The federal government began on the road to pension reform with the introduction of Bill C-9 – this year’s budget bill – which received royal assent on July 12, 2010. (See our April 1, 2010 blog post.)

Bill C-9 included a number of funding-related provisions that required separate amendments to the Regulations. A number of these outstanding issues appear to have been addressed in this latest round of amendments. The amendments to the Regulations will add the following details:

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

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

The government is advancing a three-pronged approach to the basic issues of pension plan coverage, adequacy and security. The first initiative is the reform of Ontario’s own private pension laws. In furtherance of this initiative, the government has passed one major reform bill (Bill 236) this year and recently introduced a second major set of reforms (Bill 120).

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

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

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

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

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

The pre-reform PBA allows a majority of current and former members to vote to establish an advisory committee comprised solely of member representatives. The purpose of such a committee is to monitor plan administration, make recommendations to the administrator regarding administration and promote awareness of the plan. To date, advisory committees have not been very common – Bill 236 seems to be aimed at changing that.

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

What are some of the practical implications for plan administrators?

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

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

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

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

One of the most significant changes brought about by Ontario's Bill 236 is that, effective July 1, 2012, grow-in rights will apply to all terminations by employers, unless the employee was terminated for "wilful misconduct". Special rules will permit multi-employer plans and jointly sponsored plans to elect to be excluded from this rule.

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

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

Under the old plan wind up surplus withdrawal rules, an employer had to obtain both the necessary number of member consents and establish its surplus ownership rights at common law. Historically, FSCO took a strict approach to the latter requirement and refused to approve a surplus withdrawal application unless the employer was clearly entitled to the surplus. In most cases employers could not meet this high bar and it was necessary to obtain court approval before applying to FSCO. This added to the cost and complexity of the application and created additional delays.

As of May 18, 2010 the old regime is gone and a new one is in place. Under Sections 63(1) to (3.2) of Bill 236, on full or partial wind up of its pension plan the employer has the option of establishing legal ownership of any surplus at common law or obtaining the required level of agreement from affected members to a surplus sharing arrangement. It is no longer necessary for the employer to satisfy both requirements.

It is too early to predict the full impact of the new regime as the amendment contemplates the enactment of regulations which have not yet been passed. Technically, however, the new regime is now in force.

The draft regulations implement a portion of the changes announced by the federal government on October 27, 2009. Other changes to the PBSA announced in the fall were made in Bill C-9, the Budget Bill, which was introduced by the federal government on March 29, 2010. Among other things, Bill C-9 amends the PBSA to require employers to fully fund pension benefits on plan termination, a change which brings the federal pension statute in line with most pension standards legislation in Canada. More amendments will be required to implement the package of proposals announced in 2009.

The draft regulations propose three key changes.

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

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

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

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

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

New Restriction on Taking Contribution Holidays

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

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

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

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

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

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

Proposed Regulations out for Comment

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

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

In Kovacs v. Arcelor Mittal Montreal, the employer decided to close a plant as a part of a filing under the Companies’ Creditors Arrangement Act. The employer had negotiated an early retirement package with its union. To be eligible for the negotiated early retirement program an employee had to satisfy one of the following requirements: (i) have 30 or more years of service; (ii) be older than age of 55 with 15 or more years of service; or (iii) be at least 52 years of age but less than 55 years of age with 25 or more years of service.

Mr. Kovacs, an employee at the closing plant, did not satisfy any of the eligibility requirements since he was 47 years old and had only 27 years of service. He launched a human rights complaint, arguing that he had been subject to discrimination on the basis of age.

The Tribunal noted that early retirement plans, which may contain eligibility requirements based on age, are common in unionized workforces and that they provide “superior benefits to older, long service employees; individuals who may experience greater difficulty in obtaining alternative employment if permanently laid-off.”

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

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

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

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

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

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

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

Why should you be concerned?

Because the consultation policy imposes new obligations on plan administrators that will affect the day-to-day operations of all pension plans in Ontario. These measures are framed as “recommendations” but since they embody what FSCO considers to be the prudent approach to records retention they are, in effect, requirements. The consultation paper does not differentiate between big and small employers. The expectation seems to be that all plan administrators will comply with the policy.

The key recommendation is a requirement to establish a written record management and retention policy, which must address a prescribed list of items. These items include: the types of plan documents that must be retained and their retention period, where the documents will be stored, how the documents can be accessed, treatment of private and confidential documents, the process for maintaining a back up of the documents, the process for monitoring the documents and many other matters. These issues are also supposed to be addressed in any agreements with custodians and third party administrators.

FSCO’s consultation policy also addresses retention periods. FSCO recommends keeping copies of “general plan records” indefinitely, even after a plan is wound up because there is always a risk that an error was made in the wind up report. FSCO also specifies the information administrators are expected to retain in respect of terminated plan members, and recommends that employers take steps to educate plan members on the need to keep their personal records up to date and to maintain the flow of communication with terminated members.

FSCO is looking for comments on the consultation policy. If you have concerns, comments or questions, you should let FSCO know – FSCO wants to hear from all stakeholders.

The deadline for comments is February 26, 2010.