A unique feature of the plan was that it was not subject to provincial minimum standards pension legislation and hence, the issues had to be decided based on the common law. However, the case is relevant to plans that are subject to pension legislation since the amendment provision in the plan reflected the statutory requirements regarding the inability to reduce accrued benefits.

The plan terms prohibited amendments that retroactively reduced benefits earned by a member in respect of pensionable service prior to the date of such amendment. The issue was therefore whether an amendment eliminating indexing would violate this amendment provision.

The Court held that the proposed amendments reducing or eliminating indexing benefits for active members did not have the effect of reducing vested benefits, because the indexing benefits under the plan did not vest until members’ termination, retirement or death. As well, the Court interpreted the prohibition on amendments that retroactively reduced benefits earned by a member in respect of pensionable service prior to the date of such amendment as a prohibition on amendments that reduce “benefits acquired by the member at termination from the plan by the accumulation of Pensionable Service”. Accordingly, the Court held that the proposed amendments reducing or eliminating indexing benefits for active members were within the amending power under the plan and therefore permissible.

The Court also considered whether the plan could be amended to eliminate the cost of living adjustments for retired members, and specifically whether retired members could be said to vest annually in each indexing adjustment. The Court determined that such benefits vest once notwithstanding that the indexing formula in the plan did not necessarily give rise to an increase each year. It was sufficient for vesting purposes that the increase be calculable in accordance with the terms of the plan.

It is important to point out that the Court emphasized that it came to its conclusion that the indexing benefits did not vest until members’ termination, retirement or death “[c]onsidering the provisions of the Plan, the nature and purpose of the COLA benefit as set out above and the intent of the parties in enacting section 15.04(viii) of the Plan...”. In different circumstances, it would be open to a court to find that benefits vest pre-termination.

Further, as I indicated, a unique factual aspect of this case is that the plan at issue was not subject to pension standards legislation. For most pension plans, applicable pension standards legislation will impose additional restrictions related to plan amendments that will also need to be considered.

Although these cases took place in the unionized environment, since the decisions were based on the provisions of the Ontario Employment Standards Act (the ESA) and not the collective agreements, the reasoning may potentially apply to non-unionized employees as well. 

Section 51 of the ESA requires that during certain leaves (i.e., pregnancy, parental, family medical and personal emergency leaves) the following continue: (a) the employee’s participation in certain plans (such as pension, life insurance and extended health plans) unless the employee elected in writing not to do so; and (b) the employer’s contributions to such plans unless the employee gives the employer written notice that the employee does not intend to pay the employee’s contributions, if any.

The arbitrators gave a broad interpretation to section 51 of the ESA and concluded that it requires contributions to continue to be made at the same level as they were made prior to the commencement of the leave. In all three cases, the arbitrators were guided in their interpretation by the principle that the ESA, as minimum standards legislation designed for the protection of employees, ought to be interpreted in a broad and generous manner.

These cases reinforce the fact that ensuring compliance with legislative provisions can require a more detailed review of the applicable legislation and surrounding facts than one’s first instinct might suggest. In particular, in the pension and benefit field, special attention is required when determining the employer’s obligations to provide pension and benefit plans in respect of employees on leaves of absence governed by the ESA.

Like many aspects of Bill 120, these changes have not yet been proclaimed into force, and regulations are needed to provide much of the underlying details. However, plan sponsors and administrators should start considering the implications of these amendments now since they could require changes to current practices.
 

Prior to Bill 120, there were no restrictions on benefit improvements. Pursuant to Bill 120, subject to certain exceptions (i.e., amendments required as a result of a judicial decision or in prescribed circumstances), plan amendments that would increase accrued benefits while reducing a plan’s funded status below the prescribed level will be void. In its August 24, 2010 announcement (the August Announcement), the Ontario government indicated that this prescribed level would be 85%. The August Announcement also indicated that improvements may be made in these circumstances provided the sponsor complies with certain new funding requirements (i.e., make a lump sum payment to prevent a reduction in the funded status and amortize any remaining cost over no more than five years).

Contribution Holidays

In addition to expressly permitting contribution holidays, unless the “documents that create and support” the plan or the fund prohibit such holidays, Bill 120 also indicates that there will be certain prescribed conditions on taking contribution holidays. The August Announcement stated that contribution holidays will not be permitted where they reduce the plan’s transfer ratio below 105%, and that plans will be required to disclose contribution holidays to members and former members and file annual statements with the regulator to confirm eligibility. We’ll have to wait for the regulations to confirm these additional details.

Letters of Credit

Bill 120 introduces provisions permitting letters of credit to be used to fund a solvency deficiency provided various requirements are met. Once again, we’ll need to wait for the regulations to confirm all the requirements, but some requirements are contained in Bill 120 itself. For example, Bill 120 provides that letters of credit will not be permitted to exceed 15% of the plan’s solvency liabilities. As well, multi-employer pension plans and public sector pension plans will not be permitted to take advantage of letter of credit funding (though public sector pension plans may be specifically so permitted in the regulations).

Solvency Funding for Jointly Sponsored Pension Plans

Bill 120 allows jointly sponsored pension plans that existed on August 24, 2010 to amend their plan documents such that contributions are no longer required in respect of a solvency deficiency.

Regulations regarding Actuarial Methods and Assumptions

Bill 120 includes new authority, now in effect, allowing the government to make regulations with respect to actuarial methods and assumptions that may be used in the preparation of actuarial reports. As well, the August Announcement referenced a number of new, more stringent rules for valuing plan assets and liabilities that were being considered by the Ontario government. We’ll have to wait for the regulations to see if these rules go forward.

We’ll discuss these funding changes and other changes implemented by the recent waves of pension legislative reform in Ontario at our upcoming client seminar, “Managing the Impact of Pension Reform: Practical Implications for Employers and Plan Administrators”, on Wednesday, January 26, 2011.
 

While the case has yet to be tried on its merits, an interim decision recently released offers additional lessons on the limitations of relying on releases provided by plan members as a defence against plan member claims.

Pension plan members who took up a DB/DC conversion option in 1997 (i.e., whereby plan members are offered the opportunity to exchange their DB benefits for an amount in a DC account) commenced a claim against their employer and its actuarial consulting firm, in which they alleged, among other things, breaches of fiduciary duty and negligent misrepresentations in connection with the communication of the DB/DC conversion option.

The core of the plaintiffs’ claim is that their pension benefits under the DC plan were much less than they would have been under the DB plan. The specific alleged breaches included: (i) a failure to advise the plaintiffs of the personal considerations which they ought to have had in mind when deciding whether or not to accept the conversion offer; (ii) negligent misrepresentations in relation to preparation of the written materials; and (iii) a failure to advise the plaintiffs of the risks associated with the transfer of their pension benefits to the DC plan.

From 2004 to 2008, the employer laid off a number of employees and entered into settlements, for which the employees executed agreements releasing the employer from liability from claims that the employees may have against the employer (the Releases). The plan members who executed the Releases discontinued their claims against the employer, but continued in their action against the consulting firm. The consulting firm brought a summary trial application to dismiss the claims of these plan members, arguing that they too were subject to the Releases.

In addition to other matters, the Court considered whether or not the reference in the Releases to the release of agents from liability applied to agents of the employer and determined that the Releases were ambiguous. Applying a legal principle whereby ambiguities are resolved against the drafter, the Court found that the reference in the Releases to the release of agents from liability did not apply to agents of the employer.

Risks of Transfer from DB to DC Platform

Although this decision was only an interim decision, it highlights the challenges to plan administrators/employers in meeting the legal standard for communicating with plan members about their options to transfer from a DB to a DC structure. If the case goes to trial on the merits, it will be interesting to get further details in that decision on the allegations against the employer.

From the few details in this decision it appears that the employer followed a fairly standard process, engaging a reputable actuarial consulting firm, presenting the conversion option by way of written materials and informational seminars and providing plan members with various actuarial projections and models. A decision on the merits will be instructive in terms of why the plan members allege the employer fell short of meeting its legal obligations and will hopefully offer guidance on what’s required of plan administrators/employers.

Importance of Proper Drafting

Even though it’s not clear from the decision whether or not the intent was for the Releases to apply to agents of the employer, there’s an important lesson to be learned about the inherent risk in relying on releases (or other contractual exculpatory clauses) to limit liability, rather than ensuring that legal duties are properly fulfilled.

Essentially, the Court was unable to conclude that the term “agents” covered the consulting firm, because the language in the Releases was not precise on this point. The Court highlighted the complex sentence structuring in the Releases, noting that the relevant part of the Releases was “part of a lengthy sentence that is grammatically awkward. There are eleven commas and the word “and” is used four times.” Such complex sentence structuring can give rise to ambiguities.

It is therefore important in releases provided on termination of employment, as with all other employee agreements and communications, that they be drafted clearly using “plain language” as opposed to legal jargon. As well, if particular pension issues are intended to be covered by a release provided on termination of employment, these issues should be specifically referenced. Absent a specific reference, it may be difficult to rely on the release to defend against claims related to those particular pension issues.

The Policy is important reading for pension plan administrators as it imposes a new requirement to create a document management and retention policy. It also contains requirements impacting other documents such as pension plan services agreements and even purchase and sale agreements. The Policy applies to all plans, big and small, defined benefit and defined contribution, single employer and multi-employer, etc.

The importance of prudent document management and retention practices is not new. As the Policy notes, prudent record keeping practices are crucial to fulfilling the plan administrator’s fiduciary duty and meeting its primary obligation to pay benefits in accordance with the terms of the pension plan. As well, as the Policy notes, the Canadian Association of Pension Supervisory Authorities recommends in its Guideline No. 3 (Guidelines for Capital Accumulation Plans) and Guideline No. 4 (Pension Plan Governance Guidelines and Self-Assessment Questionnaire) that pension plan administrators adopt a document retention policy.

That said, the “recommendations” incorporated into the Policy achieve new levels of importance from a compliance perspective since they reflect FSCO’s view of prudent practices and, though not legally binding, are effectively mandatory requirements for Ontario administrators. As well, the Policy goes into a level of detail beyond what’s contained in these other publications. (Of course, the Bill 236-related regulatory requirements will be legally binding once enacted.)

While good pension plan governance arguably dictates that all pension plans should have a document management and retention policy, it’s now essentially a requirement of the regulator. Given FSCO’s position, I recommend that any plans without a document management and retention policy make it a priority to establish one. Plans that already have a policy in place should review them to ensure that they meet the requirements of the Policy and, when enacted, the new regulatory requirements.
 

While many of the rules in the proposed amendments regarding EL&H trusts are similar to existing law and policy for health and welfare trusts (H&W trusts), there are a number of interesting new provisions, including the following: 

• Clearly setting out the timing for claiming a deduction for employer contributions to an EL&H trust in respect of employee benefits to be paid in a future tax year. Specifically, the portion of any pre-funding that relates to benefits payable in a future tax year may only be deducted in that future tax year.
• Permitting an EL&H trust to treat employee benefit payments as expenses and apply special rules to allow the carryback and carryforward of losses where the trust's expenses for a particular year exceed its revenue. (Under the current rules for H&W trusts, benefit payments in excess of the trust’s income for the year are treated as distributions of trust capital with no other income tax impact.) 
• Specifically addressing employer contributions to an EL&H trust by way of a promissory note and prescribe the timing for claiming deductions for payments of principal and interest under the note.

The proposed amendments would apply to trusts established after 2009. The Government is seeking comments on the proposed amendments by April 30, 2010.

The consultation paper follows on the heels of the paper of the Steering Committee of Provincial/Territorial Ministers on Pension Coverage and Retirement Income Adequacy, “Options for Increasing Pension Coverage Among Private Sector Workers in Canada”, (PDF) which analyzed two proposals for increasing pension coverage in Canada through a national pension plan, namely: (a) creating a voluntary, defined contribution structure either added as an additional “tier” to the Canada Pension Plan or as a stand-alone plan; and (b) expanding the existing mandatory defined benefit structure of the Canada Pension Plan either by increasing the replacement rate or the upper limit on income on which the pension is calculated or both.

The British Columbia consultation paper also explores two additional options. First, the consultation paper considers modernizing current pension standards legislation to improve flexibility in pension plan design, for example, by permitting an entity that is not an employer, such as a professional association, to sponsor a pension plan. Second, the consultation paper considers amending the Income Tax Act to encourage increased retirement savings under current registered retirement savings vehicles, for example, by allowing individuals to repay amounts withdrawn from registered retirement savings plans in times of financial hardship. The consultation paper further notes that a blended approach, combining two or more of the four options, could be desirable.

The landscape for pensions and retirement savings in Canada may be changing if these recommendations are acted upon. If and when changes are made, it will be necessary to review how existing employer sponsored arrangements integrate into such landscape.

Comments on the British Columbia consultation paper are being sought by April 1, 2010.

Currently, grow-in benefits are only available to members affected by a full or partial wind-up whose age plus years of total service equal at least 55. Such persons are entitled to any early retirement benefits provided under the plan that they would have “grown into” had both the plan and their employment continued until their early retirement date.

The Bill proposes to extend these benefits to all members who are involuntarily terminated by an employer (other than for cause) on and after January 1, 2012. Jointly sponsored pension plans and multi-employer pension plans may elect to opt out of this requirement.

This proposed change is part of a general initiative in the Bill to treat plan members uniformly regardless of the circumstances of their termination (i.e., whether they are terminated in the normal course or as part of a broader program). Such consistency is a worthwhile goal, since it makes little policy sense to provide this benefit to employees terminated in a special situation (e.g., plant shut down or other reorganization) but not those terminated in the normal course. But consistency of treatment among plan members could also have been achieved by abolishing mandatory grow-in rights (for those who had not yet met the eligibility requirements).

The expansion of grow-in rights could ultimately hurt the people it is intended to help. Grow-in rights only apply to plans that provide subsidized early retirement and other ancillary benefits, and there is no legislative requirement to provide these benefits. The expansion of grow-in rights forces sponsors wishing to provide these benefits to make them more widely available than they intended. I expect that the additional costs resulting from the expansion of grow-in rights will persuade some plan sponsors to eliminate these early retirements subsidy benefits altogether.

Furthermore, the expansion of grow-in rights raises certain administrative difficulties. First, disputes will no doubt arise between employers, employees and the Financial Services Commission of Ontario over whether a termination was for cause such that the member is not entitled to grow-in rights. Second, the expansion of grow-in rights further complicates the administration of multi-jurisdictional pension plans since, as noted above, none of the other provinces (except Nova Scotia) require grow-in rights.

If Bill 236 is passed with the current grow-in rights provisions, plan sponsors ought to look at the cost impact that these expanded rights will have on their plans well in advance of the January 1, 2012 effective date, so that they have ample time to consider whether or not they wish to make resulting changes to their plans (i.e., eliminate early retirement subsidy benefits). There may be legal obstacles to eliminating early retirement subsidy benefits that need to be considered, such as the removal of vested benefits, the requirements of collective bargaining agreements and employment law requirements.

Given the cost implications, plan sponsors will want to take steps to proactively manage any PBA mandated expansion of grow-in rights.

Emphasis on Funding and Investment Procedures

The paper places tremendous importance on the process to be followed by pension plan sponsors and administrators in relation to their pension plan funding and investment activities. A key element of this process is the "prudent person rule", which serves as the guiding principle for all investment decisions, and essentially requires that a pension plan administrator exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person. In other words, the focus is on the methods followed by the administrator, and not simply on the result achieved.

According to the paper, it is essential that plan sponsors and administrators document their funding and investment procedures, as part of overall good governance, and in order to be able to satisfy the regulator in the event of a regulatory review. Evidence of the processes followed by the sponsor and administrator would also assist in putting forward a strong defence, should there be litigation over the pension plan’s funded status or the employer’s level of contributions.

Sponsor vs. Administrator Role: Which Activities Attract Fiduciary Duties?

The paper provides helpful insight into the regulators’ view regarding which aspects of pension funding and investment attract fiduciary duties and which do not. Activities that are required to be carried out by the plan sponsor in its capacity as such do not attract fiduciary duties, and decisions may be made based on the business’ best interests, subject to the obligations of good faith. On the other hand, activities that are required to be carried out by the plan administrator do attract fiduciary duties, and decisions must be made in the best interests of the plan and its members.

Generally, in single-employer pension plans, the employer has a dual role of plan sponsor and plan administrator, and the paper therefore describes which activities are to be performed by the sponsor (e.g., making necessary contributions to the fund) and which are to be performed by the plan administrator (e.g., investing the assets of the fund).

Interestingly, according to CAPSA’s paper, the establishment of a funding policy is a sponsor task. For example, a funding policy might set out the circumstances in which the sponsor will contribute amounts to the pension fund in excess of the minimum recommended by the actuary in the valuation. Prior to the publication of this paper, it was not always clear whether the regulators viewed that function as being part of the sponsor’s duties or the administrator’s duties. I note however that one of the specific issues on which CAPSA has asked for comments is the role of the plan administrator regarding the funding policy.

While not legally binding, the CAPSA paper provides a good summary of the regulators’ views on best practices in the area of pension funding and investment, as part of an overall pension governance strategy. After the consultation process, CAPSA plans to prepare three guidelines: 

• best practices for funding policies;
• best practices for investment policies; and 
• examinations by pension regulators of funding and investment processes.

Comments on the consultation paper will be accepted by CAPSA until January 29, 2010.

The implications of the CAPSA paper will be discussed further at our upcoming pensions seminar on Wednesday, December 9th.