As the government indicated previously, their focus is to make public sector pension plans "more sustainable for members and more affordable for taxpayers.” In addition, the Ontario government has reaffirmed its desire to ensure JSPPs move towards a strict 50-50 funding in cases where employee contributions are currently less than employer contributions.

The Ontario government’s proposals focus primarily on funding issues. Specifically, the government is seeking stakeholder input on the following proposals:

• where there is a new deficit, plans would be required to reduce future benefits or ancillary benefits before increasing employer contributions;
• in exceptional circumstances, a limit would be set on the amount or value of benefit reductions before additional contribution increases could be considered;
• any benefit reductions would involve future benefits only (i.e., members’ accrued benefits and current retirees would not be affected); 
• where employee contributions are currently less than employer contributions, increased employee contributions would also be available as a tool to reduce pension deficits; and
• where plan sponsors cannot agree on benefit reductions through negotiation, a new, third-party dispute resolution process would be invoked.

The Ontario government has indicated that this framework would be reviewed after the budget is balanced.

The government also reiterated its interest in exploring ways to enhance the sustainability of single-employer, defined benefit pension plans in the public sector, and its intention to introduce legislation this Fall to facilitate the pooling of pension fund assets, as well as the investment management functions of smaller broader public sector pension plans. 

• clarifying entitlement of retired members receiving joint and survivor pensions where their spouses pre-decease them;
• adding a transition provision requiring survivor consent to any lump sum settlement of small survivor benefits where the first instalment of the deceased retired member’s pension is due before the coming into force date; 
• specifying that the new letter of credit provisions do not apply to jointly sponsored pension plans, as well as multi-employer pension plans; 
• repealing provisions that currently enable the Superintendent of Financial Services to consent to the commutation or surrender of certain retirement savings arrangements in circumstances of financial hardship; 
• allowing the Superintendent to require plan administrators to provide additional information to persons entitled to notice upon the wind-up of a plan; 
• clarifying requirements for asset transfers between defined contribution plans; and 
• extending the time period (to June 30, 2013) permitting the government to make retroactive regulations in connection with defined benefit plan funding.

Indalex Recap

Recall, that in Indalex, contrary to widely accepted principles governing pensions under the Companies’ Creditors Arrangement Act (the CCAA), the Court of Appeal held that the entire amount an employer is required to contribute to fund a pension plan wind-up deficiency under the Ontario Pension Benefits Act (PBA) is subject to the deemed trust provisions of the PBA. In this case, such contributions were ordered to be paid in priority to outstanding secured creditor claims, including the super priority charge granted by the CCAA court to the debtor-in-possession (DIP) loan advanced to Indalex to finance its CCAA restructuring. In particular, the Ontario Court of Appeal held that:

• 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;
• due primarily to certain fact-based procedural deficiencies identified by the Court of Appeal, the DIP charge granted by the CCAA court order, which purports to impose paramountcy over the PBA deemed trust provisions, did not, in the circumstances, have priority over such deemed trust; and 
• 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 co-existing sponsor (non-fiduciary) and administrator (fiduciary) roles (the so-called “two hats” doctrine) in dealing with pension issues under the CCAA proceedings, giving rise to a constructive trust in respect of the plan deficit which also took priority over the DIP charge.

On the first point regarding the scope of the PBA deemed trust provisions relative to pension shortfalls, we may have to wait for insight from the Supreme Court of Canada when it hears the Indalex appeal on June 5, 2012. On the other two points, CCAA courts are already weighing in.

In this decision the CCAA court dealt head-on with its jurisdiction to grant super priority to D&O (directors and officers) and other charges which validly prime the PBA deemed trust on pension deficits, as well as the suspension of employer past service contributions (special payments). The court also incorporated into its analysis the concern of the Court of Appeal in Indalex relating to the potential for conflicts of interest to arise as a result of the dual role (“two hats”) of an employer as pension plan sponsor and administrator.

Timminco Limited and Bécancour Silicon Inc. (collectively, the debtors) applied for and obtained relief under the CCAA. The debtors sponsored two defined benefit (DB) plans and a hybrid defined benefit/defined contribution (DC) plan, all of which were underfunded and one of which had already been declared wound up. The debtors applied to Ontario Superior Court for an order (among other things):

• suspending employer special payment obligations to fund DB solvency deficiencies under the pension plans; and
• granting super priority payment of the administration charge (fees of the debtors’ CCAA third party service providers) and the D&O (directors and officers) charge out of debtor assets.

The court granted both orders by suspending the debtors’ special payment obligations for the duration of the CCAA stay and conferred super priority on both the plan administration charge and D&O charge.

Suspension of Special Payments

The debtors argued that during the CCAA restructuring they could only afford to pay DB normal cost and DC contributions, as well as member contributions deducted through payroll.

The CCAA court found that the debtors were in fact insolvent for purposes of the CCAA and did not have sufficient reserves to continue making special payments during the CCAA stay. The court further held that the affected employees and former employees covered by the pension plans would not be prejudiced by the suspension of special payments since, without the suspension, the CCAA restructuring would not succeed and the debtors’ would become bankrupt, which would not produce a better result for them. Based on this lack of prejudice, the court determined that the “two hats” doctrine referred to in Indalex would not be infringed through any conflict of interest because avoiding bankruptcy was in the best interests of both the debtors and pension plan beneficiaries. Therefore the requested relief would not favour the debtors’ interests (wearing their employer/plan sponsor “hat”) over their fiduciary obligations to pension beneficiaries (wearing their plan administrator “hat”).

Super Priority on Administration and D&O Charges

With respect to the super priority request, the CCAA court noted that it was not reasonable to expect essential professional service providers in CCAA restructurings to risk not being paid for their work, nor is it reasonable to expect directors and officers to remain at their posts to provide essential decision making throughout the restructuring process without the requested protection. Again, the court recognized that without such services bankruptcy would result, leaving pensioners and employees worse off. The court agreed with the debtors’ submissions that a CCAA court has the authority under the CCAA to override conflicting provisions of provincial statutes like the PBA deemed trust provisions “where the application of the provincial legislation would frustrate the company’s ability to restructure”, and that such paramountcy was confirmed by the Ontario Court of Appeal in Indalex.

Timminco 2 Decision

Following the relief obtained in Timminco 1 the debtors brought another motion before the CCAA court for an order approving the DIP facility and granting a priority charge on the debtors’ current and future assets in favour of the DIP lender. The DIP loan agreement also specified that DIP advances could not be used to make pension plan special payments.
The debtors’ motion was opposed by the unions representing affected employees, which argued that when the debtors negotiated the DIP loan agreement they had failed to consider their fiduciary obligations as pension plan administrators, or to consider the best interests of the plan beneficiaries.

In approving the DIP facility and granting the requested DIP loan super priority, the CCAA court rejected the unions’ arguments and noted, among other factors, that the Monitor and the secured creditors supported the super priority and “without the approval of the DIP Facility and the granting of the DIP Charge, there simply will be no money available” to proceed with the CCAA restructuring. As a result, the requested priority charge and the terms of the DIP agreement were necessary under the circumstances. The court stated its rationale as follows:

It is unrealistic to expect that any commercially motivated DIP Lender will advance funds without receiving the priority that is being requested on this motion. It is also unrealistic to expect that any commercially motivated party would make advances to the Timminco Entities for the purpose of making special payments or other payments under the pension plans.

The court went on to find that it was necessary and within its powers to invoke the doctrine of paramountcy such that the provisions of the CCAA override those of Quebec and Ontario pension legislation, thereby granting the DIP lender a super priority over all trusts, liens, charges and encumbrances, statutory or otherwise, including over any deemed trust created under the pension legislation.

Comment

Both Timminco decisions demonstrate that, post-Indalex, there may be an increased focus by the courts in CCAA proceedings on the general issue of potential conflicts of interest under the “two hat” doctrine when it comes to dealing with pension issues. However, the extent to which debtors are actually wearing their administrator “hats” verses their sponsor “hat” (and, as a result, are truly acting as a pension fiduciary) when they take certain pension-related actions during the course of CCAA restructuring requires further judicial scrutiny.

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 stated objectives of the tax proposals are to put in place PRPP rules which are “simple and straightforward to promote low-cost plans, take-up by employers and pension coverage among Canadians”.

• 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”.
 

In its April 2011 ruling, the Court of Appeal held that the entire amount an employer is required to contribute to fund a pension plan wind-up deficiency under the Ontario Pension Benefits Act (PBA) is subject to the deemed trust provisions of the PBA and, in the circumstances, should be paid in priority to outstanding secured creditor claims. A detailed account of the facts is available in a previous Osler Update relating to the Ontario Court of Appeal decision.

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.

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.

• 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.
 

• 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.)

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

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

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

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

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

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

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.

• 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.

This is the second in a series of posts that we will be making on the draft legislation. I will focus on the proposed changes dealing with the payment of pension administration expenses from the plan fund, as well as the ability of an employer to take contribution holidays out of available plan surplus.

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.

We have begun posting items on our blog expressing some of our thoughts on Bill 120 (for example, see our October 22, 2010 post on the Bill's surplus withdrawal provisions) and we have also made a submission to the Ontario government outlining our concerns in greater detail. Our submission includes the following recommendations:

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

Notwithstanding the win for HBC, the conclusion in this case does not necessarily apply to other employers who sponsor defined benefit plans. It will still be necessary to carry out a review of historical plan documents in order to confirm that any proposed action, whether it involves charging plan administration expenses to the pension assets or transferring assets and liabilities to another plan with or without related surplus, is permitted.

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.

• 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.

• 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.

Ontario Bill 54, An Act respecting retirement savings plans for employees and for self-employed persons, (PDF) a private member’s bill introduced earlier this month, attempts to move this discussion forward by proposing amendments to the Ontario Pension Benefits Act to enable insurers and financial institutions to establish defined contribution pension plans for one or more unrelated employers or classes of employers. (Sole proprietorships and partnerships could also register as participating employers in such a plan.) While members would be required to make contributions, employer contributions would be voluntary. Income Tax Act changes would also be required.

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.

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

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

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

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

In a recent podcast, Osler partner Sandra Cohen of our New York office discusses the changing landscape of executive compensation and the outlook for 2010.