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

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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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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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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Is it permissible to re-open a closed pension plan and thereby quash the hopes of members to access the surplus bottled up in it? The latest decision in the Rogers v. Buschau saga suggests it is.

As some may remember, the sponsor, Rogers Communications Inc., had closed a defined benefit pension plan, registered under the federal Pension Benefits Standards Act (PBSA), to future employees, and attempted to withdraw surplus from the plan.  After a series of appeals, Rogers repaid the surplus into the pension fund, and argued before the regulator that the plan should be amended so that new employees could join. 

The members, undeterred by the Supreme Court of Canada’s ruling that the closed plan could not be terminated under an old common law doctrine (known as the rule in Saunders v. Vautier) requested that the regulator terminate the plan.  The Superintendent refused to exercise her discretion to terminate the Rogers pension plan.  

The members had the Superintendent’s decision reviewed by the Federal Court. The Federal Court of Canada agreed with the members, finding that the Superintendent’s refusal to exercise her discretion was unreasonable.  The recent appeal handed down by the Federal Court of Appeal came to the opposite conclusion. 

The Court noted that the Superintendent based her decision on the premise that the continued existence of a pension plan is a worthy goal and that the objects of the Plan and of the PBSA were better served by using the actuarial surplus in the plan to fund pensions for members of the Plan, including new members, rather than to provide a windfall to the current members of the plan.

Further, the Court of Appeal held that the Superintendent was under no duty to act in accordance with the wishes of the plan members.

The Federal Court of Appeal’s judgment joins a growing list of decisions that can be characterized as “pro-employer” -- in taking a dim view of efforts by members to access surplus funds in the context of internal plan reorganizations where the surplus could continue to be used to provide benefits.

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The decision of the Ontario Superior Court of Justice in Re Hawker Siddeley Canada Inc. Pension Plan (PDF) presents an opportunity for employers to expedite the surplus distribution process by allowing surplus attributable to unlocated members and former members to be paid into Court. 

When Hawker Siddeley Canada Inc. wound up its plan in 1996, the plan assets, including surplus, were distributed amongst the employer and the members and former members of the plan. Subsequent to the wind-up and distribution, an additional amount was received by the pension fund, related to certain annuity contracts that had been entered into. These additional funds were also treated as surplus and required further distribution, with a portion payable to the former plan members.

Because of the amount of time that had passed since the wind-up, Hawker Siddeley had difficulty locating a number of the former members. The Company therefore applied to the Court for an order approving the payment of surplus for those missing members into Court.

Given that the Ontario Pension Benefits Act does not provide a mechanism for distributing plan funds to missing members, the Court relied on the holding of the Supreme Court of Canada in Schmidt v. Air Products that where the pension legislation is silent, it is appropriate to apply general principles of trust law. Relying on Section 36 of the Ontario Trustee Act which permits a trustee to pay trust funds into Court, the Court ordered that the surplus funds for the missing members be paid into Court.

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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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