Last week, FSCO announced that effective January 1, 2013 all of  these filings must be filed electronically, as plan administrators will no longer have the option of submitting these filings in paper format.

To file electronically, plan administrators and/or their agents must first activate their unique PSP accounts. FSCO has posted instructions on how to activate a PSP account, as well as a series of FAQs providing more information.

In response to these “letter of credit amendments”, which came into force on April 1, 2011, the Office of the Superintendent of Financial Institutions recently updated its frequently asked questions on the changes to the DB funding rules to include new FAQs on letters of credit.

These FAQs consider issues such as:

• the treatment and application of letters of credit obtained under the Solvency Funding Relief Regulations and how they interplay with the “new” letter of credit regime;
• the treatment of a letter of credit that is included in solvency assets when calculating a plan’s average solvency ratio; and
• when a letter of credit that is used in lieu of solvency special payments must be provided to the trustee and what must be its effective and expiry dates.

This guidance should be of assistance to sponsors of federal pension plans seeking to use letters of credit in the future.

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.

As I discussed in an earlier blog post, New Brunswick was the fifth jurisdiction in Canada to appoint an expert panel to review pensions when it announced the formation of the Task Force last fall. The Task Force has indicated that it intends to issue an interim report, based on its initial review and stakeholders’ submissions, in the fall of 2011, and that it will present recommendations to the New Brunswick government aimed at encouraging risk management and risk sharing and ensuring the long-term sustainability of New Brunswick pension plans. Written submissions are due by September 19, 2011 and may be sent via e-mail to: pensions-retraite@gnb.ca.

There will be an opportunity for further stakeholder feedback following the release of the interim report. The Task Force expects to review and evaluate the feedback it receives and issue its final report in the spring of 2012.

The Agreement sets out a framework for the regulation and administration of multi-jurisdictional pension plans (MJPP), including:

• The rules of the jurisdiction of the Major Authority (i.e., the jurisdiction with the plurality of active plan members) will apply to a series of matters that affect the MJPP as a whole and are listed in a schedule to the Agreement (e.g., plan administrator duties, investment and plan registration).
• The rules of the jurisdiction of each Minor Authority will apply to applicable members in relation to matters that are not contained in the schedule (e.g., vesting, locking-in and surplus distribution).
• The “final location” method will be used to determine benefit entitlements (i.e., a member’s pension benefits will be governed by the laws of the jurisdiction where he or she terminates employment or retires under the plan).

The Agreement also includes specific rules related to plan funding, amendments, asset transfers, and plan wind-ups.

For a more detailed discussion of the Agreement and its implications for Ontario and Quebec MJPPs, see the Osler Update by Stephanie Kauffman and Julien Ranger-Musiol.

In response to commentary included in the federal budget, the CRA recently posted a series of Qs & As clarifying its administration of the rules regarding the tax treatment of lump sum amounts received in lieu of health and dental coverage. In the past, the CRA had taken the position that lump sum amounts received by retirees or employees upon cancellation of their private health coverage could be considered “advance reimbursements of medical expenses” and, as a result, not taxable when received. Upon reconsideration, the CRA has changed its position and concluded that such amounts are in fact taxable when received.

The CRA is providing advance notice of this change in position, by allowing these lump sum payments to continue on a tax-free basis until 2012. However, where the payments are in relation to an employer’s insolvency that arose prior to 2012, the payment eventually made to any retirees or former employees would not be subject to CRA’s new position on taxability even if it is made in 2012 or later.

Further details regarding reporting and withholding requirements are included in the CRA Qs & As.

As noted in an earlier blog post, Bill C-9 included a number of significant amendments to the PBSA related to funding, plan wind-ups, vesting, and plans at risk.  Briefly, the sections coming into force as of April 1, 2011 relate to:

• an employer's ability to use letters of credit in lieu of solvency payments;
• the ability of employers and plan members to agree to "workout schemes" (i.e., short moratoriums on deficit payments and changes to pension arrangements) where the employer is unable to meet the statutory funding requirements;
• the rights of members, former members and certain others to new types of plan information (e.g., actuarial reports, and documents related to workout schemes and letters of credit);
• the Superintendent’s authority to appoint a replacement administrator in insolvencies and certain other circumstances; and
• payments required on plan termination.

Effective July 1, 2011, provisions related to immediate vesting of benefits will come into force.

Previously, Ontario had adopted the investment rules as they read on December 31, 1999 – requiring any changes to the rules made by the federal government to be specifically adopted by the Ontario government. This change to the Regulations means that Ontario registered pension plans will now be subject to the most recent amendments to the federal investment regulations, and any future changes to these regulations will automatically apply to Ontario 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.

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.

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.

As discussed in a prior post, Bill C-47 follows up on the Bill C-9 amendments to the federal Pension Benefits Standards Act (the PBSA) that were passed earlier this year. Perhaps the most interesting are amendments which purport to provide defined contribution plan administrators with a limited form of “safe harbour” from liability related to member directed plan investments. Bill C-47 also included the following amendments to the PBSA:

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.

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 government also indicated that public sector pension plans would be subject to a separate review.

A press release indicated that Bill 120 would include amendments aimed at:

• strengthening pension plan funding requirements;
• providing certain multi-employer pension plans and jointly sponsored pension plans with more flexible funding rules;
• clarifying the surplus sharing provisions by providing a "dispute resolution process" to allow members, retirees and plan sponsors to reach agreements on how surplus should be allocated on wind up; 
• making the Pension Benefits Guarantee Fund more sustainable;
• strengthening regulatory oversight; and 
• improving plan administration.

The Ontario government also expressed its continued interest in a “modest and gradual” expansion of the Canada Pension Plan and further pension innovation.

We will provide a more detailed post on these most recent legislative amendments later this week.

• 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.

• eliminating partial wind-ups;
• introducing immediate vesting; 
• extending “Rule of 55” grow-in benefits to all plan members whose employment is involuntarily terminated (other than where there is wilful misconduct, disobedience or wilful neglect);
• enabling plan sponsors to access surplus on the full or partial wind-up of a plan by entering into a surplus sharing agreement; 
• taking steps to facilitate asset transfers and plan mergers;
• increasing plan transparency, and plan members’ and retirees’ access to information; and
• permitting plans to offer phased retirement.

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.

These amendments, which will apply to all registered pension plans, whether federally or provincially regulated, beginning with 2010 current service contributions, will allow employers to accumulate greater surpluses in their plans. The theory is that in doing so employers will be encouraged to contribute more to their plans, thereby increasing benefit security and reducing funding volatility.

While many in the pension industry have been lobbying for these changes to the tax rules for some time, the willingness of employers to take advantage of these amendments may be influenced by their perceived ability (or lack thereof) to access such surplus under current provincial pension standards legislation. The so-called “asymmetry issue” (where those responsible for funding deficits are not given equivalent access to surplus) is an issue that can only be fully resolved by legislative reform, which is still pending across Canada.

• elimination of the deferral for public company stock options;
• restrictions on the deduction for the cash out of stock options; and
• special relief for tax deferral elections.

For more information on these changes to the taxation of employee stock option plans, see the Osler Update: Budget Briefing 2010.