• proclamation of the "retired member" provisions in the PBA;
• implementation of immediate vesting for plan members (the 2012 Budget indicates that this change will come into effect on July 1, 2012);
• increases to the threshold for the pay out of "small pensions"; and
• clarification of the surplus withdrawal rules.

Some Good News for Private Sector Employers

The government recognized that as a result of ongoing market volatility and low interest rates many private sector defined benefit plans continue to struggle with solvency funding deficits. In response, the government announced an extension of the temporary solvency funding relief measures introduced in 2009. Employers will also be permitted to begin amortization of solvency and going concern special payments one year after a plan valuation date. These changes will go into effect when filing the first actuarial valuation report dated on or after September 30, 2011. 

In addition, the government reiterated its plan to permit employers to use letters of credit for up to 15% of a plan’s solvency liabilities. (This amendment was included in Bill 120, but is yet to be proclaimed in force.)

The Budget also announced the establishment of an “Unclaimed Intangible Property Program” to reunite owners with their “unclaimed property”, including insurance policies, returned stocks and bonds, bank deposits, unpaid wages, and pension benefits. This may finally provide a mechanism for plan administrators to deal with the benefits of unlocated members.

The Budget recaps past pension reform (e.g., Bill 236 and Bill 120 amendments to the Ontario Pension Benefits Act) and indicates that draft regulations to implement these reforms will be released later this year – some as early as this spring – including regulations related to the following:

• clarification of the surplus rules;
• implementation of many of the asset transfer provisions;
• implementation of a “funding concerns” test for plans not required to fund on a solvency basis; and
• eligibility conditions for “contribution holidays” and accelerated funding of benefit improvements.

The Budget also states that a number of previously announced reform amendments will be coming into force on July 1, 2012, including:

• immediate vesting;
• elimination of future partial plan wind-ups; and
• extension of grow-in benefits to all employees (other than those dismissed for wilful misconduct, disobedience or wilful neglect of duty) and the related ability of jointly sponsored and multi-employer pension plans to opt out.

“Sustainable” and “Affordable” Public Sector Plans

Taking its cue from the pension-related recommendations in Don Drummond’s report on the Ontario public service, the Budget notes the increasing cost of the government’s pension obligations and emphasizes the need for public sector plans to be “more affordable for taxpayers and sustainable for pension plan members.” In this regard, the Budget  includes (in addition to wage freezes, which would impact most public sector plans) the following announcements specific to pension plans:

Jointly Sponsored Plans

• The government would develop a legislative framework, subject to consultation, to implement the objectives set out below.
• Where employee contributions are currently less than employer contributions, increases to employee contributions would be considered as a means of reducing pension deficits. The goal being to split plan funding 50/50 between employers and employees.
• Where there is a deficit, plans would be required to reduce future benefits or ancillary benefits (subject to limits in exceptional circumstances) before further increasing employer contributions.
• Any benefit reductions would affect future benefits only. It would not impact benefits that have already been accrued or the benefits of current retirees. 
• If plan sponsors cannot reach an agreement on benefit reductions, a new third-party dispute resolution process would be triggered.

Single-Employer Plans

• The government will adjust previously announced temporary solvency funding relief measures to encourage plans to split the cost of ongoing contributions evenly between employers and employees within five years.
• Efforts to convert current single-employer defined benefit public-sector pension plans to jointly sponsored pension plans with equal cost-sharing will also be encouraged.

Pension Asset Management

• Recognizing the effectiveness of the asset management strategies of some of the larger public sector plans, the government indicates that it will introduce legislation this fall to facilitate the pooling of pension fund assets and investment management functions of smaller public sector plans.
• The Budget indicates that this pooling of resources may be achieved “through a new investment management entity or by building on existing large public-sector pension plans” and that further consultation will be required.

Enhancements to Canada’s Retirement System

The Budget reiterates the Ontario government’s commitment to“modest” enhancements to the Canada Pension Plan. At the same time, the government expresses its concerns regarding the federal government’s proposed pooled registered pension plans, specifying that “the implementation of pension innovation should be tied to CPP enhancement as part of a comprehensive approach.”

Next Steps

While much of the detail is yet to come, this year’s Ontario Budget contains more pension announcements than we have tended to see in past years, indicating that pensions are higher up on the government’s agenda. Private and public sector plans, and organizations that sponsor them, may want to start preparing (now) for the changes ahead.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The PBSA reforms contained in Bill C-47 include:

New Specific Rules for DC Plans

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

Missing Plan Members

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

Negotiated Contribution Plans

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

Portability

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

Electronic Communications

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

Multi-Jurisdictional Plans

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

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

Specifically, the current provisions to be eliminated are those which prevent plan sponsors from investing more than: 

• 5% of the book value of plan assets in any one parcel of real property or Canadian resource property;
• 15% of the book value of plan assets in Canadian resource properties; or 
• 25% of the book value of plan assets in real property and Canadian resource properties.

Under the existing rules, real property generally refers to real estate holdings (and includes leasehold interests), and Canadian resource properties are rights with respect to petroleum or natural gas.

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

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

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

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

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

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

For instance, Bill C-9 contains the increase to the Income Tax Act pension surplus threshold from 10% to 25% of actuarial liabilities (as discussed in our March 25, 2010 post). Bill C-9 also includes a number of significant amendments to the federal Pension Benefits Standards Act (the PBSA), although many of these will require amendments to the Pension Benefits Standards Regulations (PBSR) before they can be fully implemented.

Funding

• Subject to certain specified conditions, employers may use letters of credit in lieu of solvency payments. (Although not included in Bill C-9, it was previously announced that the maximum amount of any such solvency letters of credits would be capped at 15% of the plan’s assets – such limits will likely be introduced in future amendments to the PBSR, before this provision becomes effective.)
• Unless permitted by the Superintendent, amendments which would reduce a plan solvency ratio below a prescribed level will be void. (According to the earlier announcement, this level will be 0.85, however, it is to be set by future amendments to the PBSR.) 
• The Superintendent will have the authority to require filing of actuarial valuations and financial statements at “any intervals” it so directs.
• The Superintendent may appoint an actuary to prepare an actuarial report of a plan where it believes it to be in the “best interests” of plan members and former members to do so.

Plan Wind-Ups

• Employers will be required to fully fund pension benefits on plan termination and any overpayments will revert to the employer (i.e., the overpayments will not be considered “surplus” and therefore will not be subject to the surplus withdrawal requirements).
• Employer declared partial terminations will be eliminated (although the regulator will retain the discretion to order partial terminations).

Vesting

• Vesting of benefits will be immediate on commencement of plan participation, however, the two-year waiting period currently allowed before participation begins will be maintained.

Plans At Risk

• Where an administrator is insolvent (or otherwise unable to act) the Superintendent may remove the administrator and appoint a replacement.
• A framework will permit employers and members of plans to agree to a “workout scheme” (i.e., a short moratorium on deficit payments and changes to the pension arrangements) where the employer is unable to meet the statutory funding requirement.

Defined Contribution (DC) Plans

• Members entitled to an immediate pension may elect to receive a “variable benefit” (similar to Life Income Funds) from a DC plan.

Some of these changes, such as the permitted use of letters of credit for solvency funding, will provide (welcome) funding relief to plan sponsors. Yet other changes (in particular the wide latitude given to the regulator to order new valuation reports) could result in significantly higher funding obligations for plan sponsors, and should be viewed with caution.

Plan sponsors and administrators should also keep in mind that a number of items that were previously announced by the federal government were not included in Bill C-9. Many of these outstanding items, e.g. implementing a new solvency funding standard, permitting plans to consolidate past deficiencies each year, and revamping the federal investment rules, appear to require separate amendments to the PBSR. Sponsors of DC plans should also look for further amendments to the PBSA clarifying their duties and responsibilities, as previously announced.

In any event, it does appear that the federal government is moving ahead with its promise to reform its pension legislation – the full impact of such reform will not be entirely clear, however, until it has been completed.

If the Supreme Court overturns the Court of Appeal decision and rules that this death benefit is discriminatory and contrary to the Charter, public sector plans which use age-based criteria to calculate certain benefits could find themselves facing a similar Charter challenge. Similarly, an adverse ruling by the Supreme Court could potentially be used in the private sector as a new basis to argue that the use of age-based criteria in pension plans violate provincial and federal human rights legislation.

The Withler case arose as a class proceeding, which was initiated by the surviving spouses of deceased members of the Public Service Superannuation Act (the PSSA) and Canadian Forces Superannuation Act (the CFSA). The spouses received a supplementary death benefit (SDB) upon the death of the member, the amount of which differed depending on the age of the plan member. Provisions in the PSSA and the CFSA permitted a 10% reduction in death benefits for every year the plan member exceeded age 65 (for the PSSA) or age 60 (for the CFSA). The surviving spouses argued that the reduction provisions constituted age discrimination, contrary to s. 15 of the Charter.

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

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

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

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

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

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

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

Over the past year, there have been at least four reported court cases where the determination of an employer’s (or plan administrator’s) potential liability in relation to a pension plan was based largely on its communications with plan members.

In Kraft Canada Inc. v. Pitsadiotis, the administrator was able to successfully use evidence of its past communications with members regarding the plan terms to support a claim for rectification of the plan text with the intended pension promise. Specifically, the court found that past communications to members supported the administrator’s claim that a change to the plan text was made in error, and as a result ordered that the error should be corrected to reflect the intended plan terms, as communicated to members.

In Desjardins v. General Motors du Canada Ltée, a Quebec court noted that the plan administrator had held information sessions and distributed brochures explaining certain plan amendments to plan members. Based on this evidence, the court concluded that the administrator had not breached its duty to inform certain members about amendments permitting the buyback of past service.

In two other cases, employers were found liable for providing incorrect information or failing to provide necessary information about the plan to its members.

For example, in McLean v. Alberta (Minister of Justice), the employer mistakenly told a prospective employee that he could transfer pensionable service with his former employer into the employer’s pension plan. The Court ruled that the employee had been employed on the basis of the employer’s pension representation and awarded him damages, amounting to almost $300,000, in lieu of crediting him with the pensionable service with his previous employer. While such claims are typically based on negligent misrepresentation, the ruling in this case suggests that there are different legal remedies that courts may invoke to ensure that representations made by employers to their employees in relation to pension plans are legally binding.

Finally, in Health Employers’ Assn. of British Columbia and B.C.N.U., an arbitrator held that the employer had breached its duty under the collective agreement, as well as its duty of care, when it failed to tell an employee that she was eligible to join the plan once she began working part-time. The employee was awarded an amount as damages which was equivalent to the sum she had paid for the purchase of past service when she was a part time employee but not a member of the plan.

Concerns about plan member communications have not escaped further scrutiny by legislatures as well. Most recently, the federal government’s announcement regarding pension reform included a proposal to enhance the disclosure requirements for plan members. Specifically, the government intends to require pension plan administrators to provide additional information in annual statements and to expand the recipients of such statements to include former members and retirees.

Employees and plan members will typically rely on communications they receive from their employer (or the plan administrator) for information about their pension plan. Accordingly, it should not be surprising to note the trend in the case law towards increased litigation based on such communications and/or the duty of an employer/administrator to communicate information about the plan in a timely and understandable way.

Although defined benefit plans were the focus of much of the legislation and case law discussed above, these general legal principles applicable to plan communications will equally apply to capital accumulation plans, including defined contribution plans and group RRSPs.

What can employers and/or administrators do to improve their governance practices and fulfill legal duties in relation to plan communications?

First and foremost, plan administrators and employers will have to ensure that they meet whatever disclosure requirements are set out in the applicable pension standards legislation (as noted above, in certain jurisdictions such requirements may soon become more onerous). However, as evidenced by the recent case law, an employer’s (or administrator’s) legal obligations do not end with the legislation, as plan member communications (whether they be annual statements, member booklets or verbal representations) can form the basis for a legal action (as can a failure to communicate information about the plan).

Accordingly, those persons vested with responsibility for overseeing the operation of a plan should consider making a legal review of communications a regular part of their governance and risk management processes.