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

In March of 2009, Mr. Littlechild transferred his RRSP to London Life Insurance Company, applied for a segregated fund policy and designated Ms Orpin, his spouse, as the beneficiary of the policy. 

On March 14, 2011 the deceased executed a new will, under which he left his estate to his two adult sons. On March 15, 2011 the deceased signed a change of beneficiary designation with London Life, by which he deleted Ms Orpin and designated his sons as the beneficiaries of the London Life policy. On March 25, 2011 the deceased executed a new will, leaving his estate to Ms Orpin. The will included very broad language regarding his investments, as follows:

III. I HEREBY DESIGNATE my spouse, LOUISE CLARE ORPIN as the sole beneficiary of all moneys that I may have at the date of my death in any registered retirement savings plan, registered retirement income fund, registered pension plan, registered investment fund or any other similar device. I DIRECT my Trustees to make all necessary arrangements to transfer such funds to my spouse as soon as is reasonably practicable following the date of my death.

Mr. Littlechild did not, however, contact London Life to change the beneficiary designation for the London Life policy – his sons remained the designated beneficiaries on file with London Life.

The Court first had to decide whether the investment held by London Life should be characterized as a Registered Retirement Savings Plan or RRSP, in which case the Ontario Succession Law Reform Act would apply to beneficiary designations made in respect of the investment, or whether it should be characterized as a policy of insurance, in which case the Ontario Insurance Act would apply. The Court examined the policy and held that it was “an insurance contract based on the life of the insured”, and hence the Insurance Act applied.

Under the Insurance Act, beneficiary designations may be made or revoked by a “declaration”, which in turn is defined as “an instrument signed by the insured”. An “instrument” includes a will. Therefore beneficiary designations may be made or revoked by will. In order to be effective, the declaration must “identify the contract” or “describe the insurance or insurance fund or part thereof”.

The issue, therefore, was whether the wording in the will, shown above, sufficiently identified the policy held at London Life such that it designated Ms Orpin as the beneficiary of the policy and revoked the designation in favour of Mr. Littlechild’s sons.

The Ontario Superior Court held that while the will did not specifically refer to an “insurance policy”, the words used were sufficient to constitute a declaration for purposes of the Insurance Act.

[T]he testator implicitly revoked the prior designation of the life insurance policy and designated the applicant as the person for whose benefit the insurance money was to be payable.

The Court held that Mr. Littlechild, in using such broad wording in his will, including the phrase “or any other similar device”, intended to include all moneys held in investment vehicles, including the policy at London Life.

Since Mr. Boys had belonged to the Shoppers Plan for such a short period, his basic pension entitlement under that plan qualified as a “small pension”. While Mr. Boys elected a deferred pension under the Imasco plan and wanted to make a similar election under the Shoppers Plan, Shoppers insisted that he commute his small Shoppers Plan pension to a lump sum cash payment.

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.

The key elements of the proposed PRPP tax rules are as follows:

• Eligible PRPP administrator - defined as a resident Canadian corporation licensed to administer a PRPP under federal or provincial PRPP legislation.
• No employer-employee relationship required - employees whose employer has no involvement with the PRPP, as well as self-employed individuals, are eligible to participate. 
• PRPP contributions - by employers, employees and self-employed individuals will generally be deductible for tax purposes, subject to prevailing RRSP contribution limits available for the year, 
  • Employers will be permitted to make direct, deductible, contributions to a PRPP in respect of an employee (like RPP contributions) with no required minimum, however, to prevent over-contributions in relation to the member’s RRSP limit where an employer participates, annual employer PRPP contributions in respect of an employee will be limited to a maximum of the RRSP dollar limit for the year, unless the employee directs the employer to contribute more than this amount;
  • Since PRPP contributions will be made under a member’s available RRSP limit, there will be no pension adjustment reporting requirement for an employer in respect of employer and employee contributions
• Immediate vesting - of employer PRPP contributions will be required.
• No “qualified investment” rules for PRPPs - instead, some general rules will apply to address diversification and self-dealing risks,
  • the administrators of “large” PRPPs will be required to avoid intentionally acquiring investments in which a member has a significant interest and to take reasonable precautions to avoid concentrating more than 10 per cent of plan assets in a particular business (or non-arm’s length group of businesses);
  • “small” PRPPs (generally those with fewer than 10 unrelated employers participating) will be required to comply with these two rules as well, and will be required to avoid holding investments in participating employers. 
• Transfer rules – existing rules for defined contribution (DC) RPPs (governing transfers between RPPs, RRSPs, RIFs, etc.) will, with some exceptions, generally apply to a PRPP.
• Pension payment or “decumulation” options (i.e., purchase of a life annuity, transfer of PRPP account funds to an RRSP or RRIF, or payment of variable RRIF benefits) - from the member’s PRPP account will be limited to those currently available to DC RPPs.
• On death - a deceased PRPP member’s spouse or common-law partner will be permitted to, 
  • become a successor PRPP member, taking over ownership of the deceased member’s PRPP account funds and making ongoing decisions in respect of those funds as a member of the PRPP; or
  • alternatively, will be permitted to transfer the PRPP funds to his or her own RRSP, RRIF, PRPP account or RPP account, or to use the funds to acquire a qualifying annuity - these latter options (plus others) will also be permitted for an infirm financially dependent child or grandchild of the deceased member.
• Goods and Services Tax/Harmonized Sales Tax (GST/HST) rules under the Excise Tax Act - will be amended to ensure that PRPPs are subject to the same GST/HST treatment as RPPs.

It is proposed that these changes come into force at the same time as Bill C-25. The government has invited interested parties to submit comments on the consultation package by February 14, 2012, following which legislation will be introduced “at an early opportunity”.
 

Bill 96 introduces significant changes to Nova Scotia’s pension regime. Many of these changes closely mirror the amendments recently made to the Ontario Pension Benefits Act by Bill 236 and Bill 120, including:

• defining “retired members”, thereby creating rights for a new group of plan participants;
• introducing immediate vesting;
• permitting plans to offer phased retirement options;
• permitting prescribed employers to use letters of credit to fund solvency deficiencies;
• allowing for the use of jointly sponsored pension plans and target benefit plans;
• allowing employer contribution holidays when the plan is in surplus, unless prohibited by the plan or the funding documents for the plan;
• clarifying the requirements with respect to asset transfers between pension plans;
• providing that surplus may be paid to an employer when it has reached an agreement with two-thirds of the plan members (or a union on behalf of such members) and a prescribed number of former members, retired members and others or by court order; and
• permitting the payment of “reasonable” plan administration expenses from the plan fund unless such payment is prohibited or the payment of fees and expenses is otherwise provided for in the plan or funding documents for the plan.

While these reforms will bring Nova Scotia’s pension regime closely in line with Ontario’s, certain differences will continue to exist between Ontario’s and Nova Scotia’s pension legislation. Most notably, partial plan wind ups will continue to be permitted in Nova Scotia, whereas they are to be phased out in Ontario after a transition period.

Further, Nova Scotia is not following Ontario’s expansion of grow-in rights to all plan members whose employment is involuntarily terminated (except where there has been wilful misconduct, disobedience or wilful neglect). Nova Scotia will continue to require grow-in rights to be provided on the partial or full wind-up of a plan, however, in Nova Scotia’s pension regime there is no requirement to pre-fund such benefits and the full amount of all pensions, deferred pensions, ancillary benefits and other benefits must be paid prior to grow-in benefits in the event of full or partial wind-up.

We expect Nova Scotia to amend the regulations to their pension legislation in order to clarify the “prescribed requirements” for many of the amendments discussed above. Since Nova Scotia followed Ontario’s amendments to its pension legislation, they may very well continue to look to Ontario’s reforms for guidance in this regard. We look forward to reviewing Nova Scotia’s regulations in the future and will keep you informed as to the progress of pension reform in Nova Scotia.
 

In 2009, Indalex Limited (Indalex) obtained creditor protection under the Companies’ Creditors Arrangement Act (CCAA) and debtor-in-possession (DIP) financing pursuant to a CCAA court order which granted super priority status to its DIP loan ahead of other creditors. A sale of Indalex’s assets was approved by the CCAA court, and the monitor was directed to make a distribution to repay the DIP loan from the proceeds of the sale. The sale of the assets was opposed by pension claimants who argued that assets equal to the entire amount of the funding deficiencies under the company’s pension plans were deemed to be held in trust and should be remitted to the plans in priority to the DIP loan repayment.

The Ontario Court of Appeal held that:

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

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

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

These measures were due to expire at the end of 2011. Considering the historically low interest rates now prevailing and the mixed investment returns over the last few years, many DB plan sponsors would be placed in a very difficult situation if they were required to perform their next valuation in accordance with the regular solvency funding rules.

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

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

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

Further Pension Reform on the Horizon?

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

What is a PRPP?

A PRPP is a new type of pension plan, which is being proposed by the federal government to address the current “gap” in Canada’s retirement system. The stated intent of the PRPP is to take advantage of economies of scale by providing employers, employees and the self-employed with the option of participating in a “large-scale and low-cost” defined contribution pension plan, and thereby enable Canadians to save more for their retirement.

Under Bill C-25 employers would not be responsible for the administration of a PRPP. Rather, PRPPs would be administered by an “administrator”, being a holder of a licence issued under Bill C-25 or an entity so designated by the Superintendent of Financial Institutions. While an employer must enter into a contract with an administrator to provide a PRPP to a class or classes of its employees, Bill C-25 clearly states that employers are not liable for the acts or omissions of the administrator.

Who Can Participate in a PRPP?

While the PRPP was originally touted as a cross-Canada solution, the federal government indicated in its press release that “provincial enabling legislation” and changes to tax legislation would still need to be introduced.

Further, Bill C-25 makes it clear that (subject to limited exceptions) it only applies to members of PRPPs who work for federal undertakings or businesses in “included employment”. The Bill does, however, allow the federal government to broaden the scope of PRPPs to other Canadian jurisdictions by entering into bilateral and multilateral agreements with the provinces. Such agreements are stated to have the force of law and to prevail over any provision of Bill C-25 and its regulations to the extent of any inconsistency or conflict.

What is the Process for Establishing/Administering a PRPP?

Bill C-25 is a “stand alone” Act, in that it sets out a detailed regime specifically for the establishment and administration of PRPPs. A number of the provisions in Bill C-25 address issues that are also found in other pension standards legislation, including:

• Registration/Plan Amendments: Similar to other federal pension plans, a PRPP must be registered and plan amendments must be filed with the Superintendent, however, the Bill makes it clear that PRPPs are not registered pension plans under the federal Pension Benefits Standards Act (PBSA) or RRSPs under the Income Tax Act (the ITA).
• Minimum Standards: There are minimum standards provisions, including provisions relating to membership, contributions, variable payments, standard of care, locking-in, pre-retirement death benefits, rights to information, termination/wind-up and marriage breakdown. 
• Member Investments: The Bill contains a limited form of “safe harbour” provision, which is similar to the one found for registered defined contribution pension plans in the PBSA. It specifies that if members are permitted to make investment choices, they must be offered “investment options of varying degrees of risk and expected return that would allow a reasonable and prudent person to create a portfolio of investments that is appropriate for retirement savings” as well as a default investment option should they fail to make an election. If an administrator meets these requirements (and any further requirements to be prescribed) it will be “deemed to comply”. 
• Contributions: Employers need not contribute at all to a PRPP and members may, after notifying the administrator, set their contribution rates at 0%.
• Enforcement and Offences: Directions of the Superintendent against the administrator, employer or other persons may be enforced through a process as if they were an order of the Federal Court. Contravention of Bill C-25 may lead to prosecution and penalties, however, there is an express due diligence defence.

Other provisions in Bill C-25 address issues specific to PRPPs, for example:

• Administrator/Employer Relationship: As noted above, there is a clear distinction between the plan administrator and the employer. In addition, Bill C-25 sets out a number of requirements regarding the contract to be entered into by the employer and the administrator of the PRPP, including a requirement that the administrator notify the Superintendent should the employer fail to comply with the contract.
• Limitation of Liability: While Bill C-25 expressly states that employers are not liable for the acts and omissions of the plan administrator, it is clear that the employer can be held liable for its own statutory contraventions or breaches of contract. Although Bill C-25 does not expressly impose a standard of care on the employer’s conduct, many employers were looking for express acknowledgement that they are not in any way acting as fiduciaries in connection with the establishment and operation of the PRPP. 
• Low Cost Plan: Administrators must provide the PRPP at a “low cost” to members.
• Plan Termination: Only the Superintendent or administrator may terminate a PRPP. The Superintendent may also revoke the registration of a PRPP, where an administrator fails to comply with the Superintendent’s directions.

Next Steps

It is clear that there are still a number of hurdles to overcome before PRPPs become a reality in Canada.

In the meantime it should be remembered that not everyone is pleased with the PRPP model. Supporters praise it as a cheaper, more widely available and effective means for accessing the defined contribution pension system; filling a gap not addressed by RRSPs and “traditional” employer-sponsored retirement savings arrangements. Detractors point to concerns over the actual take up among private sector employers and question whether the “gap” may be more effectively addressed through expansion of the CPP/QPP.

Bill C-25 largely only applies to federal workers, and the provinces would still have to pass their own enabling legislation. Such legislation will be required to deal with a number of important issues, including the extent to which PRPPs will provide for auto-enrolment, subject to opt out. Further, amendments to the ITA would also be required – the federal government has indicated that such amendments are “under development”. In addition, regulations under Bill C-25 must be passed to deal with licensing and a host of other issues.

Assuming that these steps are taken by the federal and provincial governments, it will be interesting to see the level of interest in PRPPs and whether they will in fact become a preferred alternative to today’s capital accumulation plans.

Pension Plan Prudent Investment Practices Guideline

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

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

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

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

Pension Plan Funding Policy Guideline

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

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

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

Practical Implications

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

Background

Mr. Jarman was an Air Canada pilot who participated in two Air Canada pension plans, a defined benefit registered pension plan and an SRP. It appears from the judgment that the SRP was a non-registered supplemental plan. At issue in this case was whether the payment due to Jarman’s former spouse from the SRP was subject to provincial family law legislation, and consequently payable directly from the Air Canada SRP.

Air Canada took the position that the Air Canada SRP was not governed by the British Columbia Family Relations Act (the FRA) and that their administrative policy should apply. This administrative policy placed the onus on the plan member, or potentially his/her new spouse in the case of survivor benefits, to pay a former spouse his/her entitlement (i.e., the former spouse would not be paid directly from the Air Canada SRP).

The B.C. Supreme Court began its analysis by noting that the definition of “pension plan” in the federal Pension Benefits Standards Act, 1985 (the PBSA) (being the statute applicable to Air Canada's registered pension plans) includes a “supplemental pension plan”. The Court then noted that under the PBSA, pension plan benefits are “subject to the applicable provincial property law”. Since “provincial property law” is defined in the PBSA to include property division on marriage breakdown, the FRA was held to apply to Air Canada’s SRP. As a result, Mr. Jarman’s former spouse was entitled to have her share of the SRP paid directly to her by Air Canada.

What Does This Case Mean for Administrators of Supplemental Plans?

Section 28.5 of the regulations to the PBSA (the PBSR) states that an SRP is exempt from the application of the PBSA if the terms of the pension plan to which the SRP is supplemental entitle all members of the SRP to benefits at least equal to the maximum benefit or contribution limit under the federal Income Tax Act (the ITA). SRPs are typically established as “top-up” plans for higher-earning individuals who are limited by the ITA in the amount of benefits they can receive out of the registered plan. If the SRP only provides top-up benefits for such individuals, then it will be exempt from the PBSA, and thus the applicability of provincial family law legislation in circumstances involving marriage breakdown of a member of the plan will not flow from the requirements of the PBSA.

Despite certain SRPs being exempt from the application of the PBSA by virtue of section 28.5 of the PBSR, however, plan administrators should still review their obligations under the applicable provincial family law legislation itself. For example, the FRA appears to apply to all supplemental plans provided to employees in B.C.. Therefore, even if an SRP provided to B.C. members is not subject to the federal pension legislation, nevertheless the administrator will be required to administer the pension split pursuant to the requirements of the provincial family property legislation itself.

These forms are to be used by plan members, their spouses/former spouses and plan administrators during most of the steps in the process. For example, there are forms for: 

• applying to the plan administrator for the “imputed value” or “family law value” of the pension;
• the administrator advising the applicant if an application is incomplete; 
• providing a statement of the imputed value of the pension to the applicant -- there are different versions of these forms depending on the type of plan (e.g., defined benefit or defined contribution) and the status of the member (e.g., active or retired); and
• requesting the plan administrator to transfer a former spouse’s share of a pension or to divide a retired member’s pension, or to advise that there will be no pension division.

One form that appears to be missing is a form for the plan administrator to advise the member and the former spouse of the completion of a pension transfer or division, which could include information such as the amount transferred to the former spouse and the amount of the member’s adjusted pension going forward.

While FSCO has indicated that the forms may be amended between now and the December 31, 2011 deadline, they have also stated they do not expect to make any “material changes” to the forms.

To provide plan administrators and members with further guidance, FSCO has posted instructions and questions and answers related to the forms. FSCO has also indicated that they are in the process of developing additional materials, including questions and answers that will clarify transitional issues.

We’ll discuss these forms further and, more generally, the practical implications of the new pension division regime for plan administrators at an upcoming webinar on Wednesday, November 9, 2011. For more information, please contact Vaughna Mackenzie at seminars@osler.com.

Background

Hudson’s Bay Company (HBC) closed its defined benefit (DB) plan to new members in 1988. In 1994, HBC re-opened the plan to employees of subsidiary companies who became members of a defined contribution (DC) component that was added to the DB plan. At the same time, HBC began using surplus in the plan to take contribution holidays with respect to the DC component of the plan.

The members of the original DB plan commenced a class action, arguing that HBC improperly used the surplus to pay the employer contributions to the DC plan. At trial, the judge ruled that while HBC was entitled to use the surplus to pay its contributions to the DC plan, the DB plan members were entitled to any surplus assets remaining on plan termination.

The members’ appeal of the cross-subsidization issue was abandoned; however HBC continued with its cross-appeal, challenging the trial judge’s conclusion that HBC was not entitled to any surplus assets remaining on the plan’s termination.

Ontario Court of Appeal Decision

The Court of Appeal applied the principles regarding entitlement to surplus on plan termination established by the Supreme Court of Canada in Schmidt v. Air Products of Canada Ltd. Finding that there was a trust governing entitlement to surplus in the plan and that HBC had not reserved a power of revocation, the Court of Appeal considered the terms of the original trust agreement. The Court of Appeal noted that the “exclusive benefit language” in the original HBC trust agreement was similar to the language considered in Schmidt, which the Supreme Court found entitled the members to surplus despite later amendments purporting to give surplus to the company.

The Court of Appeal then went on to reject HBC’s submission that the original plan text, which provided HBC with an entitlement to surplus, “trumped” the original trust agreement. Again relying on Schmidt, the Court of Appeal held that since the plan was funded through a trust, it was “governed by equity and to the extent that equitable principles conflict with plan provisions, equity must prevail.” Thus, the Court concluded that the original trust agreement, not the original plan text, “trumps”.

Finally, the Court of Appeal distinguished the present case from the Supreme Court’s decision in Burke v. Hudson’s Bay Company (where the Supreme Court found that employees transferred as a part of a sale of an HBC division were not entitled to a share of surplus).

The Court of Appeal began by noting that Burke did not change the law on surplus entitlement – established in Schmidt – but rather reinforced it. It then went on to find that the decision in Burke turned on language “which is materially different from the language of the original Trust Agreement in this case”. The Court held that in Burke, the original plan documentation expressly limited the employees’ rights to receipt of their pension benefits on retirement; whereas in the present case, the original plan documentation expressly created an irrevocable trust, over all of the assets in the pension trust fund, for the exclusive benefit of the employees.

As a result, the Court of Appeal concluded that the DB plan assets were impressed with a trust in favour of the plan members and they were entitled to any surplus assets in the plan on its termination.

It is worth noting that there was a dissenting judgment, which found in favour of HBC, finding that the “exclusive benefit language” relied upon by the majority must be “read in light of the whole document”, and “the whole document is the sum total of the original Plan and Trust Agreements trust agreement”.

This dissent may be cited should HBC seek leave to appeal the Ontario Court of Appeal’s decision to the Supreme Court of Canada.

What Does this Decision Mean for Plan Sponsors?

It appeared that the Supreme Court of Canada had been moving away from the strict application of trust law principles to pension plans, as evidenced by its decisions in Burke and Buschau v. Rogers Communications Inc., where it seemed to take a more pragmatic approach to pension plan entitlement issues. However, the Ontario Court of Appeal’s decision in Sutherland seems to herald a return to the strict application of trust law principles. While, at first glance, this would seem to be a troubling development, it should be read in light of the recent reform of the surplus entitlement rules in Ontario.

Manitoba Policy Bulletin #8 “Conversion of a Defined Benefit Plan to a Defined Contribution Plan” (the Manitoba Policy Bulletin) sets out the process to be followed by a pension plan administrator when implementing a DB to DC pension plan conversion. In particular, the Manitoba Policy Bulletin provides a detailed list of the requirements that need to be met to effect a conversion, including:

• documents to be filed;
• plan amendment requirements (depending on whether defined benefits are being commuted or preserved); 
• funding agreement requirements if accrued defined benefits are being maintained in a separate fund;
• issues to be addressed in the actuarial valuation; 
• annuity purchase options;
• treatment of surplus (if any); 
• dealing with underfunded plans; 
• treatment of pensioners and deferred members; 
• employee excess contributions (for contributory plans); and 
• disclosure to members.

Similar to the Financial Services Commission of Ontario’s Policy C200-101 “Conversion of a Plan from Defined Benefit to Defined Contribution” (FSCO Policy), the Manitoba Policy Bulletin is quite detailed.

Interestingly though, unlike the FSCO Policy, the Manitoba Policy Bulletin does not require an administrator to give all members the option of preserving their accrued defined benefits. Rather, the Manitoba Policy Bulletin provides that only those plan members who are eligible for early retirement “must” be given the option of receiving a pension (by way of annuity) equal to their accrued defined benefits under the plan. The plan administrator, at its discretion, may decide whether this option will be made available to all plan members.

The Manitoba Policy Bulletin, however, goes on to suggest that plan administrators have members sign a form indicating “that the changes are understood and accepted”. Since members are not entitled to decline the conversion, however, it may be that some members may not be willing to sign a form indicating that they “accept” the change. More useful would be an acknowledgement by members that they understand the change, and understand their obligations under the DC plan going forward.

The percentage of paid workers who are members of registered pension plans (RPPs) declined from 41% in 1999 to 39% in 2009, a drop of only 2%. Interestingly, this decrease appears to be due to a significant decrease in the percentage of men who participate in RPPs – with their participation rate declining from 42% in 1999 to 38% in 2009. During this same time, the coverage for women increased from 39% to 40%. Also of note is the fact that the number of workers covered by pension plans actually increased during the period, from 5.3 million to 6 million; however, the workforce grew at a faster pace, thus leading to the decline in the percentage of workers with pension coverage.

The statistics also demonstrate the well-known disparity between the public and private sectors, with RPP coverage for the public sector at 86% in 2009, versus only 25% for the private sector. There is also a large disparity in the type of pension plans offered. While the proportion of pension plans offering defined benefit (DB) coverage in the public sector has been stable between 1999 and 2009 (at 94%), there has been a significant reduction in the proportion of pension plans offering DB coverage in the private sector (from 76% to 56%).

These statistics make it clear that while overall pension coverage is not declining as quickly as some might have thought, DB plans are indeed on the decline, at least in the private sector. Whether the various pension reform initiatives introduced across Canada will serve to slow this trend remains to be seen.

The plan at issue was established by the province of New Brunswick to provide pension benefits to certain unionized employees. As a result of a substantial deficit in the plan, the actuary advised the administrator that it would be necessary to take measures to reduce benefits. The administrator applied to the Court for direction with respect to the proposed amendments, including whether it could amend the plan to reduce or eliminate indexing benefits for active and retired members.

A unique feature of the plan was that it was not subject to provincial minimum standards pension legislation and hence, the issues had to be decided based on the common law. However, the case is relevant to plans that are subject to pension legislation since the amendment provision in the plan reflected the statutory requirements regarding the inability to reduce accrued benefits.

The plan terms prohibited amendments that retroactively reduced benefits earned by a member in respect of pensionable service prior to the date of such amendment. The issue was therefore whether an amendment eliminating indexing would violate this amendment provision.

The Court held that the proposed amendments reducing or eliminating indexing benefits for active members did not have the effect of reducing vested benefits, because the indexing benefits under the plan did not vest until members’ termination, retirement or death. As well, the Court interpreted the prohibition on amendments that retroactively reduced benefits earned by a member in respect of pensionable service prior to the date of such amendment as a prohibition on amendments that reduce “benefits acquired by the member at termination from the plan by the accumulation of Pensionable Service”. Accordingly, the Court held that the proposed amendments reducing or eliminating indexing benefits for active members were within the amending power under the plan and therefore permissible.

The Court also considered whether the plan could be amended to eliminate the cost of living adjustments for retired members, and specifically whether retired members could be said to vest annually in each indexing adjustment. The Court determined that such benefits vest once notwithstanding that the indexing formula in the plan did not necessarily give rise to an increase each year. It was sufficient for vesting purposes that the increase be calculable in accordance with the terms of the plan.

It is important to point out that the Court emphasized that it came to its conclusion that the indexing benefits did not vest until members’ termination, retirement or death “[c]onsidering the provisions of the Plan, the nature and purpose of the COLA benefit as set out above and the intent of the parties in enacting section 15.04(viii) of the Plan...”. In different circumstances, it would be open to a court to find that benefits vest pre-termination.

Further, as I indicated, a unique factual aspect of this case is that the plan at issue was not subject to pension standards legislation. For most pension plans, applicable pension standards legislation will impose additional restrictions related to plan amendments that will also need to be considered.

In Oosterbosch v. FAG Aerospace Inc., an 18-year employee of FAG Aerospace was dismissed pursuant to the employer’s progressive discipline policy. Under the policy, four written warnings within a 12 month period could result in dismissal. Oosterbosch received four written warnings between August 22, 2007 and March 20, 2008 for: (i) failure to notice a defect on the production line; (ii) returning approximately 15 minutes late from a 30 minute break; (iii) arriving late for his shift; and, (iv) further failure to notice a defect on the production line and falsification of a production report.

Oosterbosch filed a claim for wrongful dismissal. As part of its defence, the employer argued that Oosterbosch was guilty of “wilful misconduct, disobedience, or wilful neglect of duty”, and, therefore, pursuant to the regulations under the Employment Standards Act, 2000 (the ESA), he was not entitled to statutory termination or severance payments.

The Court found that, while Oosterbosch was dismissed for just cause and his conduct was casual and careless – it was not wilful:

He was undoubtedly careless and the persistence of that carelessness justified his dismissal. I would not, however, characterize his offending behaviour as “wilful misconduct, disobedience or wilful neglect of duty” that would disentitle him to receipt of termination and severance payments under the provisions of the Employment Standards Act, 2000.

Accordingly, the Court awarded Oosterbosch statutory termination pay and severance pay pursuant to the ESA.

The Oosterbosch decision may prove to have implications for employers who sponsor defined benefit pension plans.

As result of the changes to the Ontario Pension Benefits Act (the PBA), employees who are dismissed on or after July 1, 2012 for reasons other than “wilful misconduct, disobedience or wilful neglect of duty” or other prescribed circumstances (such circumstances have not yet been prescribed), will be entitled to grow-in benefits. The test in the PBA mirrors that in the ESA.

Based on the Oosterbosch decision, the fact that an employee who is eligible for “grow in” benefits (or will be eligible for “grow in” benefits within the applicable notice period) is dismissed for cause at common law will not necessarily disentitle him or her from receipt of “grow in” benefits. To avoid paying “grow in” benefits, the employer must establish that the employee’s conduct is “wilful” and not merely careless.

The reform of the marriage breakdown provisions began with the passing of Bill 133, the Family Statute Law Amendment Act, on May 14, 2009. Under this new regime, former spouses of plan members will be able to receive an immediate payment of their share of the member’s pension benefits – either as a lump sum transfer or a division of monthly pension payments, depending upon whether the valuation date is before or after the member’s retirement. (This differs from the current “if and when” regime, which requires spouses to wait until the member has terminated employment or retired before they can access the member’s pension.)

In March of this year, the Ontario government finally released the regulations – in draft form – required to implement this regime. As discussed in my earlier blog post, the draft regulations set out the methodology to be followed by pension plan administrators when calculating the valuation of the member’s pension assets.

In the final form of the regulations, some refinements have been made to the calculation methodology, including:

• guidance for administrators of “hybrid” plans (i.e., plans that include both defined benefit and defined contribution components) – the government had sought feedback on this issue earlier this year in its consultation paper;
• separate methodologies depending upon whether the valuation date falls before or after the earliest date on which the member would have been eligible (or deemed eligible) for an unreduced pension under the plan’s early retirement provisions; and
• procedures to follow where an agreement has not yet been reached with respect to the valuation date.

To provide additional guidance to plan administrators and members, the Financial Services Commission of Ontario (FSCO) has posted questions and answers on its website. Among other things, these Qs&As confirm that there will be no retroactive application of the new rules, and thus court orders and agreements made before January 1, 2012 will continue to be governed by the current “if and when” regime. The Qs&As also emphasize that once in force, all plan administrators must provide these calculations when requested to do so – it is not voluntary.

FSCO has also indicated that it is in the process of developing new marriage breakdown forms, including a form to be completed by spouses requesting a plan administrator to determine the value of pension assets and a form to be completed by the plan administrator showing the value of those assets.

Given the complexity of these new regulations, plan administrators should begin putting in place systems and procedures now so that they are ready to respond to requests in the new year.

For example, the document raises the following issues:

• the eligibility requirements to be a PRPP administrator;
• the application of the “primary purpose” test to PRPPs (i.e., the primary purpose of a registered pension plan (RPP) must be to provide periodic payments to individuals after retirement in respect of their service as employees); 
• the treatment of employer contributions (if any) and member contributions to a PRPP (i.e., two approaches could be considered: (1) permitting contributions to PRPPs under the dual system of RPP and RRSP limits; or (2) permitting contributions to PRPPs under the RRSP limits only); 
• whether and how the concept of “pensionable service” for past service could be applied to PRPPs; 
• whether the rules allowing contributions during leaves of absence and periods of reduced pay should be extended to PRPPs; 
• to what extent certain transfers should be permitted from RPPs to PRPPs;
• the application of investment rules to the PRPP (e.g., the rules regarding “prohibited investments”); 
• whether there should be minimum employer/membership requirements; and 
• the application of potential rules associated with forfeitures or refunds of PRPP contributions.

At least two provincial jurisdictions have recently shown interest in PRPPs -- Ontario indicated in its spring budget that it would continue to work with the federal and other provincial jurisdictions regarding the implementation of PRPPs and Quebec expressed an interest in amending its legislative and regulatory frameworks to allow “voluntary retirement savings plans”. (See our earlier blog post for further discussion of the Quebec proposal.)

The government is seeking feedback on the Paper by August 12, 2011.
 

Regulation 177/11 follows up on the Bill 120 amendments to the PBA with related amendments to the PBA regulations, including: 

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

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

On February 2010, the Superintendent issued a direction requiring the Employer to pay $263,000 plus interest in the fund as a result of the breach. The Employer did not file an application for a judicial review of the direction and it then failed to pay the amount as directed. On May 13, 2010, the Attorney General filed an application with the Federal Court for the enforcement of the direction in accordance with section 33.1 of the PBSA.

The Employer opposed the application, mainly on the basis that it had properly administered the pension fund and that the direction was therefore unreasonable. It argued that the Court has a broad discretion under section 33.1 that allows it to refuse to enforce an unreasonable direction.

The Court first found that the defence raised by the Employer was essentially a collateral attack on the validity of the direction. The Court then concluded that the Parliament did not intend an application for the enforcement of a direction to be an opportunity to challenge the validity of such direction. As part of its analysis, the Court noted that the adoption of the Employer’s interpretation of section 33.1 would indirectly create a right of appeal of the Superintendent’s direction whereas the legislative scheme clearly contemplates that directions should be challenged by judicial review. The Court thus ordered the Employer to comply with the direction.

At first glance, the result may seem somewhat harsh for the plan sponsor as it was basically prevented from defending its investment strategy for what may seem to be a fairly procedural point. However, the result is not necessarily surprising given the applicable provisions of the PBSA.

This case should alert employers, whether under federal or provincial jurisdiction, that they must act promptly to challenge regulatory orders or directions issued by pension regulators or they may not be able to do so later on. Legal advice should therefore be sought as soon as possible upon receipt of a direction or other type of regulatory order.

On March 3, 2011, after much delay, the Ontario government finally released draft regulations that contain most but not all of the content required to implement the new pension-splitting regime under the PBA (click here to view the government’s announcement). In particular, the draft regulation outlines the pension valuation methodology, including rules for calculating both the “preliminary value” of the member’s pension (the total value of the pension up to the “family law valuation date”), and the “imputed value” of the member’s pension (the portion of the preliminary value attributable to the period of marriage).

The formula for determining the preliminary value of an active member’s pension is quite complicated. In essence, the formula takes the average of three calculations of the commuted value of the pension benefit:

1. the commuted value for termination purposes;
2. the commuted value assuming the member’s pension starts at age 65; and
3. the commuted value assuming continued employment to the earliest date the member could receive an unreduced pension, including the value of any bridge benefits.

The three components of the average are assigned different weight depending on how far away the member is from the earliest unreduced retirement date, assuming continued employment. The further the member is from retirement, the more weight is assigned to the commuted value for termination purposes and the less weight is assigned to the other two calculations, etc. The formulae for calculating the commuted value of the benefits of a deferred vested or retired member are much simpler.

The regulations also contain details on the impact on the calculation if the member is not vested or has applied for a withdrawal of benefits based on shortened life expectancy, or if the pension plan has been wound up in whole or in part, or a payment of plan surplus to the member is pending.

Once the preliminary value of the member’s pension has been calculated, then the imputed value is determined as a portion thereof, based on the period of pension membership during the marriage period versus the entire period of pension membership. Interestingly (and perhaps controversially to some), this pro rata method is to be used for calculating the imputed value not only of defined benefits but also of defined contribution benefits.

The draft regulations are not yet in force. When the draft regulations were released, the Ontario government also published a consultation paper seeking comment on several outstanding issues, including a valuation methodology for “hybrid” (combination defined benefit/defined contribution) plans. The period for comments on the draft regulations and the consultation paper has closed. Given that the legislation was first introduced in 2008, it is hoped that final regulations will be passed soon so that the legislation may be brought into force.

In this case, members of the Public Service Superannuation Plan (the PSSP) had the option of transferring pension monies from the PSPP to private pension plans by means of a reciprocal transfer agreement (RTA). These RTAs were negotiated by the Treasury Board Secretariat (the TBS).

An actuary/pension consultant established a consulting company, Loba Limited, which had its own pension plan. He proposed that federal employees resign from their employment with the public service, join Loba, and transfer their pension monies to the Loba plan. Once their pension monies were transferred, they would quit Loba and transfer their monies out of the Loba plan, which was structured to permit cash payouts. The TBS agreed to the RTA with Loba, but had concerns about the legitimacy of the Loba pension scheme. As a result, the TBS put a hold on transfers to the Loba plan during the summer of 2000. The Canada Revenue Agency shared these concerns and set them out in a letters to the TBS and the actuary. These letters were not broadly distributed, as requested by the CRA.

In the meantime, a number of employees quit the public service and commenced employment with Loba. They subsequently learned that transfers to the Loba plan had been suspended, and eventually that the registration of the Loba plan had been revoked. The former public service employees commenced an action against the federal government, claiming the difference between: (1) the benefits (salary, pension, severance pay, health coverage, life insurance coverage) they would have received between the date of resignation from the public service and the date they likely would have retired from the public service had they not joined Loba; and (2) the benefits (earnings, pension, etc.) they actually received over the same period. The federal government in turn brought third party actions against Loba, the actuary and his actuarial consulting firm (the Loba defendants) for negligent misrepresentation and breach of fiduciary duty.

The Court of Appeal began by finding that the federal government as employer and administrator of the plans owed a duty of care to the employees.

[T]here is a special relationship between the administrator of a pension plan and the members of the plan and, as a result, the administrator has an obligation to be mindful of plan members’ interests when administering the plan.

Further, the Court held that the federal government had misrepresented the availability of the ability to transfer to the Loba plan. For example, the Court noted “the disconnect between what senior TBS administrators knew in the months running up to the October 15, 2000 cut off date for RTAs about the significant risks associated with transfers to the Loba plan and the ignorance of the lower level compensation advisors – the people who actually met with and assisted the employees – about those risks.” The Court then concluded that these misrepresentations had caused the damages suffered by the employees.

The Court of Appeal also found that, as between the plaintiffs and the Loba defendants, there was a fiduciary duty even before the plaintiffs became employees of Loba. The court stated that there were “elements of trust, reliance, confidence and vulnerability in the relationship and dealings between the parties” before the employees left the public service.

Fiduciary law focuses on relationships. It is the nature of the relationship at issue as well as the surrounding circumstances that give rise to fiduciary duties.

The Court also confirmed that “a duty of loyalty is ‘inherent to any professional relationship’, including that of an actuary and his or her client.”

Finding that the actuary and the other Loba defendants acted in a fiduciary capacity, the Court affirmed that they had breached such duties and increased their apportionment of liability (from 20% as determined by the trial judge) to 40%.

The Ontario Court of Appeal has shown an ever increasing willingness to broadly apply fiduciary duties not only to pension plan administrators, but also employers and others responsible for communicating information to plan members. (Also see our Osler Update regarding the Court’s recent decision in the Indalex case.) The Ault case is also a reminder of the high legal duties applicable to fiduciaries to communicate all relevant information to plan members who are making elections that can affect their pension benefits. This is a positive legal duty that applies even if the members do not make any inquiries.

The case involved a grievance filed by CUPE on behalf of a former (unionized) employee of Durham. As an employee of Durham, he was a member of the OMERS pension plan and also entitled to PRBs under a plan sponsored by his employer, if he qualified for such benefits on his retirement. The collective agreement in question provided that in order to qualify for PRBs (extended health and dental benefits), employees must meet three criteria:

• they must retire before age 65,
• they must achieve a factor of 90 or have at least 15 years service, and
• they must take a retirement pension.

In this case the employee retired in 2009 and met the first two criteria. On his retirement, the employer (Durham) advised him that if he elected a commuted value of his pension, he would not be considered a retiree within the meaning of the collective agreement, and therefore would not be eligible for the (extended health and dental) PRBs. Nevertheless, on his retirement the employee elected to take a commuted value of his OMERS pension entitlements, rather than electing to be a pensioner and receive monthly pension payments. On learning of his election, the employer took the position that he did not meet the third criteria above and terminated his PRBs. The union filed a grievance, claiming that the form or manner in which the pension is taken is of no relevance to entitlement to the PRBs.

The arbitrator focused on the proper interpretation of the words “retirement pension” used in the collective agreement, and whether the commuted value elected could qualify as such. The arbitrator noted that both the pension plan in question (OMERS) and the Ontario Pension Benefits Act define a pension as a periodic payment, and make a clear distinction between a pension and the commuted value of a pension. As a result, he ruled that the intention of the collective agreement was to provide PRBs only to employees who elect a pension, and not to those who take a commuted value, dismissing the grievance.

This decision should be contrasted with the result and reasoning in a court decision involving OMERS (Berthiaume v. City of Windsor) in which the court ordered the employer to provide post-retirement health benefits to a retiree who was not yet in receipt of a pension. While at first glance the results of these two decisions may appear to be difficult to reconcile, what they really demonstrate is how each case is very much dependent on its facts and the wording and terms of the PRB plan in question. Employers would be well served to review the terms of their PRB plans to ensure that conditions for eligibility for PRBs are clearly and precisely defined.

The union Trustees felt the assets should be set aside and continued to be held for the benefit of the missing members if and when they were located. The Trustees appointed by the Toronto Dress and Sportswear Manufacturers Guild Inc. disagreed, and wanted the funds distributed as a bonus to current employees. The Trustees could not reach an agreement and the union rejected the Guild’s attempts to reach a negotiated solution, so the matter was submitted to an arbitrator under the terms of the trust agreement and the collective bargaining agreement.

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.

As reported in an earlier post, the federal government amended the investment rules in June of 2010 to eliminate the 5%, 15% and 25% quantitative investment limits in respect of resource and real property investments. As a result of the recent amendments to the Regulations, these changes will now apply to Ontario pension plans.

Future amendments to the federal investment rules will also apply to Ontario plans. For example, the regulatory impact statement that accompanied the amendments to the quantitative investment limits also indicated that the federal government intended to propose further modifications to the investment rules in respect of the 10% concentration limit (which, according to a previous government announcement, is to be updated to reflect market, rather than book value) and the general prohibition on pension fund investment in the shares of its sponsoring employer.

Administrators of Ontario plans will want to watch for any further amendments to the federal investment rules, as their plans will now be directly and immediately impacted by any future changes.

Pension Legislation Reform

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

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

Pension Innovation

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

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

Bill 173

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

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

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

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

Draft Guideline on Pension Plan Prudent Investment Practices

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

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

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

Draft Pension Plan Funding Policy Guideline

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

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

Guideline on Fund Holder Arrangements

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

In dismissing the Charter claim, the SCC applied the two-part test for assessing s. 15 claims, as established in previous jurisprudence: (1) does the law create a distinction that is based on an enumerated or analogous ground; and (2) does the distinction create a disadvantage by perpetuating disadvantage or prejudice, or stereotype to the claimant group?

Since the SDB reduction provisions are age-related, the Court concluded that such provisions constituted an obvious distinction based on an enumerated ground.

Moving to the second part of the test, the SCC agreed with the Court of Appeal’s approach, and considered the SDB in relation to the other benefits provided under the PSSA and CFSA when determining whether the claimants had been denied an equal benefit of the law. Viewing the benefit package as a whole, the Court held that it did not perpetuate discrimination because any reduction of the SDB paid to spouses of older employees was offset to some degree by the surviving spouse’s survivor pension.

The Withler decision confirms that age-based differences, which are the hallmark of most pension arrangements, will not necessarily be found to be discriminatory, if the differences make sense in the broader context of the entire arrangement.
 

More details regarding VRSPs can be found in the document released by the government entitled “A Stronger Retirement Income System”.

The implementation of VRSPs will require significant changes to the heavy legal framework governing registered pension plans in Quebec. The bulk of the new rules will probably be found in the exemption regulations, much like what was done in respect of simplified pension plans, which are somewhat similar to VRSPs.

Amendments to the federal Income Tax Act will also be required to accommodate VRSPs in Quebec and PRPPs (if any) in other provinces. Notably, the federal government will have to create exceptions to the requirements for an employer-employee relationship and a minimum employer contribution.

We will monitor the March 22, 2011 federal budget closely to see if the required tax amendments will be made in the near future, and we will report on the proposed legislative changes as the different pieces of legislation are tabled.

 

While on their face, the contribution formulas in the plans and the collective agreements resulted in contributions not being required during the unpaid leaves of absence (since contributions were based on earnings (one case) or hours worked (two cases) and the employee had no earnings or hours worked during the leaves), the arbitrators concluded that contributions were required to continue because of section 51 of the ESA.

Section 51 of the ESA requires that during certain leaves (i.e., pregnancy, parental, family medical and personal emergency leaves) the following continue: (a) the employee’s participation in certain plans (such as pension, life insurance and extended health plans) unless the employee elected in writing not to do so; and (b) the employer’s contributions to such plans unless the employee gives the employer written notice that the employee does not intend to pay the employee’s contributions, if any.

The arbitrators gave a broad interpretation to section 51 of the ESA and concluded that it requires contributions to continue to be made at the same level as they were made prior to the commencement of the leave. In all three cases, the arbitrators were guided in their interpretation by the principle that the ESA, as minimum standards legislation designed for the protection of employees, ought to be interpreted in a broad and generous manner.

These cases reinforce the fact that ensuring compliance with legislative provisions can require a more detailed review of the applicable legislation and surrounding facts than one’s first instinct might suggest. In particular, in the pension and benefit field, special attention is required when determining the employer’s obligations to provide pension and benefit plans in respect of employees on leaves of absence governed by the ESA.

Temporary solvency funding relief for defined benefit (DB) plans is not a new concept in Ontario – in 2009, regulations were passed outlining a variety of funding relief measures for DB plans. This time around, though, the government is specifically responding to requests for funding relief from public sector and BPS pension plans.

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

Which Plans Are Eligible?

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

Applications for Relief

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

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

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

Two-Stage Process

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

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

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

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

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

Window Now Open

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

In Tower Estate, the late Cedric Tower, an employee of Correctional Services Canada, was entitled to a pension and other benefits under the Public Service Superannuation Act (PSSA). While married, Mr. Tower designated his then wife, Shirley Tower, as beneficiary of his death and pension benefits pursuant to the requirements of the PSSA. The couple subsequently divorced and signed a separation agreement which purported to settle all claims between them, including claims to pensions:

8.1 The Parties agree to release any and all interest he or she may have in any pension plan held or paid into by the other;
8.5 The Parties agree to execute any and all documentation required to give effect to clause 8.

Cedric Tower did not subsequently remove his ex-wife as beneficiary of the benefits.

In advancing their claim, the Towers’ sons claimed that the separation agreement contained terms settling all issues between Mr. Tower and his former wife. As a result, they alleged that their mother was not entitled to the benefits at issue and that the benefits were the property of Mr. Tower’s estate.

In denying the sons’ claim, the Court reviewed the relevant provisions of the PSSA and held that Mrs. Tower’s designation as a beneficiary was not revoked by the separation agreement. The Court held that in order to effect a beneficiary revocation under the PSSA, it is necessary to comply with the relevant statutory requirements, which included filing a prescribed form. Relying on the reasoning in a series of life insurance cases, the Court reiterated the following:

A former spouse is entitled to proceeds of a life insurance policy if his or her designation as beneficiary has not changed. This result follows even where there is a separation agreement in which the parties exchange mutual releases and renounce all rights and claims in the other’s estate. General expressions of the sort contained in releases do not deprive a beneficiary of rights under an insurance policy because loss of status as a beneficiary is accomplished only be compliance with the legislation.

[Richardson Estate v. Mew, 2009 ONCA 403 (CanLII)]

The Court also rejected the sons’ argument that the benefits received by Mrs. Tower were subject to a constructive trust for the benefit of the estate, finding that the elements of unjust enrichment were not present. As a result, the Court concluded that Mrs. Tower was entitled to the pension and death benefits at issue.

Plan administrators should be wary of administering changes to pension plan beneficiary designations based on separation agreements containing only broad and general language releasing claims to benefits. Instead, they should ensure that plan members file the proper documentation in accordance with legislative requirements and the plan terms.

The degree of intervention by OSFI varies depending upon the “composite risk rating” that has been assigned to the plan based on OSFI’s “Risk Assessment Framework for Federally Regulated Pension Plans”. Under this framework, OSFI assigns a risk rating ranging from low to high. These ratings are based on a series of indicators that are included in regulatory filings such as: Annual Information Returns, certified financial statements and general interrogatories, actuarial reports and plan amendments.

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

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

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

Mr. King subsequently remarried and contacted the plan administrator to appoint his new wife as beneficiary and to confirm that the survivor pension would be paid to her. The plan administrator informed Mr. King that the separation agreement did not clearly state that his former wife waived her survivor pension and, therefore, did not constitute a valid waiver.

The Court held that, pursuant to s. 44(1) of the Pension Benefits Act (Ontario) (PBA), Mr. King’s pension became a joint and survivor pension when the first instalment of his pension was due in January 1992. At that time he was married to his former wife.

The Court went on to say that the general release provision of the separation agreement did not meet the waiver requirements of s. 46(1) of the PBA, which provides, in part, as follows:

46(1) The persons entitled to a joint and survivor pension benefit may waive the entitlement to receive payment of pension benefits in the form of a joint and survivor pension by delivering to the administrator of the pension plan...a written waiver in the form approved by the superintendent or a certified copy of a domestic contract, as defined in Part IV of the Family law Act, containing the waiver. [Emphasis added.]

Although the separation agreement in this case contained a release, which explicitly released Mr. King’s former wife from any entitlement to Mr. King’s pension, the release did not constitute a valid waiver under the PBA. Such waiver must take the prescribed form and either (i) be included in the separation agreement filed with the pension plan administrator, or (ii) be filed separately with the pension plan administrator. Interestingly, in this case, the separation agreement contemplated the execution of other documents which would be needed to give effect to the separation agreement. Arguably, this would have included the prescribed form required by the Superintendent (at that time the Superintendent’s Form 3).

Although a separation agreement may contain language which purports to waive a spouse’s entitlement to a survivor pension, plan administrators should not be so quick to accept such agreements as valid waivers. The separation agreement itself must contain the proper, prescribed waiver and, if the waiver contained in the separation agreement is not in the prescribed form, a waiver in the prescribed form must be executed and filed with the plan administrator. 

For example, the Policy suggests that administrators be familiar with applicable legislation, including the PBA, employment standards legislation, privacy legislation, and family law legislation and provide certain information to beneficiaries, including:

• the name of a contact person;
• how to submit complaints and inquiries; 
• the administrator’s expected timeframe for providing a response to inquiries and complaints (FSCO recommends 30 days);
• information relating to the administrator’s internal dispute resolution process (if one exists); and
• the beneficiaries’ right to make a submission to FSCO in cases where a complaint cannot be resolved by the administrator.

FSCO also recommends that administrators develop a written policy on managing inquiries and complaints in accordance with its "Guideline for Developing a Written Policy on Managing Inquiries and Complaints from Plan Beneficiaries".

FSCO acknowledges that, in some instances, service providers will deal directly with inquiries and complaints. It therefore recommends that all agreements between the administrator and the service provider address privacy concerns and provide instructions on how inquiries and complaints are to be processed on behalf of the administrator.

FSCO is seeking comments from interested parties on the Policy and the related guideline by February 11, 2011.

Administrators would be wise to review the recommendations made by FSCO contained in the Policy. Although most administrators may already have a procedure in place to deal with inquiries and complaints, the Policy may be a useful checklist from a “best practice” perspective. In addition, administrators may want to check with their service providers which handle beneficiary inquiries and complaints directly to ensure that they have procedures in place which comply with applicable legislation.

The Committee filed a $17 million lawsuit against the actuary and his firm alleging, among other things, that they had (i) failed to inform the Committee of the risks involved in investing in hedge funds generally and in the Norshield hedge fund more particularly; (ii) failed to perform adequate due diligence on the Norshield hedge fund; and (iii) failed to disclose a conflict of interest when they offered their services to the Committee. Note that the actuary and his firm filed their defence and are strongly denying any wrongdoing.

The case as not yet been heard on the merits, but there are already “lessons” which should be considered by both plan administrators and service providers:

• Document the due diligence and investment process;
• Keep proper records (service agreements, correspondence, reports, etc.);
• Have mechanisms in place to check for conflicts of interest; and
• Review/update your services agreements.

We will discuss this case as well as a few other recent cases which provide useful guidance to plan administrators and service providers at our upcoming client seminar, “Managing the Impact of Pension Reform: Practical Implications for Employers and Plan Administrators”, on Wednesday, January 26, 2011.

Restrictions on Benefit Improvements

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

Contribution Holidays

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

Letters of Credit

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

Solvency Funding for Jointly Sponsored Pension Plans

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

Regulations regarding Actuarial Methods and Assumptions

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

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

• Letters of Credit: Bill C-9 permitted plan sponsors to use letters of credit in lieu of making solvency payments to the pension fund. The Regulations will specify that such letters of credit are limited to 15% of plan assets.
• Funding on Termination: Per Bill C-9, plan sponsors are required to fully fund pension benefits on plan termination. The proposed amendments to the Regulations will set out a payment schedule to fund the termination deficiency. In particular, the Regulations would require that the solvency deficiency that exists at the time of termination be amortised in equal payments over no more than five years.
• Void Amendments: Unless permitted by the Superintendent, Bill C-9 provided that amendments which would reduce a plan solvency ratio below a prescribed level will be void. The draft Regulations would set the solvency ratio level at 85%. In addition, they would stipulate that, to put into effect a plan amendment that would otherwise be voided under this provision, the sponsor could fund the benefit up front such that the amendment would not have the effect of lowering the solvency ratio of the plan.
• Workout Schemes: Bill C-9 set out a framework which would 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 requirements. The Regulations will provide further details of how these schemes will work and the process that the parties will have to follow.

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

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

• authorizing the 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;
• permitting plan information to be provided in electronic form;
• providing rules regarding negotiated contribution plans;
• requiring consent of a member’s spouse or common-law partner before the transfer of the member’s pension benefit credit to a retirement savings plan;
• authorizing the Minister of Finance to enter into an agreement with the provinces respecting multi-jurisdictional pension plans; and
• authorizing the Superintendent to direct the administrator of a pension plan that is subject to the pension legislation of more than one jurisdiction to establish a separate pension plan for certain members, former members and survivors.

With the passing of these amendments to the PBSA (and the publication of draft amendments to the Pension Benefits Standards Regulations earlier this week - which will be discussed in a future blog post) the federal government will have completed much of the reforms that it had originally announced in October of 2009.

Many of the provisions of Bill 30 are similar to the Ontario Pension Benefits Act pre-pension reform. For example, Bill 30 includes provisions regarding:

• notice requirements for adverse amendments;
• partial wind-ups; and
• grow-in rights for members affected by a plan wind-up.

Commenting on the Bill, Minister Curry indicated that “[a]n extensive consultation with stakeholders will take place throughout the upcoming months. Once the formal consultation process is complete, the Bill may be brought forth for second reading in the spring 2011 sitting.”

The consultation paper is quite brief and focuses on the following topics: vesting, locking-in and a transition period for registration of already-existing plans. The paper indicates that comments are due by January 30, 2011.

While the introduction of Bill 30 is a step in the right direction, it clearly does not take into account the ongoing pension reform in Ontario and other Canadian jurisdictions. The consultation process may result in amendments to the Bill consistent with the pension reform taking place in other Canadian jurisdictions.

• restricting plan amendments that would increase pension benefits while reducing a plan’s funded status;
• permitting certain employers to use letters of credit for up to 15% of a plan’s liabilities; 
• allowing employer contribution holidays, subject to certain prescribed requirements, unless the “documents that create and support” the plan or the fund prohibit such holidays;
• permitting the payment of “reasonable” plan administration expenses from the plan fund unless such payment is prohibited or the payment of expenses “is otherwise provided for, under the documents that create and support” the plan or the fund;
• clarifying that surplus may be paid to an employer when it has reached an agreement with two-thirds of the plan members (or a union on behalf of such members) and such percentage of the former members and other entitled persons that the Superintendent considers appropriate; 
• providing for arbitration if the Superintendent does not consent to the payment of surplus to the employer and there is no agreement in place within a prescribed period of time after a plan wind-up;
• authorizing defined contribution plans to pay pension benefits from the plan fund; and
• providing for target benefit plans in unionized workplaces.

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

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

The health of a private-sector DB plan is dependent on the financial ability of the employer to support it. Low long-term interest rates and market volatility continue to negatively impact DB plan funding. Bill C-501, the stated purpose of which is “to ensure that unfunded pension plan liabilities be accorded the status of secure debts in the event of bankruptcy proceedings”, may add to DB plan sponsors’ funding difficulties.

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

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

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

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

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

The revised version of Bill 120 includes the following changes:

• Plan Expenses: The government clarified that plan administrators will not be prevented from paying expenses incurred by third parties where the plan documents prohibit the administrator from charging internal expenses to the fund. However, the troubling restrictions on the payment of reasonable fees and expenses where “payment to the administrator is prohibited, or payment of the fees and expenses is otherwise provided for, under the documents that create and support the pension plan or the pension fund” remain. (Please see our October 29, 2010 blog post for further discussion of this issue.)

• Surplus Withdrawals: The surplus withdrawal provisions were clarified (again). As before, the employer must reach an agreement with two-thirds of the plan members (or a union agreeing on behalf of such members) and such percentage of the former members and other entitled persons that the Superintendent considers appropriate. The difference is that the provision makes it clear that this consent regime applies in each of the following situations: where a plan is ongoing, or where a plan (including a successor plan resulting from a plan merger) is fully or partially wound up. It also clarifies that on partial wind-up the required consents are restricted to those members affected by the partial wind-up. Further, the Bill was revised to clarify that surplus may be paid to an employer through this consent regime or by way of a court order declaring an employer entitled to the surplus.

• Surplus Arbitrations: Amendments to this provision indicate that further details may be included in future regulations, as the information to be included in the notice to the Superintendent, the factors to be considered by the Superintendent when appointing an arbitrator and the factors to be considered by the arbitrator when making a decision may be prescribed. There remains a problem, however, with the arbitration regime. Section 77.12(1) describes two distinct circumstances under which an arbitration may be invoked at the discretion of the Superintendent: (i) entitlement-based surplus withdrawals and (ii) consent-based surplus-sharing. As currently drafted, it appears that both circumstances must have occurred for an arbitration to be triggered. We recommended clarifying this provision so that an arbitration is triggered by one or the other circumstance, but the section was not revised. 

• Target Benefits: New provisions will enable the government to make target benefit plans subject to additional criteria “as may be prescribed”. However, the provisions limiting the application of these plans to unionized workplaces were preserved.

While we were pleased to see these changes to Bill 120, we were also disappointed that the government did not take this opportunity to “fix” certain provisions, such as those related to plan expenses (as noted above) and contribution holidays (which continue to make the ability to reduce or suspend contributions dependent on the historical plan documents).

Before we can fully understand the impact of Bill 120 and its predecessor, Bill 236, however, we will have to see the accompanying regulations, which we expect to be passed sometime next year.

With Bill 129, the Québec government is now proposing to extend this benefit payment scheme to retirees and retirement eligible members of pension plans that are terminated as part of a restructuring under the Companies’ Creditors Arrangement Act.

Bill 129 also proposes to allow the government to extend the scheme to members in the pulp and paper industry without the need for the insolvent employer to declare a plan termination.

It is to be noted that Bill 129 would confer on the Régie the authority to order a division of a multijurisdictional pension plan “if it considers it is necessary to protect the rights of [Québec] members or beneficiaries”.

Although intended to allow Québec members of plans registered in other jurisdictions to opt for the benefit payment scheme, the wording of the Bill is too broad. It could provide the Régie with the power to order a division of the plan in a number of other circumstances which would add considerably to the administrative burden of multijurisdictional plans. The full impact of such a broad power remains to be seen and sponsors of multijurisdictional plans would be well advised to closely monitor the Régie’s policy in that regard.

The other two initiatives are the ones announced in June after the last finance ministers’ meeting, namely, a modest expansion of the CPP and changes to the existing tax and pension system to permit pension innovation by the private sector. A major goal of this latter initiative is to expand the retirement savings options available to the self-employed and those who work for small businesses.

It is generally recognized however that the “devil is in the details”. The purpose of the consultation paper is to get input from Ontarians on how each of these options should be pursued. The paper asks, for example, what kind of “modest” CPP benefit enhancement would work best? How can governments make it easier and more affordable to save for retirement?

This paper is not just for “experts”. The questions it asks are the kinds of questions Canadian individuals and business people ask themselves:

• How much income to do think you will need in retirement to maintain your standard of living?
• Are you concerned about your ability to save? 
• What can be done to help reduce fees charged on investment funds?

This is an opportunity for both ordinary Ontarians and pension experts to provide input into the future of Canada’s retirement savings system.

The government hopes to use the feedback it receives through the consultation process in its discussions with the other provinces and the federal government. The deadline for providing feedback is November 29, 2010.

Plan Expenses

Bill 120 would, unless prohibited “or otherwise provided for, under the documents that create and support the pension plan or the pension fund”, permit reasonable plan and fund administration expenses to be paid out of the pension fund. The Bill would also clarify that, in addition to the fees of third party service providers, permitted expenses may include reimbursement of the administrator’s “internal” expenses. This is very helpful in principle, however, the highlighted exemption wording needs to be revised in two respects before Bill 120 becomes law if the government is to deliver on its stated objective of “improving plan administration”.

First, the phrase “the documents that create and support the pension plan” implies an intent to codify the existing common law with respect to pension plan expenses as laid down by the Supreme Court of Canada in the Kerry case. This is not an “improvement” to plan administration. Rather, this wording would result in perpetuating an existing problem under which plan administrators may be required to obtain complex legal opinions on the historical merits of charging expenses to their funds making plan administration even more difficult and costly.

In addition, the phrase “or payment of the fees and expenses is otherwise provided for,” is far too ambiguous and arguably introduces a new compliance test. Expense provisions in pension plans often permit the payment of expenses from the fund “unless (first) paid by the employer”. It has been generally accepted that an administrator who first paid the expenses from its own revenues could then seek reimbursement from the fund based on this language. Will such wording now operate to bar or restrict expense reimbursement? If the wording of Bill 120 is passed unaltered, plan administrators may face a whole new round of uncertainty and expense-related litigation.

Second, Bill 120 provides that “the administrator is not permitted to pay from the pension fund to an agent, employer or other person...fees and expenses...if payment to the administrator is prohibited” etc. On a literal reading the administrator may not pay expenses incurred by third parties if the plan documents prohibit payment to the administrator. This makes no sense and is likely not the intended result. There could be situations where the plan documents prohibit the administrator from charging internal expenses to the fund, but do not prohibit payment by the fund of certain third party expenses. The wording should be clarified.

If Bill 120 is not changed, the likely result will be new, more onerous, regulatory requirements and checklists for plan administrators which seems to run counter to the stated intent of the reforms.

Contribution Holidays

In the same vein as my plan expenses comments, Bill 120 makes the ability to reduce or suspend contributions dependent on the historical plan documents, effectively incorporating the common law trust analysis of contribution holidays into the PBA. Codification of the common law on this issue, like expenses, could result in onerous new regulatory requirements and additional costs for plan administrators without adding any value. This should not be the effect of the reforms.

Final Thoughts

If the government is serious about improving plan administration, a simple “fix” would be to clarify that all reasonable administration expenses can be paid from the plan fund and contribution holidays can be taken, without regard to historical plan documents, as long as the current or amended plan terms do not prohibit such actions. This would be a real step forward in achieving a more affordable defined benefit pension system that properly recognizes the priority of primary goals like improving pension coverage and delivering promised benefits ahead of perpetuating expensive stakeholder squabbles relating to the largely unintended results of historical plan drafting.

A final word on policy implementation. If there is any doubt about the need for carefully drafted legislation versus reliance on reasonable regulatory interpretation, experience shows that unless PBA/regulations wording is clear and unambiguous, FSCO will be pre-disposed to take positions based upon the most conservative interpretations that involve minimal risk to the regulator. Surprisingly, FSCO’s risk aversion is sometimes given priority over a result which may be clearly in the best interests of members and other stakeholders. If the government really wants to achieve a “fine balance” through pension reform, the wording of Bill 120 should be much clearer on these issues.

• clarify that all reasonable plan administration expenses can be paid from the plan fund without regard to historical plan documents as long as the current or amended plan terms permit such payments;
• clarify that any limitation on contribution holidays based on plan documents is limited to current plan documents, as amended;
• specify that when seeking to withdraw surplus in the context of a partial wind-up, the employer is only required to seek the consent of the plan members affected by the partial wind-up, not the plan members as a whole;
• amend the surplus arbitration provisions to include criteria to guide the Superintendent when exercising his discretion to appoint an arbitrator and greater clarity regarding the arbitrator's authority; and
• with respect to plan mergers, eliminate the provision providing that surplus arising under any plan into which assets have been transferred is to be construed as prohibiting the payment of surplus to an employer unless both plans provide for payment of surplus prior to the merger, or at least clarify that only the terms of the predecessor plan as of the date of the merger are relevant.

We consider these issues of great importance and will be pursuing further opportunities to express our concerns.

The Bill 236 amendments related to surplus withdrawals (which were some of the very few provisions that came into force on royal assent) will be replaced with new provisions.

The Bill 120 provisions provide that when a plan is fully or partially wound up, surplus may be paid to an employer when it has reached an agreement with the union (or if there is no union with at least two-thirds of the plan members) and with such percentage of former members and other persons entitled to benefits that the Superintendent considers appropriate.

Clearly this amendment was made in response to the Financial Services Commission of Ontario’s (FSCO) controversial position that under Bill 236, in order for an employer surplus withdrawal to proceed, 100% consent of all members and former members of the plan was required – even on partial wind-up – unless the employer could also demonstrate that it is legally entitled to the surplus. (See my September 24, 2010 blog post for further discussion of FSCO’s interpretation.)

What is not clear under Bill 120, however, is whether an employer will be able to withdraw surplus based on entitlement alone with no member consent. Also not clear is whether a surplus withdrawal on partial wind-up requires two-thirds consent from all plan members and former members, or only from those affected by the partial wind-up.

Also included in Bill 120 is a new arbitration provision that is triggered if the Superintendent does not consent to the payment of surplus to the employer, and no surplus sharing agreement has been entered into, within a prescribed period of time after the plan wind-up.

The arbitration provisions introduce an element of discretion on the part of the Superintendent, which one hopes will be exercised with a view to the practical realities of surplus withdrawals. Working out the details of a complex surplus sharing proposal, in some cases involving hundreds or thousands of plan members, can take a significant amount of time, and arbitrations should not be triggered if the parties are working in good faith towards a negotiated settlement.

Background

The case arose as a result of the sale of a division of 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 an action, arguing that the transfer should have included a pro rata share of the HBC plan surplus. They also 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 on the plan expenses issue.

The Ontario Court of Appeal held that based on a review of the historical plan documents, the members were not entitled to the surplus, and therefore the failure to transfer a portion of the surplus was not a breach of trust. On the plan expenses issue the Court of Appeal determined (as later confirmed in the Kerry case) that since the plan text had been silent on plan expenses from inception until express wording was introduced in 1985, HBC had always been permitted to pay plan administration expenses from the plan fund.

Supreme Court of Canada Decision

The transferred employees appealed the Court of Appeal’s decision on both the surplus transfer and the plan expenses issues to the Supreme Court of Canada (SCC). The SCC dismissed the appeal on both counts.

On the plan expenses issue, the SCC followed its reasoning in Nolan v. Kerry (Canada) Inc., where it held that there is no statutory or common law authority that obliges an employer to pay the expenses of a pension plan and as such, the obligations of the employer will be determined by the plan text and the trust documents. Silence in the documents on the treatment of expenses is not a prohibition. Accordingly, HBC could charge plan administration expenses to the pension fund.

On the surplus transfer issue, the SCC confirmed that it was necessary to examine the current and historical HBC plan documents to determine whether the transferred employees had an “equitable interest” in the plan’s actuarial surplus while the plan was ongoing. Noting, among other things, that the “exclusive benefit” language in the HBC trust agreement was restricted to promised benefits and did not give employees entitlement to surplus, the Court concluded that no such equitable interest in surplus existed. The SCC implicitly confirmed the distinction between an employer’s duties when acting as plan sponsor and an employer’s “fiduciary duties” when acting as administrator, and concluded that since HBC negotiated the transfer from the HBC plan to the new purchaser’s plan wearing its sponsor hat, the terms of such transfer were not subject to the rule of even handedness. The Court concluded that absent any member entitlement to surplus based on the specific plan language, the administrator’s fiduciary obligations to protect any such rights did not come into play.

The Court went on to comment that it was not deciding whether the outcome could be different if the plan documents include language that entitles the employees to surplus.

This decision does not purport to deal with other situations involving actuarial surplus and plan transfer. Each situation must be evaluated on a case‑by‑case basis. Specifically, the resolution of the issue of surplus transfer when the pension plan documents indicate that employees are entitled to surplus on plan termination is best left to another case where that issue arises.

Implications for Employers

While this decision provides some support for employers who want to pay plan expenses from a plan fund or leave surplus in a plan involved in a corporate transaction, the SCC emphasized the case specific nature of their analysis and the need to review the particular plan documents at issue. As a consequence, employers will have to review their plan documents carefully to ensure that they permit such actions.

With respect to the need to transfer surplus on a sale, there remain a number of unanswered questions. For example, what if a plan has exclusive benefit or other language which confers surplus entitlement on members generally, or specifically on plan wind up? How do these rights intersect with negotiated transfers in sale transactions where plan wind ups are, in most jurisdictions, deemed by pension legislation not to occur? Members leaving the plan on individual terminations do not normally have surplus transfer rights, so why should such rights be conferred in sale situations?

To further complicate matters for Ontario employers, the recent amendments in Bill 236 include a provision specifying that asset transfers from one pension plan to another as a part of a sale of business or an internal reorganization must include a pro rata portion of any surplus determined in the prescribed way. This change has not yet been proclaimed in force, but the potential result will likely be that Ontario employers wishing to transfer pension plan assets and liabilities and/or to merge plans will have to ensure that the appropriate amount of surplus is also transferred notwithstanding the SCC’s decision on the matter.

Earlier this year, Bill C-9, which included amendments regarding plan funding, wind-ups, vesting, and “work out schemes” for plans at risk (see our April 1, 2010 post), received royal assent. Bill C-47 follows up on the Bill C-9 amendments with further significant amendments to the federal Pension Benefits Standards Act (the PBSA).

The PBSA reforms contained in Bill C-47 include:

New Specific Rules for DC Plans

• There are new provisions which expressly permit pension plan members, former members and their beneficiaries to make investment decisions with respect to the assets in their individual accounts within a DC plan.
• However, the new provisions regarding DC plan investments also specify that if a plan administrator provides members with investment choices, the administrator must offer choices with “varying degrees of risk” and expected investment returns that would allow “a reasonable and prudent person to create a portfolio of investments that is well adapted to their retirement needs”. If an administrator meets these obligations and the requirements of the PBSA regulations (yet to be enacted), it is deemed to have complied with the “prudent person” requirements in the PBSA.
• While these provisions do appear to provide a limited form of “safe harbour”, DC plan administrators should proceed with caution as the requirements outlined in the amendments are generally worded and it is not yet clear how they will be interpreted and applied in practice. For example, in order to provide investment options that may be adapted to meet members’ “retirement needs”, plan administrators may have to consider the demographics of their plan membership. 
• In addition, the reference to compliance with the “regulations” seems to indicate that further guidance will be provided. Perhaps such guidance will be provided by adopting into the regulations certain aspects of the Capital Accumulation Plan Guidelines released by the Canadian Association of Pension Supervisory Authorities (CAPSA), as was indicated in the federal government’s announcement last fall.
• Although the new DC plan specific rules will be helpful, in particular since these new rules provide a limited form of safe harbour by deeming administrator compliance with the prudent investment requirements of the PBSA, they do not appear to be as definitive as the “safe harbour” rules in the United States Employee Retirement Income Security Act (ERISA), which provide plan sponsors with relief from specific fiduciary duty liabilities provided that the plan satisfies specified requirements.

Missing Plan Members

• The Minister of Finance will be authorized to designate an entity for the purposes of receiving, holding and disbursing the pension benefit credit of any person who cannot be located.
• This is a welcome change that should ease plan administration for many plan sponsors and administrators.

Negotiated Contribution Plans

• The amendments recognize a new type of pension plan – a “negotiated contribution” (NC) plan. It is described as a multi-employer pension plan with a defined benefit provision, which limits a participating employer’s contributions to an amount determined in accordance with a participation agreement or a collective agreement, statute or regulation, and which amount does not vary as a result of prescribed solvency tests and standards. (This appears to be similar to Ontario’s jointly sponsored pension plans, which provide defined benefits and require members to make contributions in relation to any unfunded liabilities or solvency deficiencies.)
• Administrators of NC plans will be able to amend their plans to reduce pension benefits or pension benefit credits.

Portability

• Plan administrators will be required to obtain the consent of a member’s spouse or common-law partner before transferring the member’s pension benefit credit to a retirement savings plan where the member is eligible to retire.

Electronic Communications

• Subject to receiving the reader’s consent and certain other conditions, plan information may be distributed electronically, including information provided to plan members or to the Superintendent.
• Signatures in relation to electronic documents may also be acceptable if certain requirements are met.

Multi-Jurisdictional Plans

• The Minister of Finance will have the authority to enter into bilateral and multi-lateral agreements with the provinces respecting pension plans that are subject to the pension legislation of more than one jurisdiction. (Presumably, these provisions will enable the federal government to affirm the CAPSA proposed agreement regarding the regulation of multi-jurisdictional pension plans, as well as any future agreements.)
• In addition, the Superintendent will have the authority to direct the administrator of a pension plan that is subject to the pension legislation of more than one jurisdiction to establish a separate pension plan for members and former members who are or were working for a federally regulated employer.

The Bill C-47 amendments address a number of the items that were previously announced by the federal government, but were not included in Bill C-9. Some of the latest amendments (e.g., the method for dealing with missing plan members and the ability to communicate with plan members electronically) seem to be aimed at simplifying plan administration, while others (e.g., DC “safe harbour” rules) may help to clarify administrators’ duties. However, in order to take advantage of these improvements, plan administrators will (not surprisingly) have to continue to meet certain requirements, which may include additional regulations not yet enacted.

As a result, we made a submission in response to the Ontario government’s announcement, which included the following recommendations:

• implement measures to address funding concerns of single employer pension plans (e.g., extending the amortization period for solvency funding);
• permit pension security funds; 
• permit contribution holidays so long as the current version of the plan text does not prohibit them – in other words, do not require a historical analysis of the plan documents; 
• clarify the surplus withdrawal rules; and
• provide flexible funding rules based on risk profile, rather than inflexible rules based on plan design models.

Subsequently, on September 20, 2010, the Financial Services Commission of Ontario (FSCO) posted a question and answer on its website, which outlined its interpretation of the surplus withdrawal rules as amended by Bill 236. Briefly, FSCO stated that when making an application to withdraw surplus from a pension plan, an employer is required to do one of two things: (i) demonstrate entitlement to surplus under the historical terms of the plan and obtain the agreement of 2/3 of the members (or the agreement of the collective bargaining agent) and 2/3 of the former members and others entitled to payments under the pension plan; or (ii) obtain the consent of all the members, former members and other persons entitled to payments under the pension plan.

As we noted in an earlier post, FSCO’s interpretation runs contrary to the clear intention behind the Bill 236 amendments. It was apparent to most industry observers that the intention behind the amendments was to facilitate the sharing of surplus between employers and employees where a surplus sharing agreement could be negotiated. FSCO’s interpretation of the new provisions, however, imposed even more onerous conditions on parties seeking to withdraw surplus. In light of FSCO’s position, we felt it was necessary to make another submission to the government, requesting that the legislation be amended to be make it clear that the intention is to facilitate distribution of surplus where the parties have reached an agreement.

The new surplus withdrawal provisions in the Ontario Pension Benefits Act (PBA), however, do not in fact require that employers who are asserting entitlement to surplus also obtain member consent, nor does the amended PBA require 100% member consent where the employer has reached an agreement with the members to share the surplus.

Section 8 of the Regulations under the PBA has not yet been amended to reflect the changes to the PBA. Section 8 provides that unless all of the surplus is being paid to the affected members, surplus cannot be paid to the employer on wind-up unless the employer has obtained the agreement of 2/3 of affected members (or the agreement of the collective bargaining agent) and the agreement of 2/3 of the former members (per FSCO policy).

Our main concern arising out of the Q&A posted by FSCO rests with their interpretation of the new provisions as applied to surplus sharing agreements between employers and members. Where an employer is applying to withdraw surplus based on an agreement with the members, FSCO’s position is that 100% member consent is now required. They clearly are not applying the 2/3 consent threshold contained in s. 8 of the Regulations, except as an additional condition to surplus withdrawal based on employer entitlement under (a).

When the new surplus withdrawal rules were introduced, it seemed clear to most industry observers (particularly based on the conclusions in the Arthurs Report) that the intention behind the provisions was to facilitate the sharing of surplus between employers and employees where a surplus sharing agreement could be negotiated. In requiring unanimous member consent (virtually impossible to achieve in most circumstances), the exact opposite is achieved. Rather than facilitating surplus sharing arrangements, FSCO’s interpretation of the surplus withdrawal provisions makes these arrangements far more difficult to achieve, contrary to the clear intention behind the legislation. In effect, FSCO is taking the position that Bill 236 accomplished nothing in the area of surplus withdrawals.

In its recent announcement, FSCO referenced the Government of Ontario’s Technical Backgrounder, stating that the government will “provide more legal certainty and a binding arbitration process for surplus distribution on plan wind up, while continuing to allow payment to an employer where there is entitlement or a surplus-sharing agreement.” In light of this, FSCO has stated that employers may put pending surplus applications on hold until the government provides such “legal certainty”. This is not good news for parties to surplus sharing arrangements who may have already spent years waiting for their deals to be implemented. It is hoped that the government will step in quickly to ensure that its original objectives for pension reform in this area are actually implemented at the regulatory level.

In July 2008, immediately prior to collective bargaining, the company advised the union of its intention to convert the pension plan to a defined contribution plan. A notice concerning the proposed conversion was sent to all employees.

A new collective agreement was ratified in August 2008. The provisions dealing with the pension plan remained unchanged from the previous collective agreement, and the union failed to obtain the employer’s agreement to maintain the pension plan as a defined benefit plan. After ratification of the collective agreement, the union grieved the conversion of the pension plan and argued that such a change to the pension plan was contrary to the terms of the collective agreement. Specifically, the union argued that the collective agreement, which made reference to the pension plan, secured the “defined benefit promise” and that any substantive change to the “defined benefit promise” could only be achieved through the collective bargaining process.

The arbitrator concluded that since the pension plan formed part of the collective agreement, the amendment power contained in the pension plan, which provided that the company “reserves the right to amend the Plan or discontinue the Plan either in whole or in part at any time”, also formed part of the collective agreement. Additionally, there was nothing in the language of the collective agreement which limited the company’s right to amend the pension plan unilaterally or prevented the company from making changes to the pension plan for the duration of the collective agreement. Therefore, the company did have the power to unilaterally amend or discontinue the pension plan.

The arbitrator also noted that since the union had an opportunity to deal with the pension plan conversion through the collective bargaining process, it could not revive the issue through the grievance procedure.

The arbitrator’s decision lends support to the argument that an employer’s ability to amend a pension plan is not necessarily prohibited simply because the pension plan is incorporated by reference into a collective agreement. The employer’s amendment power is determined by the language in the collective agreement and the pension plan documents. It is therefore necessary to review the terms of the collective agreement and the relevant pension plan documents in order to determine whether a collectively bargained pension plan may be amended without union consent.

The Decision

Pension plan members who took up a DB/DC conversion option in 1997 (i.e., whereby plan members are offered the opportunity to exchange their DB benefits for an amount in a DC account) commenced a claim against their employer and its actuarial consulting firm, in which they alleged, among other things, breaches of fiduciary duty and negligent misrepresentations in connection with the communication of the DB/DC conversion option.

The core of the plaintiffs’ claim is that their pension benefits under the DC plan were much less than they would have been under the DB plan. The specific alleged breaches included: (i) a failure to advise the plaintiffs of the personal considerations which they ought to have had in mind when deciding whether or not to accept the conversion offer; (ii) negligent misrepresentations in relation to preparation of the written materials; and (iii) a failure to advise the plaintiffs of the risks associated with the transfer of their pension benefits to the DC plan.

From 2004 to 2008, the employer laid off a number of employees and entered into settlements, for which the employees executed agreements releasing the employer from liability from claims that the employees may have against the employer (the Releases). The plan members who executed the Releases discontinued their claims against the employer, but continued in their action against the consulting firm. The consulting firm brought a summary trial application to dismiss the claims of these plan members, arguing that they too were subject to the Releases.

In addition to other matters, the Court considered whether or not the reference in the Releases to the release of agents from liability applied to agents of the employer and determined that the Releases were ambiguous. Applying a legal principle whereby ambiguities are resolved against the drafter, the Court found that the reference in the Releases to the release of agents from liability did not apply to agents of the employer.

Risks of Transfer from DB to DC Platform

Although this decision was only an interim decision, it highlights the challenges to plan administrators/employers in meeting the legal standard for communicating with plan members about their options to transfer from a DB to a DC structure. If the case goes to trial on the merits, it will be interesting to get further details in that decision on the allegations against the employer.

From the few details in this decision it appears that the employer followed a fairly standard process, engaging a reputable actuarial consulting firm, presenting the conversion option by way of written materials and informational seminars and providing plan members with various actuarial projections and models. A decision on the merits will be instructive in terms of why the plan members allege the employer fell short of meeting its legal obligations and will hopefully offer guidance on what’s required of plan administrators/employers.

Importance of Proper Drafting

Even though it’s not clear from the decision whether or not the intent was for the Releases to apply to agents of the employer, there’s an important lesson to be learned about the inherent risk in relying on releases (or other contractual exculpatory clauses) to limit liability, rather than ensuring that legal duties are properly fulfilled.

Essentially, the Court was unable to conclude that the term “agents” covered the consulting firm, because the language in the Releases was not precise on this point. The Court highlighted the complex sentence structuring in the Releases, noting that the relevant part of the Releases was “part of a lengthy sentence that is grammatically awkward. There are eleven commas and the word “and” is used four times.” Such complex sentence structuring can give rise to ambiguities.

It is therefore important in releases provided on termination of employment, as with all other employee agreements and communications, that they be drafted clearly using “plain language” as opposed to legal jargon. As well, if particular pension issues are intended to be covered by a release provided on termination of employment, these issues should be specifically referenced. Absent a specific reference, it may be difficult to rely on the release to defend against claims related to those particular pension issues.

Here is a summary of the proposed reforms with some initial thoughts on some of the key provisions:

1. Strengthening funding contribution rules through smoothing restrictions and limitations on excluded benefits

• The use of smoothing (averaging) methods to value going concern assets would be limited to no more than the last five years.
• Current interest rates, as opposed to the average of solvency interest rates, will have to be used to value plan liabilities.
• The actuarial value of pension assets will be required to be within 20% of market value so that contributions better reflect current market conditions.
• Indexing benefits will continue to be permitted exclusions from solvency liabilities, but will be required to be included in going concern valuations.
• Plans with a funding threshold below 85% (currently 80%) will be obliged to undertake annual valuations to address “solvency concerns”. This matches federal requirements.

2. Employer Contribution holidays

• Contribution holidays are to be expressly permitted (subject to prohibitions in plan documents) provided they do not reduce the plan’s transfer ratio below 105%.  What is not addressed is whether parties can rely on the current plan documents, or whether it will still be necessary to do an analysis of historical plan provisions, to determine whether or not the plan documents prohibit or restrict contribution holidays.
• Contribution holidays will trigger enhanced member disclosure obligations, as well as the requirement to file annual statements with the regulator.

3. Accelerate the funding of benefit improvements

• Benefit improvements will be required to be funded over no more than eight years on a going concern basis, in contrast to the current 15-year amortization rules.
• Where benefit improvements would result in a plan having a transfer ratio of less than 85% or the plan being less than 85% funded on a going concern basis, two new requirements will be imposed in conjunction with implementing the improvement: (i) a lump sum contribution will be required to prevent a reduction of either the transfer ratio or the going concern funded ratio below 85%; and (ii) any remaining cost of the improvement must be amortized over no more than five years. 

4. Clarify surplus entitlement

• In addition to continuing to allow surplus to be paid to an employer where surplus entitlement can be demonstrated by the employer or a surplus sharing agreement has been reached, a binding arbitration process will be created to address surplus distributions on plan wind up. The scope of this arbitration provision remains to be seen, i.e. will it cover all disputes that arise in the context of negotiation or just surplus entitlement?
• Payments of surplus to an employer from an ongoing plan will be permitted where there is either employer entitlement or appropriate consent has been obtained (2/3rds of members or bargaining agent and retireds and deferreds). However, for ongoing withdrawals, the surplus remaining in the plan must be no less than the greater of 25% of the wind up liabilities; or twice the current service cost plus 5% of wind up liabilities.
• For plan splits and mergers, surplus sharing agreements will be required if the importing and exporting plan surplus provisions differ, to protect member surplus rights. This recommendation is surprising given the recommendations surrounding plan mergers from the Expert Commission and the Bill 236 changes to the PBA, and could be a significant impediment to plan mergers and other plan asset transfers, especially if a historical analysis of plan terms is required.

5. Increased funding flexibility for MEPPs and JSPPs

• “Target benefit” MEPPs that meet certain criteria are to be exempt from solvency funding requirements. These MEPPs will also be permitted to reduce benefit levels to the greater of the transfer ratio or going concern ratio when individual members exercise portability and the plan is underfunded.
• Current JSPPs would be exempt from solvency funding requirements provided that certain criteria (e.g., enhanced disclosure to members and retired members) are met.
• “Target benefit” MEPPs or JSPPs would have five years to fund a benefit improvement if that improvement causes the plan to become less than 85% funded (on a going concern basis).

6. Create financial stability in the PBGF

• Assessment levels for PBGF covered plans would be increased by creating a minimum assessment level of $250 for each pension plan covered by the PBGF; raising the base fee per plan member from $1 to $5; raising the maximum fee per plan member in underfunded pension plans from $100 to $300; and eliminating the overall assessment cap for underfunded pension plans.
• New plans, and benefit improvements under existing plans, will be excluded from PBGF coverage for a period of five years (formerly three years).

7. Temporary solvency funding relief for certain broader public sector plans

• This proposal is expected to be utilized by certain universities in Ontario, but its potential application to other pension plans in the broader public sector is not yet clear.
• The criteria plans must meet to participate are not yet clear. “Participating” defined benefit and hybrid plans that are less than 90% funded would be able to receive temporary solvency funding relief. To qualify, a proposal must first be submitted to the Ministry of Finance, outlining how sustainability will be achieved. These plans would be given a three-year window where a lower solvency threshold would be applied. Plans that have demonstrated progress towards stability at the end of the three-year period would then be permitted to enter “stage two” of the process. Plans that are not permitted to enter “stage two” are to be transitioned back into the normal pension funding rules.
• “Stage two” would facilitate negotiations between plan members and their representatives by providing up to 10 years to implement the proposed changes and liquidate solvency deficits. During this period, contribution holidays and benefit improvements would be restricted.

8. Encourage flexibility and opportunities for plan innovation

• Employers will be permitted to use irrevocable letters of credit from a financial institution to cover up to 15% of solvency liabilities.
• Defined contribution plans will be permitted to pay variable (life income fund-like) benefits.
• Flexible defined benefit plans will be allowed (subject to Income Tax Act requirements)
• Defined benefit plans will be permitted to amortize going concern and solvency special payments over a period beginning up to one year following the valuation date.
• The recent federal investment rule changes will be adopted (Ontario currently applies the federal investment rules as they read on December 31, 1999), and Ontario will continue to review the appropriateness of the 30 percent rule for pension investments.
• Require the PBA to be reviewed every 5 years.

An Observation

These proposed measures are directed to strengthening the retirement income system in Ontario, but in fact do little to encourage employers to establish or maintain defined benefit pension plans which, for the most part, will continue to be expensive to administer and risky to fund beyond minimum requirements. One additional way in which benefit security might have been enhanced in a sponsor-friendly fashion would have been through the adoption of a dedicated pension security fund, as suggested by the Alberta/British Columbia Joint Expert Panel on Pension Standards. This would be a balanced way of addressing sponsor “trapped capital” concerns associated with more aggressive pension plan funding and would encourage better benefit security without jeopardizing member rights. Perhaps it is not too late for the Ontario government to consider this as it would go a long way to achieving a better balance between member security and sponsor funding interests.
 

Next Steps

The government will continue to consult with various stakeholder groups and has asked that any comments with respect to these reforms be submitted by September 14, 2010. Moreover, the provincial government continues to welcome feedback on how regulatory oversight of Ontario’s pension system can be improved. Legislation concerning these reforms can be expected around the middle of Fall 2010, with any accompanying Regulations to follow at a later date.
 

The big change in Bill 236 is the plan administrator’s role in relation to the advisory committee –once the Bill comes into force, administrators will have to take a much more active role. In particular, they will be required to help the members to set up the committee in the first place by distributing the notice of the intent to establish the committee. In addition, Bill 236 specifies that once a committee is established, the administrator must meet with it, assist it in carrying out its duties, and provide specified information. While the full extent of these obligations is not yet clear, as they are subject to regulations to be prescribed, they obviously create new administrator duties that did not exist previously.

Advisory committees will still be established by a vote of the active members and retirees (rather than former members) of the plan. However, under Bill 236, unions may act on behalf of plan members in establishing a committee – seemingly negating the need for such a vote.
Another significant change is that the costs associated with the advisory committee will now be payable from the pension fund, subject to prescribed conditions.

What are some of the practical implications for plan administrators?

First, a plan administrator must determine whether the new provisions apply to it. There are exceptions for plans administered by pension committees with member representation, multi-employer pension plans established pursuant to a collective agreement and jointly sponsored pension plans.

Second, the new provisions prima facie impose a very broad obligation on the administrator to provide the advisory committee with information relating to the administration of the plan. This could include information about administrative errors or investments. Notably, the new provisions do not impose a corresponding duty of confidentiality on the committee members. Indeed, one of the functions of the committee is to disseminate information about the plan!

Third, plan administrators who are also employers will want to ensure that records relating to their functions as “employer” are kept separate from their functions as “administrator”. Why? While advisory committees will be entitled to have access to records and information related to administrator functions, they should not to be entitled to records and information related to employer functions.

While it is true that advisory committees will not have substantive legal power – their purpose is to “monitor” and “make recommendations” – where a committee does make a recommendation, I am of the view that the administrator would be well-advised to take the recommendation seriously and provide an explanation to the committee if it decides not to follow it. The power of the committee may lie primarily in the fact that it exists and can be used as a platform for member activism.

• Say on Pay will now be the law of the land in the U.S. Interestingly, the Act requires companies to allow shareholders a non-binding vote not only on the Company’s pay policies, but also to vote on how often they will vote on pay (annually, biennially, or triennially). Shareholders will also get to vote on golden parachute packages, in the context of a transaction.
• New proxy rules require a “pay equity” comparison, showing the ratio between the median total compensation for all employees worldwide, and the CEO’s total compensation. This comparison is expected to be a burdensome one to prepare.
• Compensation committee members must meet new independence standards, and further, they must consider the independence of their compensation advisers before engaging them, using factors that will be established by the SEC. 
• Compensation claw-backs, which require executives to disgorge ill-gotten gains or bonuses, have become increasingly popular. The Act now requires issuers to develop a policy to recoup incentive payments made to current or former executive officers prior to any accounting restatement due to the issuer’s material non-compliance with financial reporting requirements and to disclose their policy to shareholders.
• The company must disclose whether employees or directors are allowed to purchase financial instruments that would hedge the downside risk in their stock compensation programs. I suspect that many companies that currently do not have a policy on this will soon be developing one, rather than disclose that the Company does not monitor executive and director hedging.
• Financial institutions will be subject to enhanced disclosure and reporting of executive compensation, with specific attention to incentive compensation that could lead to risk-taking and material loss to the institution. U.S. operations of foreign banks will be covered.

Notably, record-keeping will also shortly become subject to statutory requirements. When Bill 236 comes into effect, the administrator will be required to “retain the prescribed records about the pension plan and the pension fund for the prescribed period of time.” The accompanying regulations have not yet been enacted. Presumably they will not be inconsistent with the Policy, which also identifies records to be retained and suggests retention periods (or the Policy will be revised to comply with the new regulatory requirements).

The importance of prudent document management and retention practices is not new. As the Policy notes, prudent record keeping practices are crucial to fulfilling the plan administrator’s fiduciary duty and meeting its primary obligation to pay benefits in accordance with the terms of the pension plan. As well, as the Policy notes, the Canadian Association of Pension Supervisory Authorities recommends in its Guideline No. 3 (Guidelines for Capital Accumulation Plans) and Guideline No. 4 (Pension Plan Governance Guidelines and Self-Assessment Questionnaire) that pension plan administrators adopt a document retention policy.

That said, the “recommendations” incorporated into the Policy achieve new levels of importance from a compliance perspective since they reflect FSCO’s view of prudent practices and, though not legally binding, are effectively mandatory requirements for Ontario administrators. As well, the Policy goes into a level of detail beyond what’s contained in these other publications. (Of course, the Bill 236-related regulatory requirements will be legally binding once enacted.)

While good pension plan governance arguably dictates that all pension plans should have a document management and retention policy, it’s now essentially a requirement of the regulator. Given FSCO’s position, I recommend that any plans without a document management and retention policy make it a priority to establish one. Plans that already have a policy in place should review them to ensure that they meet the requirements of the Policy and, when enacted, the new regulatory requirements.
 

The policy provides guidance on:

• 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.

As reported in a previous post, the amendments include the following changes:

• with respect to defined benefit (DB) plan funding, implementing a new standard for establishing minimum funding requirements on a solvency basis that will use average – rather than current – solvency ratios, and permitting past funding deficiencies to be consolidated annually for the purpose of establishing solvency special payments;
• restricting contribution holidays to plans with a solvency margin (in excess of full funding) of 5% of the plan’s solvency liabilities; and 
• eliminating the 5%, 15% and 25% quantitative investment limits in respect of resource and real property investments.

While the new DB funding rules and the contribution holiday restrictions apply only to federally regulated plans, the changes to the federal investment rules may apply to plans in other jurisdictions as most provincial jurisdictions have adopted these investment rules. However, not all jurisdictions adopted the federal rules as amended from time to time. The new rules will not apply automatically in Ontario, for example, as Ontario adopted the investment rules as they read on December 31, 1999. Ontario will still have to amend its pension legislation for the rules to apply to Ontario-registered plans.

OSFI has taken certain steps in response to the changes to the DB plan funding provisions.

OSFI has amended the “Directives of the Superintendent Pursuant to the Pension Benefits Standards Act, 1985” to reflect the requirement for annual valuation reports. Specifically, the new Directive states that annual valuations will generally be required, but there will be certain exemptions for plans that meet the definition of a designated pension plan under section 8515 of the Income Tax Regulations and plans with solvency ratios equal to or greater than one as at certain dates. The amended Directive also requires the filing of actuarial valuations as at the effective date of an amendment to a pension plan which alters the cost of benefits under the plan.

OSFI has also extended the deadline for filing actuarial reports that were required to be filed for plan year-end dates between December 31, 2009 and February 28, 2010 to September 15, 2010. In addition, OSFI indicates that while plans that file their actuarial reports prior to July 1, 2010 will not be required to re-file the report, plans that wish to use the modified funding rules may re-file the report.

First of all, section 8 of the Regulations under the PBA has not yet been amended to reflect the Bill 236 changes. Under that section, unless 100% of the surplus is being paid to the affected members, no surplus can be paid from the pension plan to the employer on plan wind up unless member consent thresholds have been satisfied.

The expectation was that once the above Bill 236 surplus-related changes were made to the PBA, section 8 of the Regulations would be quickly brought into line. Until that is done, or until an adjudicator determines that the PBA amendments must be read in such a way that section 8 has no application where employer entitlement is being demonstrated, the current effectiveness of this change to the PBA may be in some doubt. The intent of Bill 236 is certainly clear: the member consent regulations should have no application where the employer is seeking to withdraw surplus based solely on legal entitlement.

The second area of concern relates to the manner in which the PBA amendments under Bill 236 were drafted. On a plain reading, the new wording allows the Superintendent to consent to a payment of surplus to an employer based purely on the satisfaction of member consent thresholds without having to consider the issue of employer surplus entitlement as a matter of trust law or otherwise.

We have heard that some in the industry may not agree with this interpretation of the Bill 236 PBA amendments and feel that even where the necessary number of member consents have been obtained, the Superintendent can nevertheless refuse to consent to the agreed surplus distribution if the historical provisions of the pension trust do not clearly permit employer surplus payments. This interpretation (with which we disagree) would effectively neuter the Bill 236 changes to the PBA, is contrary to the intention behind the legislation, and would result in an unacceptable and nonsensical reversion to the situation that existed prior to Bill 236 that both employer and member groups agreed should be changed. 

This expansion of grow-in will have an impact on pension costs. Employers are used to taking into account the cost of providing grow-in benefits in the context of partial or full wind-ups. In the future, the cost of grow-in benefits will be a factor in all individual and group terminations where a plan has enhanced early retirement benefits.

In addition to the pension implications, this raises employment law questions that employers need to consider immediately. For example, can employees who are terminated prior to July 1, 2012 take the position that they are entitled to grow- in benefits based on common law or statutory notice periods? What behaviour constitutes "wilful misconduct" so as to disentitle an employee to these benefits? Can plans be amended to remove these costly benefits, and what happens if an employee objects to the amendment?

Please plan on participating in our Webinar on July 8, 2010, 12:00-1:00 EST for a more in-depth discussion of the pension and employment implications of this and other changes made by Bill 236. An invitation will follow.

Most sponsors will have to amend their pension plans and administration systems to reflect immediate vesting for all pension plan members.

In certain circumstances, however, where the sponsor’s pension plan does not currently contain a waiting period for new employees to become eligible for pension plan membership, the sponsor may wish to avoid having new employees become immediately eligible for a deferred pension. It can do this by amending its plan to institute a waiting period for pension plan eligibility for all new hires. Bill 236 has not changed the eligibility provisions found in section 31 of the Pension Benefits Act, which continue to permit sponsors to require a waiting period of up to 24 months for full-time and part-time employees, before they become eligible to join the pension plan. 

Most of these provisions will come into force on a date to be proclaimed, and many others are subject to requirements yet to be prescribed by regulation. Nonetheless, given the breadth of the changes and the fact that they may be proclaimed at any time, plan administrators should begin reviewing their plans and administrative practices and planning for the changes that will be required now. For example, plan administrators will want to ensure that they have processes in place to enable them to respond to potential requests from members and retirees with respect to advisory committees, to provide statements containing plan-related information to former members and retirees, and to transfer lump sum payments of small amounts to registered retirement savings arrangements.

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.

Bill 54 goes on to propose amendments to the Ontario Employment Standards Act, which would require all employers with 20 or more employees to provide some form of retirement savings plan – one option available to such employers being the proposed insurance industry plans.

While private members’ bills do not, as a rule, become law, Bill 54 has passed second reading and was referred to the Standing Committee on Finance and Economic Affairs on May 13, 2010.

While it seems unlikely in these circumstances that the Ontario government will enact any legislation that would make retirement plans mandatory, by referring Bill 54 to Committee, the Ontario government may be signalling its interest in exploring this aspect of the coverage issue in greater detail. This is consistent with the Ontario Budget announcement, indicating that the government plans to continue studying the various options to expand pension coverage and engaging the public in further consultations.

Given that the federal and provincial governments appear to be moving away from proposals to expand or supplement the CPP, initiatives to increase the types of pension plans offered by the private sector (whether through new insurance industry-based plans or expanding the role of existing large, sophisticated plans to enable them to manage funds and/or provide plan administration services on behalf of other unrelated pension plans or organizations) may be emerging as the front-running solution to the coverage issue.

In the regulatory impact analysis statement, the federal government provided the following rationale for the proposed changes:

The investment rules, which have not been reviewed in fifteen years, were originally set under market conditions that do not reflect the present environment. The quantitative limits in respect of real estate and resource property are considered unnecessarily cumbersome.

Persons responsible for investing pension assets should note, however, that they will continue to be subject to the “prudent person” standard as well as the other (remaining) quantitative limits when investing plan assets.

Once passed into law, these changes to the regulations under Pension Benefits Standards Act will likely have implications across Canada, as many jurisdictions – Ontario, Alberta, British Columbia, Saskatchewan and Manitoba – have adopted the federal investment regulations for plans registered in those provinces. Also, Newfoundland and Nova Scotia have implemented very similar provisions in their pension standards legislation.

However, the changes to the federal investment regulations will not automatically apply to plans in Ontario (which adopted the federal regulations as they read on December 31, 1999), Nova Scotia and Newfoundland. The governments in these provinces will have to further amend their regulations to implement these changes, but the remaining jurisdictions (which adopted the federal regulations as amended from time to time) will be impacted as soon as the amendments are finalized.

The period for commenting on the draft regulations closes on May 29, 2010 – shortly after which we expect the regulations to come into force.

Not only do these changes require plan administrators to reconsider the limits in their plan’s Statement of Investment Policies and Procedures and related plan documents (which will be based on current quantitative limits), the elimination of the real estate and Canadian resource property limits may also necessitate a reconsideration of the allocation of pension fund investments, including a possible increase in the allocation to these asset classes.

New Solvency Funding Rules

The proposed regulations introduce a new standard for establishing minimum funding requirements on a solvency basis that will use average – rather than current – liabilities and solvency ratios. Under the proposal, the average solvency position of the plan for funding purposes would be defined as the average of the solvency ratios over three years (i.e., the current and previous two years). The three solvency ratios used in the determination of the average would be based on the market value of plan assets. Past deficiencies would be consolidated annually for the purpose of establishing solvency special payments. To put this funding model into effect, annual filing of valuation reports would be required.

The new standard is intended to mitigate the effects of short-term fluctuations in the value of plan assets and liabilities on solvency funding requirements due to, among other things, volatility in the equity market and changes in interest rate levels, by allowing sponsors to better manage their funding obligations. It is seen by the federal government as a better alternative to extending the amortization period for solvency deficiencies.

The current amortization period for funding solvency deficiencies would thus remain at 5 years (and the going-concern 15 year-period would similarly remain unchanged). The current solvency ratio would also continue to be the relevant measure for all other purposes under the PBSA and the regulations (e.g., for information statements sent to beneficiaries).

These changes would apply to the first actuarial report required to be filed after the proposed regulations come into effect. (However, for the first valuation report filed after the new rules come into force, the solvency ratio on the valuation date may still be used instead of the new averaging method. In that case, solvency assets may be smoothed for a period of up to 5 years.)

In terms of timing, the Regulatory Impact Statement indicates that the new rules will apply to valuations with an effective date of December 31, 2009.

New Restriction on Taking Contribution Holidays

Under the proposed regulations, plan sponsors would only be permitted to take contribution holidays when there is a solvency margin (in excess of full funding) of 5% of the plan’s solvency liabilities. The introduction of this restriction on contribution holidays is intended to create a funding cushion in order to protect plan benefits.

The solvency margin would not be required to be funded. Solvency funding requirements would continue to be based on an objective of bringing the solvency ratio of the pension plan to 1.0. The difference is that where the current solvency ratio exceeds 1.0, but is less than 1.05, the employer would have to continue making its normal cost contributions.

Elimination of the Quantitative Restrictions on Investments in Real Property and Canadian Resource Property

The current regime for pension fund investing combines the “prudent person” approach with a set of quantitative limits. The proposed regulation would eliminate certain of these limits. Specifically, the 5%, 15% and 25% quantitative investment limits in respect of resource and real property investments will be eliminated. These restrictions are viewed by the federal government as “cumbersome and no longer required” in a prudent person environment.

The regulatory impact statement indicates that the government intends to propose further modifications to the investment rules in respect of the 10% concentration limit (which, according to the fall announcement, is to be updated to reflect market, rather than book value) and the general prohibition on pension fund investment in the shares of its sponsoring employer. However, the statement goes on to say that the 30% rule, “remains appropriate at this time for prudential reasons.”

Because most Canadian jurisdictions have adopted the federal investment rules for purpose of harmonization, this proposed change would have an impact on most pension plans in Canada. However, not all jurisdictions have adopted the federal investment rules in a way which would make the changes apply automatically. Ontario, for example, adopted the investment rules as they read on December 31, 1999 so any changes to the rules made by the federal government would have to be specifically adopted by the Ontario government.

Proposed Regulations out for Comment

Comments on the regulations may be submitted until May 29, 2010. Once finalized, the regulations will come into force on registration.

I expect these regulations will be of interest as much for the issues they address as for those that they do not (such as the 30% rule). As my colleagues and I examine the proposed regulations more closely, we will be posting additional posts on topics of special interest.

The revised version of Bill 236 also includes the following amendments:

• 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.

Unfortunately, the language of the amendment, as filed and registered with the Financial Services Commission (FSCO), provided that the early retirement benefit was subject to the discretion of the employer. Accordingly, the early retirement benefit was captured by s.40(3) of the Pension Benefits Act, which deems an employer to have given its consent to the receipt of an ancillary benefit (such as early retirement) where consent is an eligibility requirement and members have satisfied all other eligibility requirements.

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.

The PBSA reforms contained in Bill C-9 include:

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.

Keeping in mind these principles, the Budget went on to outline the following chief areas of concern being considered by the government:

• Contribution Holidays: enhancing requirements to ensure greater benefit security and requiring disclosure of contribution holidays to plan members and retirees;
• Benefit Improvements: enhancing requirements for funding when existing benefits are not fully funded and requiring that all benefit improvements be funded more quickly; 
• Defined Benefit (DB) Plan Valuations: setting a uniform funding threshold at which annual actuarial valuations would be required, and limiting the extent to which funding can be based on valuations that exclude the value of certain benefits, employ asset values that significantly depart from market values, or smooth interest rates; 
• Letters of Credit: permitting them to be used to partially satisfy solvency funding requirements; 
• Surplus: clarifying procedures for determining surplus entitlement when a pension plan is wound up; and
• Innovative Plan Designs: encouraging innovative designs by providing a framework for “flexible pension plans,” as permitted under the federal Income Tax Act.

Based on the Budget, it appears that the next round of pension reform will largely focus on the funding of DB plans and, in keeping with the recommendations of the Ontario Expert Commission on Pensions, improving the security of the benefits provided under such plans. While the real impact of such an approach on plan sponsors and administrators will not be fully understood until legislation is introduced later this year, the Ontario government is promising to implement reform in stages so that any cost measures are “mitigated” as appropriate.

In granting the injunction, the Court found that it was not reasonable for SGEU to expect the CRA to approve of the proposed increase to the employee contribution rate, since the CRA had indicated to SGEU’s counsel that it would not do so. The Court further held that SGEU’s proposed increase to the employee contribution rate, if implemented, would inflict irreparable harm on the plan participants by requiring some of the plan members to quit their jobs and look for employment elsewhere. As such, the Court held that the balance of convenience favoured the pension plan members as opposed to SGEU who simply had to wait until a final decision on the amendment was made by the CRA.

Clearly this was not an ordinary contribution hike. In fact, underlying the litigation was a dispute between the sponsor and the members with respect to the continuation of the plan: the sponsor wanted to terminate it, while the members wanted it to continue. It is likely that the effect of the injunction has been to send the parties back to the negotiating table to hammer out a solution to the real issue.

At the time of the approval order, Indalex had made all of the required contributions to both plans. Although one of the plans had in fact been wound up with a deficiency in 2006, all of the required special payments (excluding the last scheduled special payment to be made at the end of 2009, which was not payable because of the stay under the CCAA) had been made in accordance with the regulations.

Subsection 57(4) of the PBA provides that on plan wind up a deemed trust is created in respect of “employer contributions accrued to the date of the wind up but not yet due”. Subsection 75(2) mandates that on plan wind up the employer shall “pay the money due” in the prescribed manner and at the prescribed times.

Focusing on the specific meaning of the words “due” and “accrued” in these subsections, the Court took the position that the deemed trust provisions only apply to regular contributions together with those special contributions that were to have been made but were not. As there were no such amounts at the time of the sale, the Court concluded that there was not a deemed trust in respect of the plan deficiencies.

While the Indalex decision does not alter established deemed trust case law, the decision lends further support to the proposition that the deemed trust provisions of the PBA only extend to those employer contributions, including special payments, that are due and owing but have not yet been made.

I also note that the proposed amendments regarding EL&H trusts preserve the same tax treatment for benefits in the hands of employees as if they had been received directly from the employer (e.g., if they would have been tax-exempt (such as private health services plan benefits) when received directly from the employer, they would be tax-exempt when paid from the EL&H trust).

The proposed amendments would apply to trusts established after 2009. The Government is seeking comments on the proposed amendments by April 30, 2010.

Now, we’ll never know from the facts in this case whether the failure to approve the amendments was due to administrative oversight, or, as defendants alleged, wrong-doing by the executives in their attempt to amend the SERP for their personal benefit. Plus, in this case, there is the added background fact that defendant (an acquirer of the plan sponsor) is now in bankruptcy, which shouldn’t, but sometimes does, influence a court’s opinion. But as a practical matter, executives nearly always direct the design and implementation of benefit plan changes, even when they are participants. Therefore, executives should be mindful of their fiduciary duty to their employer as they navigate this conflict of interest.

There is a take-away lesson from story: Always follow corporate formalities through to completion when adopting or changing compensation plans – including signatures and dates with unambiguous approval language. Further, don’t forget to formally delegate authority to officers to finalize or change amendments, whenever delegation is appropriate.

Special thank you to Michael Melbinger for bringing this new case to my attention.

The trial judge found that differential treatment on the basis of age existed, but concluded that the SDB reduction provisions did not constitute age discrimination under the Charter. The class members’ appeal to the British Columbia Court of Appeal was similarly dismissed.

The majority of the Court of Appeal found that the SDB was intended to meet differing needs, depending on the age of the employees. At younger ages, the SDB would provide a limited stream of income to spouses for the plan member’s unexpected death. At older ages, the SDB was intended to provide for expenses associated with illness and death, while the pension would provide the income stream. The Court of Appeal stated:

This case demonstrates the difficulty that arises when one attempts to isolate for criticism a single aspect of a comprehensive insurance and pension package designed to benefit an employee’s different needs over the course of his or her working life. The trial judge concluded that, viewed in context, the supplemental death benefit was the part of a larger scheme comprised of group insurance and pensions designed to look after the changing needs of an employee as he or she remained in the workforce and then retired...The comprehensive plan, while not a perfect fit for each individual, did not meet the hallmarks of discrimination given that it was a broad-based scheme meant to cover the competing interests of the various age groups covered by the plan.
 

As a result, the Court concluded that while the SDB differentiated based on age, it did not discriminate contrary to section 15 of the Charter.

While the Court of Appeal’s findings provide some comfort to administrators of public sector plans (particularly those plans that currently provide benefits which may vary according to the member’s age), the fact that the Supreme Court has granted leave to hear the appeal in this case means that this is still an open issue. If the Supreme Court overturns the Court of Appeal decision and decides that the SDB in Withler does violate the Charter, all public sector plan administrators should review their plans for possible Charter violations.

Although this case may not appear to be directly applicable to private sector plans (which cannot be specifically subject to a Charter challenge) members of such plans may use Withler to argue that the exemptions in many human rights statutes which currently permit certain age-based requirements in pension and benefit plans are contrary to the Charter.

The operation of these exemptions under human rights legislation was recently illustrated in the Ontario Human Rights Tribunal’s decision in Kovacs. In that case, the Tribunal relied in part on the exemption for the use of age-based requirements in pension plans under the Ontario Human Rights Code in reaching the conclusion that age-related eligibility criteria used in the context of a voluntary early retirement window did not violate the Code. It will be interesting to see whether the analysis in the Withler case has any impact on the availability of the exemptions under human rights legislation or on any other aspect of the use of age-based criteria in private pension plans. 

Given the potential impact on age-based criteria in pension and benefit plans, the Supreme Court’s upcoming decision in Withler is one that all plan administrators should have their eye on. 

Further, the Tribunal held that the Human Rights Code (Code) recognizes that a voluntary early retirement program, which differentiates between employees on the basis of age, may not be discriminatory if it complies with the Ontario Employment Standards Act, 2000 (ESA). The prohibition in the ESA against differential treatment under a benefit plan on the basis of age does not apply with respect to plan provisions that differentiate on the basis of age in establishing a normal pensionable date for voluntary retirees or an earlier voluntary retirement date or age, unless the pension plan contravenes the Ontario Pension Benefits Act (PBA) provisions regarding normal retirement dates and early retirement pensions. Finding that the plan in this case did not violate the PBA provisions regarding the normal retirement date, the Tribunal concluded that the early retirement package did not violate the Code.

While the Tribunal came to a seemingly obvious conclusion in this case, it is helpful to plan sponsors who are putting together early retirement packages in response to downsizing initiatives, and who often face employee allegations of discrimination in response to seemingly “unfair” age requirements.

It is important to point out that this case is far from the last word on the use of age-based criteria in the context of pension benefits. Later this month, the Supreme Court of Canada will hear the Withler case, in which a group of deceased members’ spouses have brought a Charter challenge regarding the ability of the federal government to reduce the amount of a supplementary survivor benefit based on age. While private companies are not subject to the Charter, the outcome in Withler may have an impact on how human rights tribunals decide challenges to the use of age-based criteria in private sector plans or may result in Charter challenges to the validity of the current exemptions for pension plans.

At the time of his disability Mr. Downey had worked only 245.5 hours as a union member. Nevertheless, he was mistakenly credited with hours worked while in receipt of Workers Compensation Benefits and was reimbursed for certain medical expenses under the Welfare Plan for which he was not entitled. Once the mistake was realized, the Trustees of the Welfare Plan instructed the plan administrator to advise Mr. Downey that he was not eligible for such coverage going forward.

The Trustees did not seek reimbursement of the amounts paid in error. Mr. Downey continued to assert his right to medical expense and disability pension coverage. Subsequently, he was offered additional compensation for three years’ worth of medical expenses in final settlement of his claims, however, he declined to settle on this basis and brought an action against the Trustees, the union and the employers association.

In dismissing Mr. Downey’s action, the Court held that he had to meet certain eligibility requirements for membership under the Pension Plan and the Welfare Plan, and that his union membership alone did not automatically entitle him to coverage. The Court’s findings included that the Trustees owed all eligible members a duty of good faith and even-handedness and they would have breached these duties had they authorized the payment of either disability or welfare benefits to Downey as an ineligible person under the plans.

The arbitrator also held that the information request must be handled within a “reasonable period of time”, noting that “what is reasonable can vary, and probably to a large extent depends on the factual circumstances presented on a case-by-case basis.” Based on the evidence presented, the arbitrator determined that the deceased member most likely would have retired and received the commuted value of his pension prior to his death had he been provided the necessary information.

While this case seems to have revolved around its particular facts, it nevertheless underscores the importance of having procedures in place for responding to member information requests and ensuring that such requests are handled promptly and accurately. This should also include a process for making determinations as to whether or when the employer or administrator is obliged to provide such requested information and for communicating that to the member.

• Contested applications: Applicants will be given 30 days to respond to any objections, and complainants will be given 30 days to reply. In addition, complainants will be invited to attend any compliance meetings with FSCO staff.
• Analysis of trust law: FSCO has recognized that applications involving DB plans are often delayed because FSCO staff must undertake a trust law analysis of current and historical plan documents. This state of affairs has arisen as a result of court cases such as Tecsyn and Transamerica (PDF). While some pension plan sponsors would like to see FSCO apply a “less stringent” approach despite the pronouncements of the courts, FSCO has correctly suggested that legislative reform is required to address this issue.
• Lack of service goals and performance measures: FSCO will create service goals for approving complete and compliant applications. While it is helpful for FSCO to publish service goals that it will strive to meet where an application is compliant (no missing documents, complies with law and policy, uncontested), the time needed to review and approve certain applications is arguably still too long (e.g., 150 days – 5 months – to review and approve a surplus withdrawal application).

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.

Turning to the “best evidence” before it, the Tribunal concluded on a balance of probabilities that Redmann was paid the commuted value of his pension. A statement from the plan’s insurance company showed a payment to Redmann in January of 1990, banking documentation disclosed that a locked-in RRSP account was opened in September of 1989, and Redmann testified that he received a payment into the locked-in RRSP account in the amount of approximately $5,000 (which roughly represented the commuted value of his pension).

While the Tribunal ultimately found that the claimant was not entitled to a pension in this case, the decision serves as a reminder to plan administrators to review, and update as necessary, their record retention policies.

Abolishing mandatory grow-in rights would achieve uniformity with other provinces, none of which (except Nova Scotia) require grow-in rights. Even Nova Scotia appears to be moving away from mandatory grow-in rights. Since 2004 Nova Scotia has not required that grow-in rights be funded and the Nova Scotia Pension Review Panel (PDF) recommended in its recent report that mandatory grow-in rights be abolished. However, based on the OECP Report, Ontario ultimately determined that grow-in rights are desirable as a way to provide a bridge to early retirement for terminated middle age and older workers who typically face difficulties finding re-employment.

The expansion of grow-in rights could ultimately hurt the people it is intended to help. Grow-in rights only apply to plans that provide subsidized early retirement and other ancillary benefits, and there is no legislative requirement to provide these benefits. The expansion of grow-in rights forces sponsors wishing to provide these benefits to make them more widely available than they intended. I expect that the additional costs resulting from the expansion of grow-in rights will persuade some plan sponsors to eliminate these early retirements subsidy benefits altogether.

Furthermore, the expansion of grow-in rights raises certain administrative difficulties. First, disputes will no doubt arise between employers, employees and the Financial Services Commission of Ontario over whether a termination was for cause such that the member is not entitled to grow-in rights. Second, the expansion of grow-in rights further complicates the administration of multi-jurisdictional pension plans since, as noted above, none of the other provinces (except Nova Scotia) require grow-in rights.

If Bill 236 is passed with the current grow-in rights provisions, plan sponsors ought to look at the cost impact that these expanded rights will have on their plans well in advance of the January 1, 2012 effective date, so that they have ample time to consider whether or not they wish to make resulting changes to their plans (i.e., eliminate early retirement subsidy benefits). There may be legal obstacles to eliminating early retirement subsidy benefits that need to be considered, such as the removal of vested benefits, the requirements of collective bargaining agreements and employment law requirements.

Given the cost implications, plan sponsors will want to take steps to proactively manage any PBA mandated expansion of grow-in rights.

At the provincial level:

• The Alberta and British Columbia governments have appointed a joint industry advisory group to assist in the development of legislation based on the Report of the Joint Expert Panel on Pension Standards (JEPPS) (PDF), though new legislation is not expected for at least a year or more. The two governments have also been vocal in their calls for a national solution to the pension coverage dilemma to emerge from the Whitehorse meetings, failing which they intend to proceed with development of a regional pension plan patterned largely on the “ABC Pension Plan” concept from the JEPPS Report, possibly also including participation by Saskatchewan and Manitoba;
• On December 9th, Ontario released amendments to its pension legislation in its first limited phase of a two-phase implementation of reforms based on the Report of the Ontario Expert Commission on Pensions. Thus far, Ontario has shown only tepid interest in national-plan coverage solutions; and
• The Nova Scotia government has expressed fears of a two-tiered pension system developing in Canada if national consensus cannot be achieved.

Over the past weeks and months, many other industry, labour, plan member, retiree and professional groups have also expressed their views on how the governments should address these issues.

What can be drawn from these positions?

On the good news front, pension issues are receiving unprecedented attention, both at the political level and in the public consciousness, through the mainstream media. A groundswell of support will be necessary before any political action is likely. However, as yet there seems to be little sense of any emerging national consensus, either on legislative reform or on national solutions to the coverage question. Lost amidst much of the debate in the past year is the broader question of national harmonization of pension standards.

With the stage thusly set, are expectations for the outcome of the Whitehorse meetings too high?

These discussions are, in fact, regularly scheduled annual meetings of the Finance Ministers. While pensions are on the agenda, they are not the only matters to be discussed, making the northern gathering less than the “summit” that many seem to be expecting. There are, however, indications that these meetings may indeed set the stage for an actual summit on pension issues sometime next year.

It is expected that the Ministers will receive in Whitehorse the results of the research conducted by the Research Working Group on Retirement Income Adequacy, established earlier this year as a joint initiative of the federal and several provincial governments. Given the significant initiatives and reforms already proposed or underway in many provinces, reaction to the findings of the Working Group may well be key to determining whether our governments are willing to work together towards national solutions, or whether the various governments will move on in their own provincial or regional directions.

What is becoming clear, however, is that the Whitehorse meetings are more likely to serve as the starting point for whatever direction any coming changes to Canada’s retirement income system will take, rather than being a finish line based on the significant dialogue that has already occurred to date.