Bill 38 marks the first significant amendments to British Columbia’s pension regime since the Joint Expert Panel on Pension Standards released their report on November 14, 2008. This panel was established by the Finance Ministers of Alberta and British Columbia to study the pension legislation of the two provinces and to make recommendations on pension reform.

Bill 38 introduces significant changes to British Columbia’s pension regime. According to a B.C. government press release, the amendments are designed to encourage “wider private-sector pension coverage”. In addition, the explanatory notes to the proposed reforms indicates that the reforms are intended “to harmonize British Columbia’s pension legislation more closely with that of Alberta.” (This statement seems to imply that we may see some similar amendments in Alberta in the near future.)

However, Bill 38 also introduces a number of novel and interesting pension reforms, including the following:

• Governance & Funding Policy Requirements: Plan administrators would be required to establish governance policies. In addition, plan administrators of defined benefit and target benefit plans would be required to establish funding policies. (This would appear to build on the requirements set out in the guidelines established by CAPSA.)
• Distinguishing Between Actuarial Excess and Surplus: The PBSA would distinguish between excess assets over liabilities in an ongoing plan (i.e., actuarial excess) and excess assets over liabilities in a plan that has been terminated (i.e., surplus).
• Solvency Reserve Account: Administrators of a defined benefit plan (other than a target benefit plan) would be permitted to establish a separate account within the pension fund and deposit payments into this account made in respect of a solvency deficiency. Prescribed “actuarial excess” in the reserve account will also be permitted to be withdrawn by a “prescribed person”. 
• Innovative Plan Designs: New plan designs would be added to the PBSA, including:
  • negotiated cost plans – a pension plan established under a collective agreement where contributions are determined and limited by the collective agreement;
  • target benefit plans – a pension plan where contributions and benefits are fixed according to a pre-determined formula (as in a defined benefit plan). However, in a target benefit plan, accrued benefits can be increased or reduced from time to time based upon the funded status of the plan. (Other provinces, such as Ontario, have likewise introduced target benefit provisions through recent pension reforms. However, British Columbia will permit target benefit provisions to be used in non-unionized environments. By contrast, it seems that currently an employer in Ontario will only be permitted to adopt target benefit provisions where their contribution obligations are limited to a fixed amount set out in one or more collective agreements); and
  • jointly sponsored pension plans (JSPP) – the proposed amendments create the framework for a cost-sharing plan model for private sector plans which is similar to that which is currently used in British Columbia’s public-sector pension plans. (This differs from Ontario, where the focus has been on moving public sector plans to the JSPP model.)

As is typically the case with pension reforms, these provisions will not come into force until accompanying regulations (which provide the details of how these reforms are to be applied) are released. We will be reviewing these regulations once they are released, and will provide any additional commentary in future posts.

As the government indicated previously, their focus is to make public sector pension plans "more sustainable for members and more affordable for taxpayers.” In addition, the Ontario government has reaffirmed its desire to ensure JSPPs move towards a strict 50-50 funding in cases where employee contributions are currently less than employer contributions.

The Ontario government’s proposals focus primarily on funding issues. Specifically, the government is seeking stakeholder input on the following proposals:

• where there is a new deficit, plans would be required to reduce future benefits or ancillary benefits before increasing employer contributions;
• in exceptional circumstances, a limit would be set on the amount or value of benefit reductions before additional contribution increases could be considered;
• any benefit reductions would involve future benefits only (i.e., members’ accrued benefits and current retirees would not be affected); 
• where employee contributions are currently less than employer contributions, increased employee contributions would also be available as a tool to reduce pension deficits; and
• where plan sponsors cannot agree on benefit reductions through negotiation, a new, third-party dispute resolution process would be invoked.

The Ontario government has indicated that this framework would be reviewed after the budget is balanced.

The government also reiterated its interest in exploring ways to enhance the sustainability of single-employer, defined benefit pension plans in the public sector, and its intention to introduce legislation this Fall to facilitate the pooling of pension fund assets, as well as the investment management functions of smaller broader public sector pension plans. 

• they want to cut benefit funding and administration costs, as market volatility and low interest rates drive up solvency deficits and make planning more difficult;
• to achieve better planning and budgeting by making pension liabilities more predictable for purposes of financial reporting;
• changes in the accounting rules;
• to reduce regulatory complexity and limit the risks associated with their current DB plans; and
• to align local business decisions with those of international affiliates or parent corporations.

In this four part series I will examine these hurdles as they relate to the following ways in which a DB plan can be “restructured”: 

• plan termination/wind-up;
• closing the DB portion of the plan to new entrants and establishing a defined contribution plan for new hires; 
• implementing a soft ‘freeze’ where no more future accruals are permitted under the DB plan, but earnings increases, as they pertain to previously accrued pension benefits, are recognized; 
• implementing a hard ‘freeze’ where everything is closed off and all future service and earnings are transferred to the new plan/component; and 
• amending the plan to reduce/eliminate ancillary benefits provided under the existing plan terms.

Regardless of the way in which a company pension plan is restructured, it is key for employers to communicate these changes to their pension plans clearly and in a way in which their membership can understand.

Stay tuned for Part II of the plan restructuring series, which will address the specific issues relating to the first option - plan terminations/wind-ups.

Some Good News for Private Sector Employers

The government recognized that as a result of ongoing market volatility and low interest rates many private sector defined benefit plans continue to struggle with solvency funding deficits. In response, the government announced an extension of the temporary solvency funding relief measures introduced in 2009. Employers will also be permitted to begin amortization of solvency and going concern special payments one year after a plan valuation date. These changes will go into effect when filing the first actuarial valuation report dated on or after September 30, 2011. 

In addition, the government reiterated its plan to permit employers to use letters of credit for up to 15% of a plan’s solvency liabilities. (This amendment was included in Bill 120, but is yet to be proclaimed in force.)

The Budget also announced the establishment of an “Unclaimed Intangible Property Program” to reunite owners with their “unclaimed property”, including insurance policies, returned stocks and bonds, bank deposits, unpaid wages, and pension benefits. This may finally provide a mechanism for plan administrators to deal with the benefits of unlocated members.

The Budget recaps past pension reform (e.g., Bill 236 and Bill 120 amendments to the Ontario Pension Benefits Act) and indicates that draft regulations to implement these reforms will be released later this year – some as early as this spring – including regulations related to the following:

• clarification of the surplus rules;
• implementation of many of the asset transfer provisions;
• implementation of a “funding concerns” test for plans not required to fund on a solvency basis; and
• eligibility conditions for “contribution holidays” and accelerated funding of benefit improvements.

The Budget also states that a number of previously announced reform amendments will be coming into force on July 1, 2012, including:

• immediate vesting;
• elimination of future partial plan wind-ups; and
• extension of grow-in benefits to all employees (other than those dismissed for wilful misconduct, disobedience or wilful neglect of duty) and the related ability of jointly sponsored and multi-employer pension plans to opt out.

“Sustainable” and “Affordable” Public Sector Plans

Taking its cue from the pension-related recommendations in Don Drummond’s report on the Ontario public service, the Budget notes the increasing cost of the government’s pension obligations and emphasizes the need for public sector plans to be “more affordable for taxpayers and sustainable for pension plan members.” In this regard, the Budget  includes (in addition to wage freezes, which would impact most public sector plans) the following announcements specific to pension plans:

Jointly Sponsored Plans

• The government would develop a legislative framework, subject to consultation, to implement the objectives set out below.
• Where employee contributions are currently less than employer contributions, increases to employee contributions would be considered as a means of reducing pension deficits. The goal being to split plan funding 50/50 between employers and employees.
• Where there is a deficit, plans would be required to reduce future benefits or ancillary benefits (subject to limits in exceptional circumstances) before further increasing employer contributions.
• Any benefit reductions would affect future benefits only. It would not impact benefits that have already been accrued or the benefits of current retirees. 
• If plan sponsors cannot reach an agreement on benefit reductions, a new third-party dispute resolution process would be triggered.

Single-Employer Plans

• The government will adjust previously announced temporary solvency funding relief measures to encourage plans to split the cost of ongoing contributions evenly between employers and employees within five years.
• Efforts to convert current single-employer defined benefit public-sector pension plans to jointly sponsored pension plans with equal cost-sharing will also be encouraged.

Pension Asset Management

• Recognizing the effectiveness of the asset management strategies of some of the larger public sector plans, the government indicates that it will introduce legislation this fall to facilitate the pooling of pension fund assets and investment management functions of smaller public sector plans.
• The Budget indicates that this pooling of resources may be achieved “through a new investment management entity or by building on existing large public-sector pension plans” and that further consultation will be required.

Enhancements to Canada’s Retirement System

The Budget reiterates the Ontario government’s commitment to“modest” enhancements to the Canada Pension Plan. At the same time, the government expresses its concerns regarding the federal government’s proposed pooled registered pension plans, specifying that “the implementation of pension innovation should be tied to CPP enhancement as part of a comprehensive approach.”

Next Steps

While much of the detail is yet to come, this year’s Ontario Budget contains more pension announcements than we have tended to see in past years, indicating that pensions are higher up on the government’s agenda. Private and public sector plans, and organizations that sponsor them, may want to start preparing (now) for the changes ahead.

Indalex Recap

Recall, that in Indalex, contrary to widely accepted principles governing pensions under the Companies’ Creditors Arrangement Act (the CCAA), the Court of Appeal held that the entire amount an employer is required to contribute to fund a pension plan wind-up deficiency under the Ontario Pension Benefits Act (PBA) is subject to the deemed trust provisions of the PBA. In this case, such contributions were ordered to be paid in priority to outstanding secured creditor claims, including the super priority charge granted by the CCAA court to the debtor-in-possession (DIP) loan advanced to Indalex to finance its CCAA restructuring. In particular, the Ontario Court of Appeal held that:

• the deemed trust under subsection 57(4) of the PBA extended to all amounts owed by the employer on plan wind-up, regardless of the fact that the regulations under the PBA permit employers to pay the pension shortfall over a period of five years;
• due primarily to certain fact-based procedural deficiencies identified by the Court of Appeal, the DIP charge granted by the CCAA court order, which purports to impose paramountcy over the PBA deemed trust provisions, did not, in the circumstances, have priority over such deemed trust; and 
• with respect to one of the affected pension plans that had not been wound up, Indalex was in a conflict of interest position with respect to its co-existing sponsor (non-fiduciary) and administrator (fiduciary) roles (the so-called “two hats” doctrine) in dealing with pension issues under the CCAA proceedings, giving rise to a constructive trust in respect of the plan deficit which also took priority over the DIP charge.

On the first point regarding the scope of the PBA deemed trust provisions relative to pension shortfalls, we may have to wait for insight from the Supreme Court of Canada when it hears the Indalex appeal on June 5, 2012. On the other two points, CCAA courts are already weighing in.

In this decision the CCAA court dealt head-on with its jurisdiction to grant super priority to D&O (directors and officers) and other charges which validly prime the PBA deemed trust on pension deficits, as well as the suspension of employer past service contributions (special payments). The court also incorporated into its analysis the concern of the Court of Appeal in Indalex relating to the potential for conflicts of interest to arise as a result of the dual role (“two hats”) of an employer as pension plan sponsor and administrator.

Timminco Limited and Bécancour Silicon Inc. (collectively, the debtors) applied for and obtained relief under the CCAA. The debtors sponsored two defined benefit (DB) plans and a hybrid defined benefit/defined contribution (DC) plan, all of which were underfunded and one of which had already been declared wound up. The debtors applied to Ontario Superior Court for an order (among other things):

• suspending employer special payment obligations to fund DB solvency deficiencies under the pension plans; and
• granting super priority payment of the administration charge (fees of the debtors’ CCAA third party service providers) and the D&O (directors and officers) charge out of debtor assets.

The court granted both orders by suspending the debtors’ special payment obligations for the duration of the CCAA stay and conferred super priority on both the plan administration charge and D&O charge.

Suspension of Special Payments

The debtors argued that during the CCAA restructuring they could only afford to pay DB normal cost and DC contributions, as well as member contributions deducted through payroll.

The CCAA court found that the debtors were in fact insolvent for purposes of the CCAA and did not have sufficient reserves to continue making special payments during the CCAA stay. The court further held that the affected employees and former employees covered by the pension plans would not be prejudiced by the suspension of special payments since, without the suspension, the CCAA restructuring would not succeed and the debtors’ would become bankrupt, which would not produce a better result for them. Based on this lack of prejudice, the court determined that the “two hats” doctrine referred to in Indalex would not be infringed through any conflict of interest because avoiding bankruptcy was in the best interests of both the debtors and pension plan beneficiaries. Therefore the requested relief would not favour the debtors’ interests (wearing their employer/plan sponsor “hat”) over their fiduciary obligations to pension beneficiaries (wearing their plan administrator “hat”).

Super Priority on Administration and D&O Charges

With respect to the super priority request, the CCAA court noted that it was not reasonable to expect essential professional service providers in CCAA restructurings to risk not being paid for their work, nor is it reasonable to expect directors and officers to remain at their posts to provide essential decision making throughout the restructuring process without the requested protection. Again, the court recognized that without such services bankruptcy would result, leaving pensioners and employees worse off. The court agreed with the debtors’ submissions that a CCAA court has the authority under the CCAA to override conflicting provisions of provincial statutes like the PBA deemed trust provisions “where the application of the provincial legislation would frustrate the company’s ability to restructure”, and that such paramountcy was confirmed by the Ontario Court of Appeal in Indalex.

Timminco 2 Decision

Following the relief obtained in Timminco 1 the debtors brought another motion before the CCAA court for an order approving the DIP facility and granting a priority charge on the debtors’ current and future assets in favour of the DIP lender. The DIP loan agreement also specified that DIP advances could not be used to make pension plan special payments.
The debtors’ motion was opposed by the unions representing affected employees, which argued that when the debtors negotiated the DIP loan agreement they had failed to consider their fiduciary obligations as pension plan administrators, or to consider the best interests of the plan beneficiaries.

In approving the DIP facility and granting the requested DIP loan super priority, the CCAA court rejected the unions’ arguments and noted, among other factors, that the Monitor and the secured creditors supported the super priority and “without the approval of the DIP Facility and the granting of the DIP Charge, there simply will be no money available” to proceed with the CCAA restructuring. As a result, the requested priority charge and the terms of the DIP agreement were necessary under the circumstances. The court stated its rationale as follows:

It is unrealistic to expect that any commercially motivated DIP Lender will advance funds without receiving the priority that is being requested on this motion. It is also unrealistic to expect that any commercially motivated party would make advances to the Timminco Entities for the purpose of making special payments or other payments under the pension plans.

The court went on to find that it was necessary and within its powers to invoke the doctrine of paramountcy such that the provisions of the CCAA override those of Quebec and Ontario pension legislation, thereby granting the DIP lender a super priority over all trusts, liens, charges and encumbrances, statutory or otherwise, including over any deemed trust created under the pension legislation.

Comment

Both Timminco decisions demonstrate that, post-Indalex, there may be an increased focus by the courts in CCAA proceedings on the general issue of potential conflicts of interest under the “two hat” doctrine when it comes to dealing with pension issues. However, the extent to which debtors are actually wearing their administrator “hats” verses their sponsor “hat” (and, as a result, are truly acting as a pension fiduciary) when they take certain pension-related actions during the course of CCAA restructuring requires further judicial scrutiny.

In response to these “letter of credit amendments”, which came into force on April 1, 2011, the Office of the Superintendent of Financial Institutions recently updated its frequently asked questions on the changes to the DB funding rules to include new FAQs on letters of credit.

These FAQs consider issues such as:

• the treatment and application of letters of credit obtained under the Solvency Funding Relief Regulations and how they interplay with the “new” letter of credit regime;
• the treatment of a letter of credit that is included in solvency assets when calculating a plan’s average solvency ratio; and
• when a letter of credit that is used in lieu of solvency special payments must be provided to the trustee and what must be its effective and expiry dates.

This guidance should be of assistance to sponsors of federal pension plans seeking to use letters of credit in the future.

In its April 2011 ruling, the Court of Appeal held that the entire amount an employer is required to contribute to fund a pension plan wind-up deficiency under the Ontario Pension Benefits Act (PBA) is subject to the deemed trust provisions of the PBA and, in the circumstances, should be paid in priority to outstanding secured creditor claims. A detailed account of the facts is available in a previous Osler Update relating to the Ontario Court of Appeal decision.

The Ontario Court of Appeal held that:

1. the deemed trust under subsection 57(4) of the PBA extended to all amounts owed by the employer on plan wind-up, regardless of the fact that the regulations under the PBA permit employers to pay the pension shortfall over a period of five years;
2. the DIP charge granted by the CCAA court did not have priority over such deemed trust; and 
3. with respect to one of the affected pension plans that had not been wound up, Indalex was in a conflict of interest position with respect to its sponsor and administrator roles in dealing with pension issues under the CCAA proceedings, giving rise to a constructive trust in respect of the plan deficit which took priority over the DIP charge.

A review of the Indalex decision by the Supreme Court of Canada is welcome news for borrowers, lenders and pension plan administrators.

The Ontario Court of Appeal decision represented a significant departure from what was widely viewed as established law, and has caused much uncertainty concerning the ability of DIP lenders and other secured creditors to protect the value of their security interest against pension claims, as well as raising pension plan governance concerns in the context of CCAA and more generally. We will keep you posted with any further updates relating to this matter.

• Use of a “smoothing” method (i.e., averaging method) to value plan assets on a solvency basis over a 5-year period rather than using the current market value;
• Consolidate certain solvency deficiencies; and
• Extend the amortization period to eliminate the new solvency deficiency from 5 to 10 years.

Last week, the Quebec government announced its intention to extend the temporary solvency relief measures for an additional period of two years (i.e., until December 31, 2013). The other details of the proposal have not yet been released.

The government will also extend for two more years the special settlement option available to certain plan members and beneficiaries who participate in an underfunded plan that is terminated in connection with the bankruptcy or insolvency of their employer. In these circumstances, such members and beneficiaries can elect to have their reduced benefits paid by the Régie des rentes du Québec. The assets attributable to those who elect this option are to be administered and invested by the Régie during a prescribed period and will then be used to purchase annuities at a time when the annuity market is (hopefully) more favourable. The Régie is thereby assuming the risk of a further deterioration in economic conditions.

See our prior post for more details regarding this settlement option and Bill 42 for more details regarding the extension itself.

Further Pension Reform on the Horizon?

As part of its announcement, the government also indicated that it would take the two-year extension as an opportunity to review the Quebec Supplemental Pension Plans Act in light of the new economic and demographic realities. The government has directed the Régie to establish an independent expert committee to study the various problems affecting DB plans, and to propose a series of changes to the current legislation that would improve the viability of DB plans in Quebec. That being said, no reform is expected to occur before 2014.

These guidelines are intended to build on the principles of pension plan governance established by CAPSA Guideline No.4 – Pension Plan Governance Guideline.

The Investment Guideline is designed to help administrators demonstrate the application of prudence to the investment of pension plan assets. It sets out a number of prudent investment principles including the Prudent Person Rule which it describes as “a substantive rule of law that is intended to lead to balanced decision making, rather than dictate particular outcomes.”

The Guideline emphasizes the importance of communications with plan members especially when they have responsibility for making investment decisions For example, members of capital accumulation plans (CAP) should be provided with sufficient details about plan investment options to enable them to make informed investment decisions. For more detailed guidance on plan communications, administrators of CAPs should also refer to Guideline No. 3 for Capital Accumulation Plans.

In connection with the Investment Guideline, CAPSA has also developed a Self-Assessment Questionnaire for plan administrators. The Questionnaire asks plan administrators to review their plan’s investment practices and consider a number of issues/activities when determining whether they are investing prudently, including:

• The roles and responsibilities of the plan administrator, the plan sponsor and their delegates, including responsibility for establishing the investment policy.
• The plan’s investment objectives, risks and corresponding risk management practices, and Statement of Investment Policies & Procedures.
• The delegation of investment activities, and the parties responsible for continuing to monitor and review such activities.

Pension Plan Funding Policy Guideline

The Funding Policy Guideline provides guidance on the development and adoption of written funding policies for defined benefit pension plans. It provides a list of issues that a funding policy should address, including: 

• An overview of the plan’s features.
• The plan’s funding objectives and how they integrate with the plan’s investment policy.
• Any funding risks faced by the plan and the plan’s tolerance for volatility in funding requirements.
• Funding and contribution target levels, and cost-sharing arrangements (if any).
• A description of how any funding excesses will be utilized.
• Any guidance for the plan actuary in selecting actuarial methods and assumptions, and the frequency of actuarial valuations (subject to any legislative requirements).
• Responsibility for monitoring the funding policy.
• Communication regarding the funding policy with plan members.

The Funding Policy Guideline also recognizes that different considerations may apply to multi-employer pension plans (MEPPs) – as compared to single employer plans – given that administrators of MEPPs have the option of altering benefit levels.

Practical Implications

While CAPSA guidelines do not have the force of law, plan administrators would be best advised to review their pension plan governance and investment structures with the requirements of the Investment and Funding Policy Guidelines in mind.

The Agreement sets out a framework for the regulation and administration of multi-jurisdictional pension plans (MJPP), including:

• The rules of the jurisdiction of the Major Authority (i.e., the jurisdiction with the plurality of active plan members) will apply to a series of matters that affect the MJPP as a whole and are listed in a schedule to the Agreement (e.g., plan administrator duties, investment and plan registration).
• The rules of the jurisdiction of each Minor Authority will apply to applicable members in relation to matters that are not contained in the schedule (e.g., vesting, locking-in and surplus distribution).
• The “final location” method will be used to determine benefit entitlements (i.e., a member’s pension benefits will be governed by the laws of the jurisdiction where he or she terminates employment or retires under the plan).

The Agreement also includes specific rules related to plan funding, amendments, asset transfers, and plan wind-ups.

For a more detailed discussion of the Agreement and its implications for Ontario and Quebec MJPPs, see the Osler Update by Stephanie Kauffman and Julien Ranger-Musiol.

• JSPPs that existed on August 24, 2010 (as listed in the regulations) are exempt from solvency funding requirements. However, JSPPs will still be required to determine solvency deficiencies using the method set out in the amendments, and a valuation report will have to be filed if a plan amendment changes the amount of the solvency deficiency.
• In exchange for this solvency funding exemption, JSPPs must file certain statements with the regulator and provide enhanced reporting to plan members. For example, JSPPs must include additional information in annual statements for members, such as informing them that their benefits are not guaranteed by the PBGF and may be reduced on plan wind-up, the contribution rates for employers and members could change, additional contributions are not being made to eliminate the solvency funding shortfall, and what the amounts of contribution rates were for the year before and the year after the statement.
• It is important to note that the regulations’ JSPP solvency funding exemption applies only to the six named JSPPs. All other JSPPs interested in exploring solvency funding exemptions will have to consider seeking specific exemptions.
• New regulation 3.2 requires the administrator of all JSPPs to file a statement certifying that the plan satisfies the criteria to be a JSPP and describing how this criteria has been met. This statement must be filed no later than the filing date of the first plan valuation after becoming a JSPP (or the filing date of the next plan valuation after June 1, 2011 for existing JSPPs). 
• Certain changes were also implemented with respect to DB plans more generally. For valuations on or after December 31, 2012, plans with a funding threshold below 85% (as opposed to 80%) will be required to undertake annual valuations. (JSPPs, specified Ontario multi-employer plans and certain other specified plans are exempt from this provision.) In addition, as of January 1, 2012, all DB plans must include information regarding funding levels in annual plan member statements.

The Ontario government also filed Regulation 178/11, which sets out rules and procedures for certain public sector plans seeking temporary solvency funding relief through the two-stage process announced earlier this year. (Please see our February 14, 2011 post for further discussion of this funding relief initiative.)

The government confirmed its commitment to certain previously announced amendments to the Ontario Pension Benefits Act (PBA) and the related regulations, such as providing a solvency funding exemption for certain jointly sponsored pension plans, updating Ontario’s pension investment rules to reflect recent and future federal changes, and implementing new rules regarding pension division on marriage breakdown. The Budget also announced further reforms, including:

• requiring plans to file Statements of Investment Policies and Procedures (SIP&Ps) with the regulator and to disclose whether or not their SIP&Ps address environmental, social or governance factors;
• exploring options for dealing with the benefits of unlocated members of partially and fully wound up plans; and
• reviewing the funding requirements for multi-employer pension plans with members outside Ontario.

Pension Innovation

Together with support for modest CPP expansion, the Budget expands on the government’s interest in making new, innovative retirement vehicles available to Ontarians, including: 

• taking steps to facilitate single-employer target benefit plans (i.e., changes to the Income Tax Act are needed); and
• working with the federal and provincial jurisdictions regarding the implementation of pooled registered pension plans (PRPPs) as a simple, low cost option to expand pension coverage directed at smaller employers and self employed individuals (the federal government announced a proposed framework for PRPPs last December).

Bill 173

Shortly after announcing the Budget, the government introduced Bill 173, Better Tomorrow for Ontario Act (Budget Measures), 2011. Other than the inclusion of the Nortel retiree portability amendment referred to in the Budget papers, the Bill does not address the issues raised in the Budget (as discussed above), but rather makes amendments to the PBA in relation to previously announced reforms largely described in the explanatory notes as “technical”. Bill 173 includes the following PBA amendments:

• to s. 42(1)(c), allowing terminating members to direct the plan administrator to purchase a life annuity only if the plan so provides;
• to s. 68, authorizing the Superintendent to require administrators to provide specified additional information and documents to specified individuals on plan wind up;
• to s. 115(7), extending the effective date to June 30, 2012 for the repeal of the PBA authorization for retroactive DB funding regulations;
• to s. 74 automatic grow-in provisions (triggered by “activating events”), scheduled to come into force on July 1, 2012, permitting additional “activating events” to be prescribed by regulation; and 
• to revised and unproclaimed s. 80 governing sale of business pension asset transfers, requiring all affected members, former members and retirees to consent to the transfer if the sale agreement provides for any member consent.

Perhaps most interesting of these changes is the amendment to the s. 74 grow-in rules. Does this signal the government’s intention to further expand the impact of automatic grow-in benefits?

While the government seems keen to continue its reform agenda, it will be interesting to see how much more pension reform will be completed with a provincial election looming.

The Investment Guideline is intended to help plan administrators meet their duty to act prudently in the investment of the pension plan’s assets. This Guideline puts a great deal of emphasis on the process to be followed by plan administrators in relation to their investment activities. In other words, CAPSA believes that prudence must be assessed mainly by the methods followed by a plan administrator rather than simply on the results achieved.

Given the limited judicial guidance on the standard of care that applies to plan administrators in connection with their investment activities (pension investment cases are generally settled out of court – see for example the Jeffrey Mine case), the Investment Guideline could become a benchmark against which the courts will judge plan administrators in the future.

As such, plan administrators will want to pay close attention to the “best practices” set out in the Investment Guideline, and will want to ensure they are able to show these practices were followed.

Draft Pension Plan Funding Policy Guideline

The Funding Guideline is intended to provide guidance on the development and adoption of funding policies by plan sponsors. CAPSA considers that funding decisions should not be made on an ad hoc basis, but should rather be made based on a pre-established decision-making framework. This Guideline outlines the elements that should be included in a funding policy, including among others funding objectives, key risks, tolerance to volatility, funding targets, cost sharing mechanisms and permitted uses of surplus.

It remains to be seen whether the idea of a funding policy will find traction among plan sponsors. Plan sponsors need flexibility in the funding of their plans and will not necessarily want to be bound or limited by the terms of a funding policy. It is to be expected that those who do adopt a formal funding policy will include broad statements rather than detailed rules and objectives.

Guideline on Fund Holder Arrangements

I also note in passing that CAPSA has now published its final Guideline on Fund Holder Arrangements (Guideline No. 5). This Guideline highlights good governance practices related to fund holder arrangements.

In this post, I provide a brief overview of the government’s funding relief proposal. Those seeking further information on the complex requirements of this program should refer to the detailed description provided on the Ontario government website.

Which Plans Are Eligible?

In order to be eligible for this funding relief, plans must fall within the proposed definition of “public sector pension plan”, which includes plans provided by Crown agencies and corporations, school boards, colleges, universities and municipalities. The plan must provide defined benefits and at least 25% of the total plan membership must be actively accruing benefits. Multi-employer and jointly sponsored pension plans are specifically excluded from this funding relief proposal.

Applications for Relief

Plans which intend to request this solvency funding relief, must submit an application to the Ministry of Finance (Ministry) within the applicable window. (As I note below, the first window is now open.) The government lists a number of documents that must be provided with the application, including:

• the estimated “savings target” of the plan;
• a detailed funding plan showing how the pension plan could be amended to improve its sustainability;
• evidence that the funding plan has been shared with plan members and any union, and will be shared with retirees; 
• identification of applicable collective bargaining agreements; 
• identification of plan amendments made or scheduled to come into force within the last 5 years that may have enhanced the plan's sustainability;
• identification of amendments scheduled to come into effect after entering the funding relief program that may have increased the cost of the plan; and
• copies of all plan documents, amendments and valuation reports filed since December 31, 1999.

Details of the relief measures, including eligibility criteria and additional conditions, will be outlined in amendments to the regulations under the Ontario Pension Benefits Act (PBA), which the government expects to come into force by mid-May of this year. In the meantime, you should consult the backgrounder if you think your plan may be eligible for the new relief.

Two-Stage Process

The proposed measures would provide temporary funding relief in two stages – with specific criteria attached to each stage.

If a sponsor’s application to the Ministry is accepted, plan sponsors would file a valuation report with the Financial Services Commission of Ontario. During this stage, plan sponsors would be required to make minimum payments to ensure that the solvency shortfall did not increase.

Plan sponsors would have three years from the date of the valuation report to determine what plan amendments could be made to improve the plan’s sustainability. Examples of design changes suggested by the government are: converting to joint sponsorship for future service, providing for more equitable cost sharing of benefits between sponsors and members, linking some future benefits (e.g., inflation protection) to plan performance, and enhancing cost certainty through benefit adjustments. Since many of the members of these plans are unionized, this process will likely include discussions with collective bargaining agents.

After three years, plan sponsors would be required to prepare another valuation and submit a report to the Ministry to demonstrate their progress in meeting their funding plan targets. The results revealed in the valuation would be measured against “savings targets”, which outline the criteria a plan would have to be meet to qualify for Stage 2 relief.

If the Ministry is of the view that targets have been met, it could recommend that the plan be eligible for further relief in Stage 2. Otherwise, the normal funding provisions in the PBA effective at the time would begin to apply. Among the benefits of Stage 2 would be the ability to amortize any solvency deficiency identified in the second valuation report over a ten-year period.

Window Now Open

Even though the amendments to the regulations have not yet been finalized, the first window for applying for funding relief is already open – from February 10, 2011 to March 23, 2011. Eligible pension plans with a valuation date as at December 31, 2009 or with a valuation date in 2010 could apply during this window. The government indicated that other windows of opportunity for eligible pension plans with valuation dates in 2011 and 2012 will be announced at a future date.

The Guide describes the level of intervention associated with the varying risk levels as follows:

• Low Risk Rating: OSFI has determined that the plan is financially sound, and considers it to be at “Stage 0”. At this stage, the plan is subject to “normal” monitoring. Normal monitoring generally includes a review of required filings and actuarial reports, periodic on-site examinations, in-depth risk assessments and estimated solvency ratio exercises.
• Moderate to Above Average Risk Rating: OSFI has identified deficiencies in the plan’s financial position, policies or procedures that could evolve into more serious issues. The plan moves to “Stage 1”, which requires increased monitoring. For example, OSFI may obtain and review the plan’s Statement of Investment Policy & Procedures and list of assets, as well as information on the fund’s market returns. The regulator may also recommend that the plan administrator file a revised or early actuarial report and/or provide “appropriate” disclosure to plan members.
• Above Average to High Risk Rating: Where OSFI has identified problems that pose a threat to the security of members’ benefits, the plan moves to “Stage 2”. At this stage, specific interventions may be pursued. For example, OSFI may require the plan administrator to file a revised or early actuarial report, provide “appropriate” disclosure to plan members and/or hold a meeting with plan members or other relevant parties.  Plans with this rating may eventually move to “Stage 3” if OSFI identifies “material and immediate threats to members’ benefits”. At Stage 3 OSFI escalates its interventions and plan termination is a strong possibility. 
• Permanent Insolvency: At Stage 4 there is no possibility of the employer(s) fully funding the plan, and the plan is in the process of wind-up or has been wound up with a loss to members’ benefits.

By providing this Guide, OSFI has given federally regulated plan administrators some welcome insight into the steps that they may be required to take depending upon the funded status of their plans.

Like many aspects of Bill 120, these changes have not yet been proclaimed into force, and regulations are needed to provide much of the underlying details. However, plan sponsors and administrators should start considering the implications of these amendments now since they could require changes to current practices.
 

Prior to Bill 120, there were no restrictions on benefit improvements. Pursuant to Bill 120, subject to certain exceptions (i.e., amendments required as a result of a judicial decision or in prescribed circumstances), plan amendments that would increase accrued benefits while reducing a plan’s funded status below the prescribed level will be void. In its August 24, 2010 announcement (the August Announcement), the Ontario government indicated that this prescribed level would be 85%. The August Announcement also indicated that improvements may be made in these circumstances provided the sponsor complies with certain new funding requirements (i.e., make a lump sum payment to prevent a reduction in the funded status and amortize any remaining cost over no more than five years).

Contribution Holidays

In addition to expressly permitting contribution holidays, unless the “documents that create and support” the plan or the fund prohibit such holidays, Bill 120 also indicates that there will be certain prescribed conditions on taking contribution holidays. The August Announcement stated that contribution holidays will not be permitted where they reduce the plan’s transfer ratio below 105%, and that plans will be required to disclose contribution holidays to members and former members and file annual statements with the regulator to confirm eligibility. We’ll have to wait for the regulations to confirm these additional details.

Letters of Credit

Bill 120 introduces provisions permitting letters of credit to be used to fund a solvency deficiency provided various requirements are met. Once again, we’ll need to wait for the regulations to confirm all the requirements, but some requirements are contained in Bill 120 itself. For example, Bill 120 provides that letters of credit will not be permitted to exceed 15% of the plan’s solvency liabilities. As well, multi-employer pension plans and public sector pension plans will not be permitted to take advantage of letter of credit funding (though public sector pension plans may be specifically so permitted in the regulations).

Solvency Funding for Jointly Sponsored Pension Plans

Bill 120 allows jointly sponsored pension plans that existed on August 24, 2010 to amend their plan documents such that contributions are no longer required in respect of a solvency deficiency.

Regulations regarding Actuarial Methods and Assumptions

Bill 120 includes new authority, now in effect, allowing the government to make regulations with respect to actuarial methods and assumptions that may be used in the preparation of actuarial reports. As well, the August Announcement referenced a number of new, more stringent rules for valuing plan assets and liabilities that were being considered by the Ontario government. We’ll have to wait for the regulations to see if these rules go forward.

We’ll discuss these funding changes and other changes implemented by the recent waves of pension legislative reform in Ontario at our upcoming client seminar, “Managing the Impact of Pension Reform: Practical Implications for Employers and Plan Administrators”, on Wednesday, January 26, 2011.
 

The federal government began on the road to pension reform with the introduction of Bill C-9 – this year’s budget bill – which received royal assent on July 12, 2010. (See our April 1, 2010 blog post.)

Bill C-9 included a number of funding-related provisions that required separate amendments to the Regulations. A number of these outstanding issues appear to have been addressed in this latest round of amendments. The amendments to the Regulations will add the following details:

Once these amendments to the Regulations are finalized – a consultation period will be open for 30 days after their publication – the federal government will have completed much of the reforms that it had originally announced in October of 2009.

The most innovative aspect of the new regulatory regime is the framework for pension workout schemes to facilitate the implementation of a negotiated settlement between a “distressed employer” and the plan members. This proposal makes a process that frequently takes place informally or “below the radar screen” transparent to all concerned, and avoids the need for “one off” regulations to deal with specific plans. It would be helpful if the Ontario government introduced a similar scheme for Ontario-registered pension plans.

While most of these changes will come into force on a date to be proclaimed and many are subject to regulations to be prescribed, some provisions do come into force as of royal assent. Most significant for private sector plan sponsors, are certain provisions related to payment of plan expenses from the plan fund and payment of surplus to an employer, which are now in force.

With the passing of Bill 120 and the government’s first stage of pension reform, Bill 236, earlier this year, 2010 can be marked as a year of significant change to Ontario pension legislation. The full impact of such change (and whether it will ease the administration of Ontario registered pension plans), however, remains to be seen. We look forward to reviewing the regulations next year and writing further posts as pension reform continues to progress.
 

The Bill (including amendments recently proposed by the NDP) would amend the Bankruptcy and Insolvency Act (BIA) and Companies’ Creditors Arrangement Act (CCAA) to extend “super priority” status to the entire solvency deficit, and not just those solvency deficit amortization payments that are due but not yet paid.

Extending super-priority status to the entire solvency deficit could place significant additional burdens on the financial capacity of DB plan sponsors, impede their ability to cost-effectively raise capital, adversely affect their ability to invest in Canada’s economy and remain competitive, and, ultimately, impair their ability to fund their pension obligations.

For example, the proposed amendments to the BIA and CCAA could have the following implications:

• the elevation of billions of dollars of potential pension claims ahead of lenders in the priority ladder;
• the revaluation by credit markets of assets available for security and the deduction of higher-priority claims, thus resulting in a significant reduction of available credit; and
• the creation of immediate default situations, based on covenants in existing trust indentures restricting the existence of claims that would have priority over the existing lender.

While the protection of members’ accrued benefits in a restructuring or bankruptcy situation may well be a public policy goal worth pursuing, the unintended consequences of Bill C-501 could include not only the weakening of the financial viability of DB plan sponsors, but possibly the wholesale abandonment of DB plans by corporate Canada.

A press release indicated that Bill 120 would include amendments aimed at:

• strengthening pension plan funding requirements;
• providing certain multi-employer pension plans and jointly sponsored pension plans with more flexible funding rules;
• clarifying the surplus sharing provisions by providing a "dispute resolution process" to allow members, retirees and plan sponsors to reach agreements on how surplus should be allocated on wind up; 
• making the Pension Benefits Guarantee Fund more sustainable;
• strengthening regulatory oversight; and 
• improving plan administration.

The Ontario government also expressed its continued interest in a “modest and gradual” expansion of the Canada Pension Plan and further pension innovation.

We will provide a more detailed post on these most recent legislative amendments later this week.