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

Bill 236, the first stage of pension reform in Ontario, included amendments to the advisory committee provisions in the Pension Benefits Act. The amendments appear to be aimed at increasing the involvement of pension plan members in plan administration and are directed primarily at single employer plans. Although these provisions are not yet in force, plan administrators should begin considering how they may affect their workplaces.

The pre-reform PBA allows a majority of current and former members to vote to establish an advisory committee comprised solely of member representatives. The purpose of such a committee is to monitor plan administration, make recommendations to the administrator regarding administration and promote awareness of the plan. To date, advisory committees have not been very common – Bill 236 seems to be aimed at changing that.

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Earlier this year, we did a post on the Financial Services Commission of Ontario’s (FSCO) consultation policy on pension record-keeping . FSCO has recently released the final version of this policy, “Management and Retention of Pension Plan Records by the Administrator” (the Policy).

The Policy is important reading for pension plan administrators as it imposes a new requirement to create a document management and retention policy. It also contains requirements impacting other documents such as pension plan services agreements and even purchase and sale agreements. The Policy applies to all plans, big and small, defined benefit and defined contribution, single employer and multi-employer, etc.

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As we mentioned in an earlier blog post, Bill 236, the Pension Benefits Amendment Act, 2010, received Royal Assent on May 18, 2010.

While not yet in force, sections 23 and 24 of the Bill provide for immediate vesting of pension benefits, as compared to the current 2-year vesting period for post-reform benefits (post-1986 service), and “45 and 10” vesting for pre-reform benefits (pre-1987 service). With immediate vesting, all plan members will be entitled to a deferred pension upon termination of their plan membership.

Plan sponsors should begin considering now how to react to this change.

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Bill 236, Pension Benefits Amendment Act, 2010, received royal assent on May 18, 2010. As discussed in previous posts (from April 21, 2010 and December 10, 2009) Bill 236 makes a number of significant changes to the Ontario Pension Benefits Act, including:

• 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.

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Following several days of public hearings and receipt of many written submissions, on April 19, 2010 the Standing Committee on Finance and Economic Affairs reported on Ontario Bill 236, Pension Benefits Amendment Act, 2010, making a number of amendments to the Bill.

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.

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A recent decision of the Ontario Superior Court of Justice has confirmed that, in the right circumstances, a plan sponsor can remedy incorrect pension plan language by utilizing the equitable remedy of rectification.

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).

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Many compensation and pension actions require the approval of a company’s board of directors, or a committee of the board, and for good reason. Employers should not skimp on the finalization of corporate approval via signed and dated board or committee resolutions.

U.S. Case in Point: A federal judge in New York recently denied enhanced retirement benefits to the CFO that would have been due to him under the terms of an amended SERP because the board resolutions from seven years before his retirement seem to have never been finalized. The court ruled against the executive seeking benefits, despite the undisputed facts that the board had agreed “in concept” to the SERP enhancements and that two other executives had been paid out under the amended plan terms. The reason? Under the terms of the SERP, only the Board could amend the plan and the Board never formally approved the amendments.

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Later this month, the Supreme Court of Canada will hear an appeal from the British Columbia Court of Appeal’s decision in Withler v. Canada. The issue in Withler is whether a supplementary death benefit under a pension plan that is reduced for every year the plan member’s age exceeds a specified age violates the right to equality under section 15 of the Charter.

If the Supreme Court overturns the Court of Appeal decision and rules that this death benefit is discriminatory and contrary to the Charter, public sector plans which use age-based criteria to calculate certain benefits could find themselves facing a similar Charter challenge. Similarly, an adverse ruling by the Supreme Court could potentially be used in the private sector as a new basis to argue that the use of age-based criteria in pension plans violate provincial and federal human rights legislation.

The Withler case arose as a class proceeding, which was initiated by the surviving spouses of deceased members of the Public Service Superannuation Act (the PSSA) and Canadian Forces Superannuation Act (the CFSA). The spouses received a supplementary death benefit (SDB) upon the death of the member, the amount of which differed depending on the age of the plan member. Provisions in the PSSA and the CFSA permitted a 10% reduction in death benefits for every year the plan member exceeded age 65 (for the PSSA) or age 60 (for the CFSA). The surviving spouses argued that the reduction provisions constituted age discrimination, contrary to s. 15 of the Charter.

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A recent decision from the Ontario Human Rights Tribunal has confirmed that an early retirement package which was offered to employees who met certain age requirements did not contravene the Ontario Human Rights Code.

In Kovacs v. Arcelor Mittal Montreal, the employer decided to close a plant as a part of a filing under the Companies’ Creditors Arrangement Act. The employer had negotiated an early retirement package with its union. To be eligible for the negotiated early retirement program an employee had to satisfy one of the following requirements: (i) have 30 or more years of service; (ii) be older than age of 55 with 15 or more years of service; or (iii) be at least 52 years of age but less than 55 years of age with 25 or more years of service.

Mr. Kovacs, an employee at the closing plant, did not satisfy any of the eligibility requirements since he was 47 years old and had only 27 years of service. He launched a human rights complaint, arguing that he had been subject to discrimination on the basis of age.

The Tribunal noted that early retirement plans, which may contain eligibility requirements based on age, are common in unionized workforces and that they provide “superior benefits to older, long service employees; individuals who may experience greater difficulty in obtaining alternative employment if permanently laid-off.”

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Trustees and other fiduciaries are often described as having to act fairly in discharging their responsibilities to pension and health and welfare plan members. While most people have a strong sense of what is generally fair and unfair, the concept becomes more complicated when it is applied to the interests of a single member relative to a group. What may seem fair to an individual may be unfair to the group as a whole. In dealing with such situations, fiduciaries must take care to act honestly and in a way that is even-handed, having regard to what is fair and reasonable for the entire group of beneficiaries for whom they are responsible.

A recent decision of the Nova Scotia Supreme Court in Downey v. Cranston provides a useful example of this principle.

Terrence Downey, who had worked as a non-union longshoreman for 26 years on the Halifax waterfront before becoming a member of the union in July 1991, became permanently disabled following a workplace injury in December 1991. Mr. Downey claimed a disability pension under the Halifax Port ILA/HEA Pension Plan (the Pension Plan) and benefits under the Halifax Port ILA/HEA Health and Welfare Trust Fund Benefits Plan (the Welfare Plan), both of which he had become eligible to join as a union member, subject to satisfying certain minimum work requirements (300 hours of work in the year for the Pension Plan and 450 hours of work for the Health and Welfare Plan).

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Paul Litner's post Plan Communications: The New Battleground for Pension Disputes highlighted recent cases, which reinforced the need for employers to make accurate and timely pension plan member communications a top priority in plan governance and risk management. The recent Re Greyhound Canada Transportation Corp. and Amalgamated Transit Union arbitration, where the employer was found liable for failing to provide commuted value calculations to a member, is yet another case which highlights this need.

In this case the member in question had requested information on the commuted value of his pension with a view to retiring. However this information was never provided and he died the following year. The spousal benefit on his death was approximately $185,000; whereas, had he elected prior to his death to retire and take the commuted value of his pension he would have received approximately $261,000. The union then launched a grievance requesting that the differential between these amounts be paid to the spouse.

Based on his review of the case law, the arbitrator found that Greyhound was under a fiduciary duty to provide employees with the information in its possession “affecting their financial futures”, including commuted value calculations for those employees facing retirement. In addition, the arbitrator noted that the parties had negotiated a Letter of Understanding, dated January 1, 2008, which required Greyhound to provide the commuted value information. The Letter provided: “Effective January 1, 2008 an employee will once in their career and at retirement be provided with pension value information. This would include the commuted value.”

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The Financial Services Commission of Ontario announced that effective March 31, 2010 pension plan administrators will be able to file Annual Information Returns (AIRs) electronically. The electronic filing method will be optional in that plan administrators will still be permitted to file AIRs in paper format should they so chose.

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As I discussed in an earlier post, the Canadian Association of Pension Supervisory Authorities recently published a consultation paper entitled “The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment” (PDF). The comment period for the paper – which provides helpful guidance to pension plan sponsors and administrators regarding the regulators’ view of best practices for pension plan funding and investment – has been extended to April 30, 2010.

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The Financial Service Tribunal’s decision in Redmann v. Superintendent of Financial Services, (PDF) deals with the retention by pension plan administrators of accurate records relating to the termination of plan members' employment.  (FSCO has also recently recommended keeping pension plan records for an indefinite period in its proposed policy on record retention.) On the oral and written evidence before it in this case, the Tribunal decided against the former employee, concluding that he had received full settlement of his pension entitlement at the time of his termination.

The former employee, Redmann, participated in a defined benefit, non-contributory pension plan for more than ten years. In 1989, the plant closed and the pension plan was wound up. At the time of the wind-up, Redmann was entitled to receive either a monthly lifetime pension or to transfer out the commuted value of his pension. Redmann maintained that he had not requested a transfer of the commuted value to a locked-in RRSP, but rather had elected to collect a monthly pension in accordance with the terms of the plan.

The Tribunal found that there was no evidence which conclusively demonstrated that Redmann had or had not “cashed out” his pension twenty years prior. Notably, and of concern to pension plan administrators, the Tribunal cited its previous decision in Capaldi v. Ontario (Superintendent of Financial Services) (PDF) and the British Columbia Employment Standards Tribunal's decision in Hofer (Re) for the proposition that in the absence of proper records, the Tribunal must make its decision on the “best evidence”, which can include the employee’s records and oral evidence.

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The Pension Benefits Amendment Act, 2009 (Bill 236) proposes to extend “grow-in rights” to all Ontario pension plan members whose employment is involuntarily terminated (other than for cause). While this measure was recommended in the Report of the Expert Commission on Pensions (the OECP Report) and comes as no surprise, it is one of the more controversial aspects of the Bill.

Currently, grow-in benefits are only available to members affected by a full or partial wind-up whose age plus years of total service equal at least 55. Such persons are entitled to any early retirement benefits provided under the plan that they would have “grown into” had both the plan and their employment continued until their early retirement date.

The Bill proposes to extend these benefits to all members who are involuntarily terminated by an employer (other than for cause) on and after January 1, 2012. Jointly sponsored pension plans and multi-employer pension plans may elect to opt out of this requirement.

This proposed change is part of a general initiative in the Bill to treat plan members uniformly regardless of the circumstances of their termination (i.e., whether they are terminated in the normal course or as part of a broader program). Such consistency is a worthwhile goal, since it makes little policy sense to provide this benefit to employees terminated in a special situation (e.g., plant shut down or other reorganization) but not those terminated in the normal course. But consistency of treatment among plan members could also have been achieved by abolishing mandatory grow-in rights (for those who had not yet met the eligibility requirements).

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If you are responsible for the day-to-day administration of a pension plan, you should take the time to review a consultation policy on record retention released by FSCO just before the holidays.

Why should you be concerned?

Because the consultation policy imposes new obligations on plan administrators that will affect the day-to-day operations of all pension plans in Ontario. These measures are framed as “recommendations” but since they embody what FSCO considers to be the prudent approach to records retention they are, in effect, requirements. The consultation paper does not differentiate between big and small employers. The expectation seems to be that all plan administrators will comply with the policy.

The key recommendation is a requirement to establish a written record management and retention policy, which must address a prescribed list of items. These items include: the types of plan documents that must be retained and their retention period, where the documents will be stored, how the documents can be accessed, treatment of private and confidential documents, the process for maintaining a back up of the documents, the process for monitoring the documents and many other matters. These issues are also supposed to be addressed in any agreements with custodians and third party administrators.

FSCO’s consultation policy also addresses retention periods. FSCO recommends keeping copies of “general plan records” indefinitely, even after a plan is wound up because there is always a risk that an error was made in the wind up report. FSCO also specifies the information administrators are expected to retain in respect of terminated plan members, and recommends that employers take steps to educate plan members on the need to keep their personal records up to date and to maintain the flow of communication with terminated members.

FSCO is looking for comments on the consultation policy. If you have concerns, comments or questions, you should let FSCO know – FSCO wants to hear from all stakeholders.

The deadline for comments is February 26, 2010.

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The highly anticipated judgment of the Ontario Court of Justice in the Canadian Commercial Workers Industry Pension Plan (CCWIPP) trustee prosecution (PDF) was released on December 7th. The case centered on whether members of CCWIPP’s Board of Trustees, as administrator, and the Investment Committee (a subset of the Board of Trustees) breached their obligations under the Ontario Pension Benefits Act (the PBA) in relation to the investment and administration of CCWIPP funds.

The decision of the Court was a mixed bag for the defendants and for the Financial Services Commission of Ontario (FSCO): members of the Investment Committee were convicted of breaching the quantitative investment rules under the PBA, while the Board of Trustees was convicted of failing to supervise the Committee in this regard.  However, all defendants were found not guilty in relation to the offences of failure to exercise the care, diligence, and skill of a person of ordinary prudence in dealing with pension plan assets.

Increased Vulnerability of MEPP

By way of background, CCWIPP is a multi-employer, defined contribution (DC) pension plan for grocery, food service and production sector employees. At the time of the alleged offences, CCWIPP had assets of approximately $1.1 billion. In 2006, after a FSCO investigation, a variety of charges were laid against the pension plan’s Board of Trustees and Investment Committee members in connection with certain investments made with CCWIPP funds between 2002 and 2003. These investments were made in Caribbean real estate and other business ventures that the Crown alleged should not have been made given their risk.

At the outset of her 124 page decision, Madam Justice Beverly Brown provided an overview of the CCWIPP, noting that it was a multi-employer DC plan, which did not require employers to “top-up” any unfunded liability. Furthermore, as a multi-employer plan, the CCWIPP was not eligible for protection by the Pension Benefits Guarantee Fund, and any losses could result in devastating consequences for members and former members. Justice Brown held that this increased vulnerability of the CCWIPP members should be taken into consideration when interpreting and applying the PBA.

Meeting the Standard of Care

In terms of the standard of care, diligence, and skill expected from pension fiduciaries, the Crown alleged that the defendants did not make thorough, complete and independent investigations before making these investments. The Court noted that pension plan funds should be invested prudently, and that capital should not be placed unduly at a risk of loss. However, the Court also found that pension funds should be invested so that they are capable of generating a suitable rate of return and an element of risk may be appropriate in the circumstances.

The Court noted that although the standard of care for this Board of Trustees and Investment Committee was ordinary prudence (as there was no evidence they had special skills), it is incumbent on a board of trustees or investment committee with only ordinary prudence to obtain advice from consultants or experts to supplement their knowledge.

The Court held that expert evidence was required to provide necessary context to the facts of the case. Such evidence would help it understand pension industry standards on the investment of pension funds in various businesses, and assess what kinds of investments and risk would be appropriate or inappropriate for this pension fund. However, at trial, the Crown failed to adduce any expert evidence.

The Court held that it “simply did not have evidence to assist in reviewing and analyzing this raw material which is put before the court in evidence ... [and was] unable to understand how to apply the prudent person standard to the various transactions”. As such, the defendants were found not guilty in relation to the offences of failure to exercise the care, diligence and skill of a person of ordinary prudence in dealing with pension plan assets.

The Court also rejected the Crown’s argument that the defendants were responsible for demonstrating that they had conducted an appropriate investigation and acted prudently in making their decisions, since such an approach would amount to a reversal of the Crown’s onus to prove the charges. The judge stated, “the question is not whether the administrator can show prudent action, but rather whether the Crown has proven that the decisions were imprudent”.

Compliance with Quantitative Limits Required

Turning to quantitative limits, the Court noted that the PBA does not permit more than 10% of the book value of the pension plan assets to be invested in any one person (among other requirements) in order to limit a pension fund’s exposure to risk. In considering CCWIPP investments in a holding company that invested in Caribbean properties, the Court found that the total exceeded the 10% threshold, and therefore violated the quantitative limit rule under the PBA.  The Court held that the Investment Committee acted as the “administrator” of CCWIPP in making investment decisions, and as such, its members were found guilty of breaching the rule.

According to the Court, the purpose of the rule is to ensure adequate diversification of the investments of the pension plan, and as such, it captures any acts by the administrator which result in the holdings of the plan being in excess of the limitations. The Court also rejected the defence of due diligence, given that there was no evidence that the members of the Investment Committee turned their minds to the quantitative limits.

Delegated Duties Still Require Adequate Supervision

Finally, in terms of delegation by the Board of Trustees to the Investment Committee, the Court held that while delegation of investment of the pension fund is permitted under the PBA, the administrator is obligated to supervise the agent investing the funds in a prudent and reasonable manner. On the facts, the Court found that the CCWIPP Board of Trustees failed to prudently and reasonably supervise the members of the Investment Committee relating to the quantitative limits, and convicted the members of the Board of Trustees of breaching Section 22(7) of the PBA in this regard.

The defendants will be sentenced in January 2010. They are each liable for a fine of up to $100,000.

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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 Canadian Association of Pension Supervisory Authorities (CAPSA) recently published a consultation paper entitled “The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment” (PDF). The paper provides helpful guidance to pension plan sponsors and administrators regarding the regulators’ view of best practices for pension plan funding and investment, including a summary of important legal concepts such as the “prudent person rule”, and a description of the differing roles of the plan sponsor and the plan administrator.

Emphasis on Funding and Investment Procedures

The paper places tremendous importance on the process to be followed by pension plan sponsors and administrators in relation to their pension plan funding and investment activities. A key element of this process is the "prudent person rule", which serves as the guiding principle for all investment decisions, and essentially requires that a pension plan administrator exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person. In other words, the focus is on the methods followed by the administrator, and not simply on the result achieved.

According to the paper, it is essential that plan sponsors and administrators document their funding and investment procedures, as part of overall good governance, and in order to be able to satisfy the regulator in the event of a regulatory review. Evidence of the processes followed by the sponsor and administrator would also assist in putting forward a strong defence, should there be litigation over the pension plan’s funded status or the employer’s level of contributions.

Sponsor vs. Administrator Role: Which Activities Attract Fiduciary Duties?

The paper provides helpful insight into the regulators’ view regarding which aspects of pension funding and investment attract fiduciary duties and which do not. Activities that are required to be carried out by the plan sponsor in its capacity as such do not attract fiduciary duties, and decisions may be made based on the business’ best interests, subject to the obligations of good faith. On the other hand, activities that are required to be carried out by the plan administrator do attract fiduciary duties, and decisions must be made in the best interests of the plan and its members.

Generally, in single-employer pension plans, the employer has a dual role of plan sponsor and plan administrator, and the paper therefore describes which activities are to be performed by the sponsor (e.g., making necessary contributions to the fund) and which are to be performed by the plan administrator (e.g., investing the assets of the fund).

Interestingly, according to CAPSA’s paper, the establishment of a funding policy is a sponsor task. For example, a funding policy might set out the circumstances in which the sponsor will contribute amounts to the pension fund in excess of the minimum recommended by the actuary in the valuation. Prior to the publication of this paper, it was not always clear whether the regulators viewed that function as being part of the sponsor’s duties or the administrator’s duties. I note however that one of the specific issues on which CAPSA has asked for comments is the role of the plan administrator regarding the funding policy.

While not legally binding, the CAPSA paper provides a good summary of the regulators’ views on best practices in the area of pension funding and investment, as part of an overall pension governance strategy. After the consultation process, CAPSA plans to prepare three guidelines: 

• best practices for funding policies;
• best practices for investment policies; and 
• examinations by pension regulators of funding and investment processes.

Comments on the consultation paper will be accepted by CAPSA until January 29, 2010.

The implications of the CAPSA paper will be discussed further at our upcoming pensions seminar on Wednesday, December 9th. 

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A $7.5 million class action settlement was recently reached in the Jeffrey Mine case. The settlement brings an end to the $21 million class action lawsuits brought by the members of two pension plans against the pension committee members (acting as plan administrators) -- TAL Global Asset Management Inc. and Buck Consultants Limited.

The plans in this case were wound up after the mining company filed for bankruptcy in 2002. There was a $35 million deficit at the time and the benefits had to be reduced accordingly (i.e., by more than 35%).  The members alleged that the deficit was attributable to the imprudent investment practices of the plan administrator and its advisors (specifically, investing too heavily in equities).

The two class action lawsuits were certified in January 2006 (see judgments in French only: Delorme J. (1) and Delorme J. (2)) and a hearing was scheduled for the fall of 2010.

While the settlement is welcome news for the plan members, it leaves some interesting legal issues unresolved. The case could have provided important judicial guidance as to what constitutes a prudent pension plan investment policy.  Also unresolved is the issue of whether plan members have a direct action against third parties such as investment managers and actuaries. We may have to wait for other cases to address these issues.  For example, it will be interesting to follow the Gourdeau case, in which the Quebec Superior Court will have to determine whether certain investments were prudent in light of the investment policy and the rule of diversification.

TRADUCTION:

L’affaire Mine Jeffrey est réglée pour 7,5 $M

Une entente de règlement des recours collectifs dans l’affaire Mine Jeffrey a récemment été conclue pour une somme de 7,5 $M. Ce règlement met fin aux recours collectifs intentés par les participants de deux régimes de retraite contre le comité de retraite (agissant à titre d’administrateur), TAL gestion globale d’actifs et Les Conseillers Buck Limitée leur réclamant une somme de 21 $M.

Les régimes de retraite concernés dans cette affaire ont été terminés suite à la faillite de cette compagnie minière en 2002. À ce moment, le déficit des régimes s’élevait à 35 $M et les prestations aux membres ont dû être réduites en conséquence (i.e. réduction de plus de 35 %). Les membres alléguaient dans leurs demandes que ce déficit résultait des pratiques imprudentes des administrateurs du régime et de leurs conseillers pour le placement des fonds de la caisse de retraite (notamment, en permettant une trop forte part de placements en actions).

Les deux recours collectifs ont été autorisés en janvier 2006 (voir les jugements : Delorme J. (1) et Delorme J. (2)) et leur audition au fond était fixée à l’automne 2010.

Si ce règlement constitue une bonne nouvelle pour les participants, des questions intéressantes soulevées dans ces recours demeureront sans réponse. Ils auraient pu nous donner une meilleure idée de ce que la cour considère être une politique de placement prudente. La question de savoir si les participants à un régime de retraite ont un droit d’action directe contre des tiers tels que des gestionnaires de placements et des actuaires reste aussi en suspens. Nous devrons probablement attendre d’autres jugements pour une analyse de ces questions. Par exemple, il sera intéressant de suivre l'affaire Gourdeau dans laquelle la Cour supérieure du Québec pourrait devoir décider si certains placements étaient prudents compte tenu de la politique de placement et de la règle de diversification.

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Recent legal developments have reinforced the need for employers and plan administrators to make accurate and timely pension plan member communications a top priority in plan governance and risk management.

Over the past year, there have been at least four reported court cases where the determination of an employer’s (or plan administrator’s) potential liability in relation to a pension plan was based largely on its communications with plan members.

In Kraft Canada Inc. v. Pitsadiotis, the administrator was able to successfully use evidence of its past communications with members regarding the plan terms to support a claim for rectification of the plan text with the intended pension promise. Specifically, the court found that past communications to members supported the administrator’s claim that a change to the plan text was made in error, and as a result ordered that the error should be corrected to reflect the intended plan terms, as communicated to members.

In Desjardins v. General Motors du Canada Ltée, a Quebec court noted that the plan administrator had held information sessions and distributed brochures explaining certain plan amendments to plan members. Based on this evidence, the court concluded that the administrator had not breached its duty to inform certain members about amendments permitting the buyback of past service.

In two other cases, employers were found liable for providing incorrect information or failing to provide necessary information about the plan to its members.

For example, in McLean v. Alberta (Minister of Justice), the employer mistakenly told a prospective employee that he could transfer pensionable service with his former employer into the employer’s pension plan. The Court ruled that the employee had been employed on the basis of the employer’s pension representation and awarded him damages, amounting to almost $300,000, in lieu of crediting him with the pensionable service with his previous employer. While such claims are typically based on negligent misrepresentation, the ruling in this case suggests that there are different legal remedies that courts may invoke to ensure that representations made by employers to their employees in relation to pension plans are legally binding.

Finally, in Health Employers’ Assn. of British Columbia and B.C.N.U., an arbitrator held that the employer had breached its duty under the collective agreement, as well as its duty of care, when it failed to tell an employee that she was eligible to join the plan once she began working part-time. The employee was awarded an amount as damages which was equivalent to the sum she had paid for the purchase of past service when she was a part time employee but not a member of the plan.

Concerns about plan member communications have not escaped further scrutiny by legislatures as well. Most recently, the federal government’s announcement regarding pension reform included a proposal to enhance the disclosure requirements for plan members. Specifically, the government intends to require pension plan administrators to provide additional information in annual statements and to expand the recipients of such statements to include former members and retirees.

Employees and plan members will typically rely on communications they receive from their employer (or the plan administrator) for information about their pension plan. Accordingly, it should not be surprising to note the trend in the case law towards increased litigation based on such communications and/or the duty of an employer/administrator to communicate information about the plan in a timely and understandable way.

Although defined benefit plans were the focus of much of the legislation and case law discussed above, these general legal principles applicable to plan communications will equally apply to capital accumulation plans, including defined contribution plans and group RRSPs.

What can employers and/or administrators do to improve their governance practices and fulfill legal duties in relation to plan communications?

First and foremost, plan administrators and employers will have to ensure that they meet whatever disclosure requirements are set out in the applicable pension standards legislation (as noted above, in certain jurisdictions such requirements may soon become more onerous). However, as evidenced by the recent case law, an employer’s (or administrator’s) legal obligations do not end with the legislation, as plan member communications (whether they be annual statements, member booklets or verbal representations) can form the basis for a legal action (as can a failure to communicate information about the plan).

Accordingly, those persons vested with responsibility for overseeing the operation of a plan should consider making a legal review of communications a regular part of their governance and risk management processes. 

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On November 5, 2009, Bill 48 (PDF) received Royal Assent and amended the Nova Scotia Pension Benefits Act to accommodate phased retirement.

Phased retirement occurs when a plan member receives a portion of their pension, while at the same time continuing to accrue pension benefits under the same plan. The amendments to the Nova Scotia Act permit an employer to offer phased retirement to eligible plan members by allowing payments of up to 60% of an accrued pension without having to retire and with or without a reduction in their work hours.

This announcement brings Nova Scotia pension legislation in line with other jurisdictions, such as the Federal, Alberta (PDF), British Columbia, Quebec, and Saskatchewan (PDF) governments, which have adopted similar legislation and/or policies to allow phased retirement.  Based on the Ontario Budget announcement on March 26, 2009, it is expected that Ontario pension legislation will also be amended to permit similar phased retirement programs.

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The Canada Revenue Agency has updated the rates for money purchase, registered retirement savings, deferred profit sharing and defined benefit limits, which may be used to calculate pension adjustments, past service pension adjustments and pension adjustment reversals, as well as the Year's Maximum Pensionable Earnings (YMPE).

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The decision of the Ontario Court of Appeal in Richardson Estate v. Mew earlier this year demonstrates a judicial reluctance to interfere with the designation of a beneficiary under a life insurance policy. 

On the facts, Ms. Ferguson, the widow of Mr. Richardson, claimed the proceeds of a life insurance policy that named Mr. Richardson’s former wife as the beneficiary.  Ms. Ferguson and Mr. Richardson married in 1992 after the dissolution of Mr. Richardson’s first marriage of 26 years.  Following the first marriage, Mr. Richardson continued to pay premiums on a life insurance policy with his former wife designated as the beneficiary.

The Court found that the beneficiary designation under the life insurance policy took priority over the separation agreement under which Mr. Richardson and his former wife exchanged mutual releases and renounced all rights in each other’s estate.  Notably, the Court held that general expressions in releases are not effective to deprive a beneficiary of rights under an insurance policy, and that such general language does not amount to a formal declaration within the meaning of the Ontario Insurance Act. 

Although unnecessary to decide the case, the Court of Appeal went on to consider Ms. Ferguson’s argument that she was granted a power of attorney for property by Mr. Richardson, and could have changed the beneficiary designation in her favour before Mr. Richardson’s death.  The Court disagreed, stating that as a fiduciary, Ms. Ferguson could only act for the donor’s benefit, and changing the beneficiary of the policy could not be said to be for Mr. Richardson’s benefit.

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