• proclamation of the "retired member" provisions in the PBA;
• implementation of immediate vesting for plan members (the 2012 Budget indicates that this change will come into effect on July 1, 2012);
• increases to the threshold for the pay out of "small pensions"; and
• clarification of the surplus withdrawal rules.

• 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.

Subsequently, in settlement of proceedings before the Financial Services Tribunal (FST), Shoppers agreed to a partial wind-up of the Shoppers Plan in connection with a broader post-sale restructuring and Boys became entitled to “grow-in” benefits valued at $89,087. Although this grow-in benefit exceeded the small pension threshold, Shoppers refused Mr. Boys’ request for a deferred pension in respect of the grow-in entitlement, arguing that the grow-in must be commuted and cashed out just like the previous cash out of his small basic benefit. As an added complication the FST was advised of the Canada Revenue Agency (the CRA) position that the “Income Tax Act and Regulations do not permit the additional growing-in benefits to be paid as additional lifetime retirement benefits from a registered pension plan (RPP) where the individual has already commuted and transferred the full amount of his or her initial benefits out of the particular RPP.”

Mr. Boys sought relief against Shoppers’ decision from the Superintendent of Financial Services, but the Superintendent issued a Notice of Intended Decision (NOID) indicating his intention to refuse to make such an order. Mr. Boys then applied to the FST, challenging the Superintendent’s NOID, and seeking to have his grow-in entitlement under the Shoppers Plan treated as a deferred pension.

The FST decided in favour of Mr. Boys and found that while Shoppers’ treatment of Mr. Boys’ “eight-day” basic pension as a small pension did not contravene the Ontario Pension Benefits Act (PBA) at the time (before declaration of the partial wind up), once the grow-in benefit was added, it clearly no longer qualified as a small pension. The FST stated:

[T]he partial wind up changed the value of his pension benefits on termination, taking his entitlement decisively out of the category of a ’small pension’. Once that became clear, Shoppers was required to offer him the options for his pension that came with his recalculated entitlement, including the option of taking his benefits as a deferred pension.

In particular, the Tribunal rejected Shoppers’ and the Superintendent’s arguments that the PBA does not provide members affected by a partial wind-up with a right to re-elect pension transfer options in the circumstances where a pre-partial wind up basic benefit commutation has occurred and stated:

The clear purpose and effect of s. 73(1)(a) is to change the date on which pension entitlement is to be determined for affected plan members, from their individual date of termination to the effective date of the partial wind up, in order to ensure that their grow-in benefits and any other partial wind up entitlements are taken into account.

With respect to CRA’s position, the FST expressed the view that while there may be difficulties unwinding the initial basic benefit commutation it was not impossible and therefore should not restrict the member’s rights under the PBA. In setting aside the Superintendent’s NOID, the FST indicated that it remained seized of the matter should the CRA not provide the necessary approval for the re-payment of the small pension back into the Shoppers Plan.

Case Comment: With the elimination of partial wind-ups in Ontario the incidents of basic benefit elections being out of sync with grow-in entitlements will soon be minimized, however, this case is also interesting in light of the FST’s decision that the member’s “eight day” Shoppers Plan pension was to be treated separate and apart from his predecessor plan pension for purposes of the small benefit characterization notwithstanding s. 80 of the PBA. The FST rejected (rightly so in my view) Mr. Boys’ contention that his Shoppers Plan pension should be treated seamlessly with his Imasco plan pension for purposes of determining whether the small benefit commutation provisions of the PBA applied. The FST held that while s. 80 preserves the benefits under the predecessor plan and counts the period of predecessor plan membership for eligibility and entitlement purposes under the successor plan, it does not affect the amount of benefits earned under the successor plan for purposes of the small benefit determination.

When the Toronto Dress and Sportswear Industry Retirement Fund was wound up in April of 1996, the plan was severely underfunded. Plan assets were only sufficient to fund about 41% of plan liabilities. As the wind up proceeded, extensive efforts were made to contact all members and former members. In the end, however, there remained 249 missing, but identifiable members and approximately $1 million in undistributed plan assets relating to their 41% share of pension liabilities. The plan Trustees wanted to complete the wind up distributions, but they could not agree on how the missing member assets should be treated.

The union referred the arbitrator to a similar case decided under federal pension legislation in 2009 by the Ontario Superior Court (Hawker Siddley Canada Inc. (Re) [2009] O.J. No. 5795), where residual funds relating to missing persons had been ordered paid into court, but requested the arbitrator in this case order that the left-over funds be transferred (with regulatory approval) to an ongoing successor pension plan and continue to be held for the unlocated group.

The arbitrator noted FSCO’s position that funds owing to one member cannot be paid to another member and found, based on “general principles of trust law”, that the undistributed plan assets should remain in trust for the missing members. The arbitrator further noted the need for regulatory approval and that, while FSCO may be agreeable to a locked-in transfer to another registered retirement vehicle or pension plan, FSCO had communicated its unwillingness to accept any guarantee by either an employer or a union to pay benefits if the funds were released from the trust.

In the absence of any clear directions under the Ontario Pension Benefits Act on how to deal with missing members on a plan wind up, and to permit completion of the wind up process, the arbitrator ordered that an application be brought to seek FSCO’s approval of the transfer of the remaining plan assets to the successor plan, “with the intent that the assets be held and accounted for separately, and maintained in the event any of the missing but identifiable members are located or come forward.”

This case underscores a common dilemma faced by pension plan administrators when completing plan wind ups – difficulties arise when outstanding basic benefit and/or surplus entitlements are owed to missing plan members or their beneficiaries.

Interestingly, in the 2011 Ontario Budget, the government announced that it intends to “explore options to handle the benefits of unlocated members of plans that are wound up, in whole or in part, so that full and partial wind-ups may be completed.” Perhaps, the Ontario government will consider making amendments similar to those recently passed by the federal government (which will authorize the federal Minister of Finance to designate an entity for the purposes of receiving, holding and disbursing the pension benefit credit of any person who cannot be located.) In any event, however the issue is addressed, the Toronto Dress and Sportswear case highlights the need for further pension reform in this area.

• communicating with affected members regarding the impact of providing their partial wind up benefits from the ongoing plan, including a statement that any subsequent settlement of their benefits “will be subject to the terms of the plan and its funded status at that time”;
• revised statements to be provided to affected members where a partial wind up report has already been filed and the administrator had previously decided to purchase annuities;
• filing of a revised partial wind up report where the original report had indicated that annuities were to be purchased;
• the maintenance of the notional split between the partial wind up and the ongoing portions of the plan until all partial wind up assets have been settled (including any surplus distribution), although the policy also states that where there is a surplus at the partial wind up date, the transfer of partial wind up benefits to the ongoing portion of the plan “can occur prior to completion of the surplus distribution”;
• the basis upon which partial wind up benefits remaining in the plan are to be valued (estimated annuity purchase premium basis) for funding and surplus/deficit calculation purposes;
• requirements to track and report on partial wind up assets/liabilities separate and apart from those of the ongoing plan where there is a partial wind up deficit being amortized, until such deficit is fully funded;
• sponsor refunds of excess partial wind up assets remaining in situations where the sponsor was required to fund a partial wind up deficit; and 
• sponsor contribution obligations where the partial wind up report identifies a surplus which shifts to a deficit after the partial wind up effective date.

Under the old plan wind up surplus withdrawal rules, an employer had to obtain both the necessary number of member consents and establish its surplus ownership rights at common law. Historically, FSCO took a strict approach to the latter requirement and refused to approve a surplus withdrawal application unless the employer was clearly entitled to the surplus. In most cases employers could not meet this high bar and it was necessary to obtain court approval before applying to FSCO. This added to the cost and complexity of the application and created additional delays.

As of May 18, 2010 the old regime is gone and a new one is in place. Under Sections 63(1) to (3.2) of Bill 236, on full or partial wind up of its pension plan the employer has the option of establishing legal ownership of any surplus at common law or obtaining the required level of agreement from affected members to a surplus sharing arrangement. It is no longer necessary for the employer to satisfy both requirements.

It is too early to predict the full impact of the new regime as the amendment contemplates the enactment of regulations which have not yet been passed. Technically, however, the new regime is now in force.

• eliminating partial wind-ups;
• introducing immediate vesting; 
• extending “Rule of 55” grow-in benefits to all plan members whose employment is involuntarily terminated (other than where there is wilful misconduct, disobedience or wilful neglect);
• enabling plan sponsors to access surplus on the full or partial wind-up of a plan by entering into a surplus sharing agreement; 
• taking steps to facilitate asset transfers and plan mergers;
• increasing plan transparency, and plan members’ and retirees’ access to information; and
• permitting plans to offer phased retirement.

My colleagues and I will be considering the implications of these legislative amendments in greater detail, and will be posting additional posts that address particular areas of concern for plan administrators.

Probably the most significant change in the revised version of the Bill, which was ordered for third reading, was the extension of the modified surplus sharing regime to partial wind-ups.

The current surplus sharing regime requires employers to satisfy member consent thresholds AND demonstrate surplus ownership. Bill 236 (similar to the federal regime) originally permitted employers to withdraw surplus from their pension plans on full wind-up without needing to prove surplus ownership if member consent thresholds were satisfied and other prescribed requirements were satisfied. Future and pending partial wind-up surplus withdrawals (prior to the elimination of partial wind-ups in 2012) were, however, being treated differently under Bill 236 and remained subject to troublesome conflicts in the current legislation which have caused problems for employers and affected members for years. Revised Bill 236 fixes the problem by prescribing identical treatment for full and partial wind-up surplus distributions. This means that once the Bill becomes law, plan sponsors with pending partial wind-ups (and pending partial wind-up surplus distributions) will be able to take advantage of this modified surplus sharing regime and withdraw surplus by proving ownership or with the required level of member consent.

• Advisory Committees: Plan administrators must help in the establishment of such committees by distributing notices to members and retired members at the request of organizers (rather than directly providing organizers with member names and addresses - presumably to address privacy concerns). A new provision has also been added permitting prescribed advisory committee costs to be paid out of the pension fund. The nature and extent of such costs as well as any prescribed limitations will be dealt with by regulation.
• Plan amendments: Bill 236 previously required that members be provided with advance notice of all plan amendments, but in certain prescribed circumstances no notice would be required. This exception has been changed to clarify that in certain prescribed circumstances while notice must still be given, it may be given after the amendment is filed with the regulator. 
• Inspection of prescribed records: The previous provision in Bill 236 which prevented inspection of records if the Superintendent was of the opinion that “the disclosure could reasonably be expected to prejudice the economic interests of an employer or the competitive position of an employer” has been deleted. This is an unfortunate deletion which arguably fails to recognize an employer’s legitimate right to protect sensitive information from disclosure in reasonable and bona fide situations.
•  Phased retirement: These provisions were clarified, including to specify that they are only applicable to defined benefit plans. A provision was also added which requires administrators to approve a member’s phased retirement application that satisfies the section requirements.
• Grow-in benefits: Under Bill 236, while partial plan wind ups are to be eliminated, statutory “Rule of 55” grow-in benefits are to be provided to all members who terminate employment other than for cause. The effective date for this change has been delayed for six months from January 1, 2012 to July 1, 2012.
• Asset transfers: These provisions which provide for the transfer of assets and liabilities between plans on divestitures were clarified and, in particular, the window for the amalgamation of assets related to past divestments has been extended by two years to July 1, 2015.

While Bill 236 addresses a number of the issues raised in the Report of the Ontario Expert Commission on Pensions, many others, including defined benefit plan funding, still need to be addressed. The Ontario government indicated in the Budget tabled last month that these outstanding items would be addressed in the next round of amendments to the Pension Benefits Act, which are expected to be introduced sometime this fall.

In MTD Products Limited v. Baldin, the employer had decided to provide an unreduced early retirement benefit for one long-time employee – James Dobbie. The plan language provided that on early retirement, member benefits were to be reduced by 1/2 of 1% for each full month that the pension was paid prior to the “normal retirement date”. In order to accommodate Mr. Dobbie’s unreduced retirement benefit, it was necessary to amend the plan text.

The consulting firm engaged to draft the amendment suggested amending the plan to provide unreduced early retirement benefits for all members of the plan, and not just Mr. Dobbie. Due to cost considerations, the employer rejected this suggestion and understood that the plan was amended to provide early retirement to Mr. Dobbie only. (This understanding was consistent with the consultant’s instructions and internal notes).

Almost ten years later, the plan was partially wound up. Upon reviewing the partial wind-up report, FSCO asked the employer to confirm that all affected members who met the requirements for early retirement (or who would grow into them) had their benefits valued in the report. This was the first time that the employer learned that the “Dobbie Amendment” had been drafted such that it provided unreduced early retirement benefits to all plan members. The potential liability for funding the unreduced early retirement benefit was equal to approximately $5,700,000.

FSCO suggested that the employer apply to the Ontario Superior Court for an order limiting the application of the amendment to Mr. Dobbie alone. The employer made an application for rectification of the plan text.

Based on the evidence provided, the Court was satisfied that the purpose of the amendment was to solely benefit Mr. Dobbie. Among other things, the Court noted that during the 10 years since the amendment had been registered, the employer had operated on the understanding that Mr. Dobbie, and Mr. Dobbie alone, was entitled to the amendment entitlements. Additionally, this understanding was consistent with plan member information, including plan booklets distributed in 1995 and 2004 to members. After considering all of the evidence surrounding the amendment, the Court concluded that there was a mistake in the wording of the amendment and the employer’s intention was not accurately recorded in the plan. As a result, the Court granted the remedy of rectification.

This decision confirms that an employer may remedy improper plan documentation through rectification where the evidence clearly demonstrates that, by mistake, the plan documentation in question does not accurately reflect the original intention.

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.

Funding

• Subject to certain specified conditions, employers may use letters of credit in lieu of solvency payments. (Although not included in Bill C-9, it was previously announced that the maximum amount of any such solvency letters of credits would be capped at 15% of the plan’s assets – such limits will likely be introduced in future amendments to the PBSR, before this provision becomes effective.)
• Unless permitted by the Superintendent, amendments which would reduce a plan solvency ratio below a prescribed level will be void. (According to the earlier announcement, this level will be 0.85, however, it is to be set by future amendments to the PBSR.) 
• The Superintendent will have the authority to require filing of actuarial valuations and financial statements at “any intervals” it so directs.
• The Superintendent may appoint an actuary to prepare an actuarial report of a plan where it believes it to be in the “best interests” of plan members and former members to do so.

Plan Wind-Ups

• Employers will be required to fully fund pension benefits on plan termination and any overpayments will revert to the employer (i.e., the overpayments will not be considered “surplus” and therefore will not be subject to the surplus withdrawal requirements).
• Employer declared partial terminations will be eliminated (although the regulator will retain the discretion to order partial terminations).

Vesting

• Vesting of benefits will be immediate on commencement of plan participation, however, the two-year waiting period currently allowed before participation begins will be maintained.

Plans At Risk

• Where an administrator is insolvent (or otherwise unable to act) the Superintendent may remove the administrator and appoint a replacement.
• A framework will permit employers and members of plans to agree to a “workout scheme” (i.e., a short moratorium on deficit payments and changes to the pension arrangements) where the employer is unable to meet the statutory funding requirement.

Defined Contribution (DC) Plans

• Members entitled to an immediate pension may elect to receive a “variable benefit” (similar to Life Income Funds) from a DC plan.

Some of these changes, such as the permitted use of letters of credit for solvency funding, will provide (welcome) funding relief to plan sponsors. Yet other changes (in particular the wide latitude given to the regulator to order new valuation reports) could result in significantly higher funding obligations for plan sponsors, and should be viewed with caution.

Plan sponsors and administrators should also keep in mind that a number of items that were previously announced by the federal government were not included in Bill C-9. Many of these outstanding items, e.g. implementing a new solvency funding standard, permitting plans to consolidate past deficiencies each year, and revamping the federal investment rules, appear to require separate amendments to the PBSR. Sponsors of DC plans should also look for further amendments to the PBSA clarifying their duties and responsibilities, as previously announced.

In any event, it does appear that the federal government is moving ahead with its promise to reform its pension legislation – the full impact of such reform will not be entirely clear, however, until it has been completed.

In 2006, Alexander Lomas, a retired Rio Algom employee, commenced litigation against his former employer alleging that Rio had made improper amendments to its pension trust intended to provide the company with surplus ownership and contribution holiday rights contrary to its trust, contractual and fiduciary duties. The main purpose of the litigation was to force a surplus distribution to plan members - so Mr. Lomas took the position that if his claims succeeded, the court should order the wind up of the Rio pension plan to facilitate such distribution. However, when the Supreme Court of Canada (SCC) released its June 2006 decision in Buschau v. Rogers Communications Inc. (Buschau) Mr. Lomas had a problem. Buschau held that the courts do not have the authority to order pension plans to be wound up at the instigation of plan members, primarily because applicable pension legislation confers exclusive wind up jurisdiction on the pension regulators and on the employer sponsoring the plan.

While the role of trust law may well be limited in some respects, nothing in the two sets of reasons in Buschau seems to me to rule out resort to trust law when the facts make trust principles ‘applicable’ and what is applicable is to be determined on a case by case basis.

Many (including the dissenting Divisional Court judge) found the majority’s rationale difficult to accept, particularly since the alternative remedy would allow members to circumvent pension legislation by seeking a court order, and the SCC had rejected a similar alternative remedy requested by the plaintiffs in Buschau.

In overturning the Ontario Divisional Court’s decision, the Ontario Court of Appeal held that the kind of remedy sought by Mr. Lomas (a restorative mandatory injunction) is available to a plaintiff only to protect an existing right. Since both the reasoning in Buschau and the legislative scheme governing pension plan wind ups lead to the conclusion that Mr. Lomas, as a plan member, does not have the right to compel a wind up, a mandatory injunction to that effect is not available.

The Court of Appeal stated that under Ontario pension legislation, the courts have no original jurisdiction to order the wind up of a pension plan and that there is no difference between an order requiring an employer to wind up a pension plan and an order requiring an employer to commence wind up proceedings under the PBA. As there is no power in the court to order the former, there is no power in the court to order the latter.

In addition, the Court of Appeal questioned the Divisional Court majority’s finding (see quote above) that courts have some inherent power to terminate a pension trust based on trust law principles. In rejecting this finding, the Court of Appeal concluded that apart from the rule in Saunders v. Vautier (which had been rejected as inapplicable to pension plans by the SCC in Buschau ) it was unaware of any trust law principle that allows the court to terminate a trust before the purposes of the trust have been fulfilled.

This decision is an important step in the clarification of member rights in relation to plan wind ups and provides plan sponsors with confirmation that forced wind-ups of their pension plans will not be permitted, other than by the pension regulator in accordance with the enumerated grounds set out in applicable pension legislation. Members will not be permitted to facilitate their surplus distribution claims by instigating independent wind up proceedings. 

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.

The proposed solutions outlined by FSCO are a step in the right direction, and if implemented should help DB applications to be processed in a more timely manner. As FSCO correctly points out, however, the only way to truly streamline the regulatory process is through legislative reform. Bill 236 is a first step in this direction (see our December 10, 2009 and January 7, 2010 posts discussing pension reform in Ontario).

FSCO is inviting stakeholders to submit comments on the consultation paper, by February 10, 2010.

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).

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.

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.

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.

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.

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.

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.