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

In January 2010, the Financial Services Commission of Ontario (FSCO) released a consultation paper outlining proposals to streamline the regulatory review process for defined benefit (DB) applications (PDF). The proposals outlined in the most recent paper – an earlier consultation process had taken place in the spring of 2009 – are designed to lead to more accurate and timely processing of applications involving DB pension plans (including applications in respect of surplus withdrawals, wind ups, asset transfers, refunds of employer overpayments and refunds of member contributions).

The paper proposes several solutions to address problems inherent in processing DB applications:

• Incomplete applications: FSCO will create more standardized applications, and a specific process will be followed by FSCO to address non-compliant or incomplete applications. This is a welcome reform, in that FSCO is proposing that meetings or conference calls would be held to discuss incomplete applications. Currently, incomplete applications are often dealt with through an exchange of written correspondence between FSCO and the applicant, which can continue over months or even years.
• Resolution of prior transactions: FSCO will not delay processing a more recent application if a prior pending transaction does not significantly affect the subsequent application. This is also a welcome reform, since FSCO’s current practice is to delay processing an application if a prior application affecting the same pension plan is pending. If the pending application would have no direct bearing on the subsequent application, it makes sense for FSCO to process the subsequent application without delay.

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The Ontario Court of Appeal’s recent decision in Hydro One confirmed that the Superintendent may use a “subset analysis” when assessing the “significance” of plan member terminations for purposes of ordering a partial plan wind-up. The impact of this decision may be limited, however, if the amendments to the Ontario Pension Benefits Act (PBA) wind-up provisions included in Bill 236 are passed.

Currently, s. 69(1)(d) of the PBA gives the Superintendent the discretion to order a partial plan wind-up if a “significant” number of plan members are terminated as a result of a business reorganization. In the past, cases have held that the “significance” inquiry may be conducted on one or both of the following two bases: the absolute number of terminations or a percentage of the total number of active plan members. The Hydro One case considered a third scenario: whether the Superintendent can carry out the “significance” analysis based on the number of terminated members falling within a defined subset of plan members.

In Hydro One, there were different categories of plan members based on whether or not they were represented by unions. The absolute number of terminations was 73. As a percentage, the terminations represented 2% of the total plan membership (4000) and 18% of the category at issue. Based on the latter test, the Financial Services Tribunal held that the number of terminations was significant. (PDF) The Divisional Court upheld the Tribunal’s decision.

The Court of Appeal agreed with the Tribunal and the Divisional Court. Noting that the public policy and remedial objectives of the PBA require it to be given a “liberal interpretation”, and that the term “significant” is not defined under the PBA, the Court found that a flexible and contextual approach should be taken when assessing whether a “significant” number of plan members has been terminated, thereby triggering a partial wind-up order by the Superintendent. Not surprisingly, the Court concluded that a subset analysis was consistent with a the remedial nature of the PBA and the long line of authorities that have considered s. 69(1)(d).

The Hydro One case is likely one of the last disputes over the meaning of “significant” in s. 69(1)(d). The decision will continue to be relevant during the transition period while partial wind-ups are being phased out, but will ultimately be moot. (Under Bill 236, partial wind ups with an effective date prior to January 1, 2012 will be grandfathered, after which partial wind-ups will be eliminated.)

The elimination of partial wind-ups means that employers will no longer be required to distribute surplus out of the plan based on the test in s. 69(1)(d). However, the elimination of partial wind-ups is not a panacea. The trade off is that the other main benefit conferred on Ontario plan members by partial wind-ups – “grow in rights” – must in future be provided to all eligible involuntary terminations (other than for cause).

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On December 9, 2009 the Ontario government announced the first stage of a multi-step process to reform the province’s occupational pension system – the Pension Benefits Amendment Act, 2009 (Bill 236). The next stage is scheduled to be released in the spring of 2010.

It appears that the government is taking its cue from the Arthurs Report released one year ago, and rolling out legislation that provides some fixes to problems that have plagued the Ontario pension industry since the current pension legislation was enacted in 1987. The stated goal of the Arthurs Report was to balance the interests of employees and employers. Bill 236 seems to be tracking the recommendations in the Arthurs Report quite closely. As a result, some changes will be welcomed by sponsors; however, the proposals also contain enhancements for plan members that will increase benefit costs.

Here is a summary of the Bill with some initial thoughts on its key provisions.

1.  Elimination of partial wind ups, introduction of immediate vesting and extension of “Rule of 55” grow-in benefits to all plan members whose employment is involuntarily terminated (other than for cause)

• Partial wind-ups would be eliminated except for those with an effective date prior to 2012 (according to the Technical Notes). Partial wind ups with an effective date prior to 2012 would be grandfathered.
• Starting January 1, 2012, “Rule of 55” grow-in benefits would be extended to all eligible members whose employment is terminated by the employer (other than for cause), in addition to being available on full wind-up of a pension plan. Multi-employer/jointly sponsored plans will be permitted to opt-out of this requirement.
• All accrued pension benefits (past and future) will vest immediately.

2.  Forced annuitization eliminated

• Plan administrators would not be required to purchase life annuities for pension benefits related to partial wind-ups in progress. According to the Technical Notes, to take advantage of this amendment, provision must be made for the distribution of any surplus.

3. Facilitate plan mergers and asset transfers while protecting member benefit security

• Inter-plan transfers would no longer require the replication of exporting plan benefits,but the transfer could not result in a reduction of the commuted value of members’ benefit entitlements.
• Asset transfers between plans would continue to require the Superintendent's consent.
• If the transaction involves the transfer of pension entitlements from one employer's plan to another employer's plan, plan administrators could agree to give individual plan members the option of transferring or not transferring their pension benefit to the successor plan. Bargaining agents could also exercise this choice on behalf of their members.
• Similar to Quebec, a portion of any surplus related to the assets being transferred from the previous employer's plan would be transferred to the successor plan. The amount of the surplus that must be transferred will be prescribed in the regulations.
• Any entitlement to surplus on full wind-up of a plan would remain unless the pension benefits are fully annuitized such that the plan has no continuing obligations. 
• Until July 1, 2013, pension plans affected by past restructurings could enter into agreements that would allow current individual plan members to consolidate their pension benefits in a single plan through an asset transfer based on value. This could certainly benefit members whose pensions are currently split up between two plans; however, the cost of consolidating benefits under one plan could be significant. This could also be noteworthy for plan members in the broader public sector who have changed plans due to privatizations.

4. Increase transparency and access to information for plan members and pensioners 

• Pensioners (retired members) would be defined separately from "former members", and their right to participate in Pension Advisory Committees and receive specified information about their plan would be set out.
• Pension Advisory Committees would be easier to establish, allowing members and retired members to monitor plans on an advisory basis. Cooperation from plan administrators would be required.
• Plans would be required to give all members, including retired members, information about the funded status of the plan.
• Plan administrators and the regulator would be required to provide copies of specified documents, electronically or by mail, on written request.
• With certain limited exceptions, all plan amendments would require advance notice to members, retired members, and former members before registration. This would replace the current "adverse amendment" rules which only require plan administrators to inform affected members if an amendment would reduce future pension accruals or would otherwise adversely affect their pension rights.

5. Enhanced regulatory oversight

• The Superintendent would be granted the power to make interim orders in specified circumstances, for example, to order special valuations when there is evidence that a plan is at risk. The other example given in the Technical Notes indicates this power could be used (after partial wind-ups are eliminated) to order an employer to file a report after an event which significantly reduced membership in a plan. These orders would not be subject to the Notice of Proposal process and could be appealed directly to the Financial Services Tribunal.
• The Superintendent would be granted the necessary power to approve arrangements under the federal Companies' Creditors Arrangement Act and Bankruptcy and Insolvency Act.

6. Improve plan administration and reduce compliance costs

• A number of changes are intended to clarify and assist in plan administration. For example, the filing of specified documents could be waived for certain types of pension plans, and the existing time limit for refunding employer pension contributions made in error would be extended.
• Members would also receive the right in specified circumstances to transfer certain pension monies, for example, excess contributions, small pension payouts, to a registered retirement savings plan or a registered retirement income fund.

7. Surplus sharing settlements not subject to historical plan terms

• On a full plan wind up, employers would have the option of establishing legal entitlement to the surplus or entering into a surplus sharing agreement (similar to the federal system). The Technical Notes indicate that if a surplus sharing agreement is entered into, no review of historical plan documents would be required to obtain regulatory approval, provided the agreement complies with the existing membership consent and certain other requirements. This would eliminate member and sponsor concerns relating to compliance with s. 79(3)(b) of the current legislation where an employer enters into a surplus sharing agreement on a full plan wind up.
• It appears, however, that the “old regime” will continue to apply to surplus distributions on partial wind-ups as long as they last. This is ironic and extremely unfortunate. Arguably the clearest example of a consensus point among member and sponsor stakeholders was the removal of the requirement under s.79(3)(b) that the Superintendent determine that the plan provides for payment of surplus to the employer. Lobby efforts by members and sponsor representatives to address this concern (which has in the past caused expensive delays and added unnecessary uncertainty and complexity to the implementation of surplus sharing distributions) have been ongoing for many years prior to the Arthurs report. This aspect of the reform package is difficult to reconcile from a policy, practice or legal perspective and should be fixed before the Bill becomes law.

8. Phased retirement

• As announced in the 2009 Budget, pension plans would be permitted to offer phased retirement.

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The Ontario government filed Regulation 447/09, extending the surplus sharing regulation (under the Ontario Pension Benefits Act) for two years to December 31, 2011.  In addition, the regulations for Specified Ontario Multi-Employer Pension Plans have been extended for two years to 2012.

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The Supreme Court of Canada has granted leave in Burke v. Hudson’s Bay Company.

As you may recall, the case involved the sale of a division of the Hudson’s Bay Company (HBC) and the related transfer of pension plan members, along with assets equal to these members' liabilities, to the purchaser’s new pension plan. The transferred plan members commenced a civil action, arguing that they also were entitled to a pro rata share of the surplus in the HBC plan. Additionally, the transferred plan members sought an order requiring HBC to repay to the fund amounts that had been used to take contribution holidays and to pay plan expenses from 1982 to 1986.

At trial, the judge decided that not including surplus with the transfer of assets to the new plan amounted to a breach of trust, and ordered that a further sum of money be transferred from the HBC plan to the purchaser’s plan. However, the trial judge determined that HBC was entitled to use plan funds for paying plan expenses and taking contribution holidays.

HBC appealed the decision with respect to the transfer of surplus issue, while the transferred plan members cross-appealed the trial judge’s decision that plan expenses may be paid from the fund.

The Ontario Court of Appeal stated that the issue relating to the transfer of surplus could be resolved by determining whether the transferred employees had any entitlement to the surplus based on the plan documents at the time of the sale. Upon review of the plan documents, the Court held that the plan members, including the transferred members, were not entitled to the surplus, and the failure to transfer a portion of the surplus was not a breach of trust.

With respect to the plan expense issue, the Court of Appeal applied its decision in Kerry (Canada) Inc. v. DCA Employees Pension Committee, and held that since the plan text had been silent on plan expenses from its inception until 1985, when the plan was amended to explicitly authorize payment of administrative expenses from the fund, HBC was always permitted to pay plan administration expenses from the fund. Subsequent amendments permitting trustee and fund management fees to be paid from the fund were also valid.

The case is expected to be heard by the Supreme Court in late 2010.

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

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

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

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

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

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

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

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

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

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

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

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Much has been written on the Kerry case following its release by the Supreme Court in August 2009. The facts of the case are well known by now. But what salient points from the case should pension administrators and their advisors keep in mind? There are several, and in a nutshell, they are:

• No statutory or common law rule requires a plan sponsor to pay administrative expenses; rather, the plan/trust documents will be determinative.
• Silence in the documents does not imply that the sponsor must pay plan expenses. So long as nothing in the documents requires the employer to pay expenses, “reasonable” and “bona fide” expenses can be paid from the fund.
• “Exclusive benefit” language in a pension plan does not prohibit incidental benefits from accruing to others, including the pension plan sponsor.
• The payment of plan expenses ensures the plan can continue; it is therefore for the “exclusive benefit” of members that the expenses be paid from the fund.
• Expenses must be considered on a case-by-case basis in order to determine whether they are appropriately paid from the pension fund, the implication being that expenses incurred more for the benefit of the sponsor should not be paid from the fund.
• Whether the services being paid for out of the pension fund are provided by third parties or by the sponsor is “immaterial” and “artificial”, if the payment of expenses out of the fund is permitted and the expenses are reasonable and legitimate.
• There is no need for the contribution provision in the plan text to explicitly mention an “actuary” in order to permit actuarial discretion (i.e., taking into account the plan’s surplus position) when determining the required funding.
• There is no reason why a single pension plan can’t have DB and DC components whose members are beneficiaries of the same trust.Members have no right to require surplus funding; while a plan is ongoing they have no vested interest in the actuarial surplus which would prohibit the use of surplus to pay expenses or to take contribution holidays.

Kerry left unanswered one important question: if a pension plan funded through a trust requires the employer to pay the plan’s administrative expenses, can it be amended to permit the expenses to be paid from the fund? If so, is a broad power of amendment sufficient, or must the employer have reserved the power to revoke the trust at the time the trust was established? This issue will have to be decided in a future case.

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