• Mandatory Participation: Employers with five or more employees who have at least one year of uninterrupted service and who do not have a retirement savings plan funded through payroll deductions will be required to: (i) choose a VRSP to offer to their employees; (ii) enrol all their employees with more than one year of uninterrupted service in the plan; and (iii) withhold their employees’ contributions at source. Employers will have until January 1, 2015 to comply with this obligation.
• Contributions: Employers will not be required to contribute to a VRSP. Employer and employee contributions to VRSPs, combined with other RRSP contributions, will be subject to the same annual cap as RRSPs (i.e., a maximum of 18% of annual earnings).
• Auto-Enrolment: Employees will be automatically enrolled in the plan, but may elect to opt out within 60 days of enrolment. (VRSP participants may also voluntarily decide to cease to contribute for a certain time and then resume contributing at a later date.)
• Additional Optional Enrolment: Those not automatically enrolled, such as self-employed workers or individual savers, may enrol in a VRSP by contacting a plan administrator directly.
• Locking-in: While contributions by an employer to a VRSP will be locked in and may not be withdrawn before age 55, employees may withdraw their contributions to a VRSP (subject to income tax deductions). 
• Investments: There will be a default investment option based on a “life cycle” approach (i.e., the risk level will be adjusted based on the participant’s age.) To limit the complexity of VRSPs, administrators may also offer a maximum of five other investment options with varying risk levels.
• Administration: VRSPs will be completely administered by the third parties (e.g., financial institutions or investment fund managers) who hold a permit issued by the Autorité des marchés financiers. Each VRSP will also have to be registered with the Régie des rentes du Québec.

Also of note is the fact that VRSPs will be implemented through separate legislation (not through an amendment to the Québec Supplemental Pension Plans Act or an exempting regulation). A bill should be introduced before the National Assembly within the next few months.

The implementation of VRSPs remains conditional, however, upon the adoption of certain amendments to the federal Income Tax Act.

An interesting point mentioned in the budget is that “the main parameters of the [VRSPs] will be harmonized with the new Canadian plan, the pooled registered pension plan (PRPP)”. It remains to be seen how harmonized this new scheme will really be once the federal and provincial governments have each adopted their respective framework for PRPPs / VRSPs. Considering the current patchwork of pension legislation in Canada, one can only be cautiously optimistic about the prospect of a truly harmonized pension scheme in Canada.

Lastly, the Budget reiterates an earlier announcement regarding the establishment of expert committees to review target benefit pension plans, municipal retirement plans, and Québec’s retirement system generally. The recommendations of these committees, which are expected during 2012, will provide “a basis for proposing sustainable and realistic solutions to the challenges pension plans face.”

• Use of a “smoothing” method (i.e., averaging method) to value plan assets on a solvency basis over a 5-year period rather than using the current market value;
• Consolidate certain solvency deficiencies; and
• Extend the amortization period to eliminate the new solvency deficiency from 5 to 10 years.

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.

This case involves a small federally regulated pension plan sponsored by Aéroport de Québec inc. (the Employer) that was terminated effective October 15, 2008. While examining the wind-up documentation, the Office of the Superintendent of Financial Institutions (OSFI) came to the conclusion that the Employer had failed to exercise an appropriate level of diligence and care in connection with the investment of the plan assets as required by subsections 8(3), 8(4) and 8(4.1) of the Pension Benefits Standards Act, 1985 (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.

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.

The government is planning to amend Quebec’s legislative and regulatory frameworks to allow a new type of retirement savings vehicle for those who are not eligible for an employer-sponsored pension plan. VRSPs would essentially be based on the framework for “pooled registered pension plans” (PRPPs) that was announced by the federal government last December.

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.

 

In one of these cases, which is still pending before the Québec Superior Court, the pension committee of the Pension Plan for Employees of the City of Sherbrooke (the Committee) retained the services of an actuary employed by Mercer to assist in revamping its investment policy and selecting investment managers. The actuary recommended that a portion of the assets of the plan be invested in hedge funds, and suggested a number of potential investment managers. With the assistance of the actuary, the Committee ultimately retained a firm called Norshield and invested $17 million in its hedge fund. Two years later, Norshield was placed in receivership and the plan’s investment had to be entirely written off.

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.

The assets attributable to those who elect this new 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.

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

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

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

TRADUCTION:

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

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

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

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

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

The Bill 30 Regulations include the following:

• provisions providing for the establishment of a reserve to increase benefit security (including the conditions for calculating a provision for adverse deviation);
• clarification of the rules for using letters of credit and the requirements for actuarial valuations; and
• harmonization of the provisions relating to the partition of benefits between spouses in a civil union.

The Bill 30 Regulations will come into force on January 1, 2010. However, some measures such as the provision for adverse deviation must be reflected in actuarial valuations as at December 31, 2008 or later if an employer elects to avail itself of one or more of the funding relief measures introduced by Bill 1 (PDF) and the related regulation (PDF).

Since the Bill 1 regulation has not yet been adopted, the Régie des rentes du Québec announced that the deadline for submitting an actuarial valuation as at December 31, 2008 to the Régie has been extended until December 31, 2009 (instead of September 30, 2009).

Now that the legislative framework for the new funding scheme is largely in place, it will be interesting to see whether it will significantly strengthen the funding of defined benefit plans while slowing the gradual decrease in defined benefit plan coverage.

Traduction en français:

Le gouvernement du Québec a publié, le 21 octobre 2009, un règlement qui complète les nouvelles mesures de financement des régimes à prestations déterminées qui ont été introduites dans la Loi sur les régimes complémentaires de retraite par la Loi 30 (PDF) (telles qu’ajustées par la Loi 68) (PDF) (le « Règlement »).

Le Règlement prévoit notamment les points suivants:

• les éléments qui permettent la constitution d’une réserve destinée à accroître la sécurité des prestations (incluant les modalités de calcul de la provision pour écarts défavorables);
• les exigence en matière d’utilisation de lettres de crédit et d’évaluation actuarielles; et
• l’harmonisation des dispositions relatives au partage des droits entre conjoints unis civilement.

Le Règlement entrera en vigueur le 1er janvier 2010. Toutefois, certaines mesures telles que la constitution d’une provision pour écarts défavorables devront être reflétées dans les évaluations actuarielles dont la date est postérieure au 30 décembre 2008 si un employeur choisit de se prévaloir d’une ou plusieurs des mesures d’allégement prévues dans la Loi 1 (PDF) et son règlement d’application (PDF).

Comme ce règlement d’application n’est pas encore été adopté, la Régie des rentes du Québec a annoncé que les comités de retraite qui doivent remettre une évaluation actuarielle au 31 décembre 2008 ont jusqu'au 31 décembre 2009 (au lieu du 30 septembre) pour le faire.

Maintenant que le cadre législatif du nouveau régime de financement est presque entièrement en place, il sera intéressant de voir si les nouvelles règles renforceront la sécurité des prestations tout en aidant à enrayer la diminution graduelle du nombre de régimes à prestations déterminées.