension administrators and their advisors keep in mind? There are several, and in a nutshell, they are:
Kerry left unanswered one important question: if a pension plan funded through a trust requires the employer to pay the plan’s administrative expenses, can it be amended to permit the expenses to be paid from the fund? If so, is a broad power of amendment sufficient, or must the employer have reserved the power to revoke the trust at the time the trust was established? This issue will have to be decided in a future case.
Earlier this year, the Ontario government amended the regulations under the Ontario Pension Benefits Act to provide sponsors of defined benefit plans with temporary relief from current solvency funding pressures. Included in these amendments was a permanent change to section 19 of the regulations, which now requires a plan administrator to seek the prior approval of the Superintendent before transferring any funds out of the pension plan where the administrator knows or ought to know that the transfer ratio in the most recently filed valuation report has declined by 10% or more.
These changes sparked some confusion in the industry as to how it would apply in practice, the mechanics of the approval process and the kind of information that plan administrators would be expected to provide.
In response, the Financial Services Commission of Ontario (FSCO) published Policy T800-402 (PDF) to provide guidance on how to approach these limitations on commuted value transfers as well as a new request for approval form (PDF).
Most recently, FSCO posted additional questions and answers on commuted value transfers under the new regulations. In particular, these Qs & As consider issues relating to:
Given the continued instability of the financial markets, transfer ratios may continue to decline and, as a result, many plan administrators will have to consider these new requirements before paying commuted values out of the plan.
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