The past year has been a busy one for courts and legislators considering pension law in Canada. Significant reforms to pension legislation have taken place in various jurisdictions, and there have also been a number of important developments in the case law.
ACTION ITEMS FOR PLAN SPONSORS AND PLAN ADMINISTRATORS
As a result of the recent changes to Canadian pension law, many Canadian pension plans will need to have their plan texts reviewed and amended, including plans with members in "included employment" subject to federal pension legislation, plans with members in Ontario, and plans with members in Manitoba.
Certain plans will also need to review their statements of investment policies and procedures to take into account the recent changes to the federal pension investment rules, discussed below.
2010 LEGISLATIVE REFORM
The following is a brief look back at some of the developments that have taken place in 2010.
Changes to Ontario Legislation
In 2010, Bill 236 (Pension Benefits Amendments Act, 2010) and Bill 120 (Securing Pension Benefits Now and for the Future Act, 2010) both received Royal Assent. Each of these bills amends the Ontario Pension Benefits Act (PBA). Some of the amendments are now in force, although most will not take effect until a date yet to be named by proclamation, and many will require regulations to implement.
Among the most notable changes that will be brought about by Bill 236 are:
- immediate vesting for all service;
- entitlement to grow-in benefits for all involuntary "without cause" terminations of plan members who have 55 age plus service points; and
- the elimination of partial wind-ups.
Bill 236 also relaxes the threshold for the commutation and unlocking of small benefits, changes member notice requirements, and creates new Pension Advisory Committee rules. In addition, Bill 236 will make phased retirement available in Ontario.
The most significant changes resulting from the passage of Bill 120 include:
- changes to the funding rules for DB plans;
- changes to the Pension Benefits Guarantee Fund (PBGF);
- new provisions relating to surplus withdrawals;
- new provisions to permit the creation of target benefit plans; and
- changes granting new powers to the Financial Services Commission of Ontario (FSCO).
Changes to Federal Legislation
Bill C-9 (Jobs and Economic Growth Act) resulted in various amendments to the Pension Benefits Standards Act, 1985 (PBSA). A number of the changes are currently in effect, while others will come into force on a date or dates to be fixed by proclamation. The key amendments include:
- the inability of employers to declare a plan partially terminated;
- immediate vesting for all service upon enrolment;
- the ability to negotiate workout agreements for distressed pension plans; and
- enhanced disclosure obligations for plan administrators.
In addition, Bill C-9 provides that plan administrators must obtain the Superintendent's consent to commuted value transfers where the transfer would, in the Superintendent's view, impair the solvency of the pension fund. The Superintendent may also designate an actuary to prepare an actuarial report for a plan where the Superintendent believes it to be in the best interests of the members and former members of the plan.
Bill C-9 also amends the PBSA to include an express provision permitting multi-employer pension plan administrators to amend the plan or funding agreement to reduce accrued benefits notwithstanding the plan terms, but subject to the Superintendent's approval.
Additional amendments include the ability to use letters of credit to satisfy solvency funding obligations, full funding on plan wind-up, and the ability to provide variable benefits to members of defined contribution plans.
Bill C-47 (Sustaining Canada's Economic Recovery Act) received Royal Assent on December 15, 2010. Part 9 of Bill C-47 amends the PBSA to do a number of things, including:
- authorize the Minister of Finance to enter into an agreement with the provinces in respect of multi-jurisdictional pension plans;
- authorize the Minister of Finance to designate an entity to receive, hold and disburse pension benefit credits of persons who cannot be located;
- permit information provided by plan administrators to members or the Superintendent to be provided in electronic form;
- provide rules regarding "negotiated contribution" plans; and
- require spousal consent for transfers of pension benefit credits to retirement savings plans.
In addition, Bill C-47 provides for the establishment of a limited "safe harbour" for defined contribution plans by specifying that if a plan administrator provides members with investment 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", and if in doing so the administrator complies with the regulations, the administrator is deemed to have complied with s. 8(4.1) of the PBSA, which establishes the standard of care for investing the assets of a pension fund.
Changes to the Pension Benefits Standards Regulations, 1985
On July 1, 2010, a number of amendments to the Pension Benefits Standards Regulations, 1985 (PBSR) came into force. The amendments set out the new funding requirements for DB plans, and changed the federal pension investment rules to remove quantitative limits on investments in real and resource properties. The change to the investment rules will not only affect federally-regulated private pension plans; it will also affect pension plans governed by provincial legislation that has adopted the federal investment rules as amended from time to time (e.g. British Columbia and Alberta). Plan administrators that are affected by this change should review their plans' statements of investment policies and procedures to determine whether amendments would be appropriate to reflect the change.
Changes in Other Jurisdictions
Other jurisdictions have also experienced changes to their pension legislation in 2010. Most notable among them are Manitoba, where a number of significant amendments have taken place, and Prince Edward Island, where brand new pension legislation was recently introduced. There have also been minor changes to pension laws in New Brunswick, Nova Scotia, British Columbia, and Alberta in the past year.
Key Changes to the Income Tax Act
Other important developments in 2010 include proposed amendments to the Income Tax Act (Canada), including the following:
Employee Life and Health Trust (ELHT): This is a trust that provides non-pension employee benefits, such as medical and dental. The ELHT rules codify some current Canada Revenue Agency practices for Health and Welfare Trusts but also include some significant differences. The ELHT rules include specific provisions regarding the timing of the deduction of employer contributions and restrict participation by "key" employees (high income earners and significant shareholders). The new rules apply to trusts established after 2009.
Non-Resident Trust (NRT) Rules: The previously proposed version of these rules was of concern to the pension community because it had potentially draconian consequences for a registered pension plan investing in certain NRTs (the pension plan could have been jointly and severally liable for the Canadian income tax of a NRT deemed to be resident in Canada). The revised version of the NRT rules, released in August 2010, addresses this concern by providing an exemption for registered pension plans and most intermediaries through which they invest.
November 2010 Proposed Technical Amendments: Included in the technical amendments were a number of changes relevant to registered pension plans, including relieving amendments relating to:
- repayments of pension benefits paid in error; and
- contributions to a registered pension plan by a purchaser of a business to fund benefits in respect of former employees of the vendor.
Tax-Free Savings Account (TFSA): Certain anti-avoidance rules are being put in place to address what the Government perceives to be abusive practices with respect to TFSAs.
KEY CASES FROM 2010
Hydro One Inc. v. Ontario (Financial Services Commission) – Threshold for Ordering a Partial Wind-Up
In January 2010, the Ontario Court of Appeal released a decision in Hydro One Inc. v. Ontario (Financial Services Commission) in which it considered the threshold for when the Superintendent of Financial Services (the Superintendent) may order a partial wind-up of a pension plan under paragraph 69(1)(d) of the PBA. That provision permits such an order if "a significant number of members of the pension plan" cease to be employed as a result of the discontinuance of all or part of the business or as a result of a reorganization. Prior to this decision, "significance" was assessed by either considering the number of terminated plan members in comparison with the total number of active plan members prior to the business change, or by considering the absolute number of terminated plan members. In Hydro One, the Court of Appeal held that "significance" may also be assessed by considering the relative size of the number of terminated employees in a defined subset of plan members in relation to the total number of members in that subset. This decision expands the potential ambit of the partial wind-up concept. However, the decision will be overtaken when Bill 236 comes into force, as the Superintendent's power to order a partial wind-up will be limited to situations in which "all or substantially all" of the members of the pension plan or "all or substantially all" of the business or assets of the employer are affected by a business reorganization.
Re Indalex – "Deemed Trust" Under the PBA
The decision of Re Indalex, decided by the Ontario Superior Court of Justice (Commercial List) in February 2010, considered the concept of the "deemed trust" under the PBA in the context of proceedings under the Companies' Creditors Arrangement Act (Canada) (CCAA). Indalex obtained protection from its creditors under the CCAA, and an court order was issued approving the sale of its assets. Two member groups asserted deemed trust claims over the sale proceeds in respect of pension deficits. However, the Court held that the deemed trust under the PBA does not arise in respect of the solvency deficiency of a continuing pension plan or in respect of special payments in a plan wind-up which are not due and payable at the relevant time. An appeal of this decision was heard in late November, and a decision is expected sometime in the new year.
Lomas v. Rio Algom Limited – Employees Cannot Force Wind-Up
In March 2010, the Ontario Court of Appeal released its decision in the case of Lomas v. Rio Algom Limited, which held that pension plan members cannot obtain a court order requiring the employer to wind up a pension plan. According to the court, allowing members to force a wind up would be contrary to the societal purposes for which pension plans exist and contrary to the language of most pension plans themselves. More importantly, the Court also noted that the type of order sought by the applicant would conflict with the legislative scheme of the PBA, which only contemplates wind-up proceedings being commenced by the employer or the Superintendent. The Court's decision is favourable for employers, because it emphasizes that employees do not have a right to initiate the wind up of a pension plan on their own. However, plan members who feel a plan should be wound up are not without recourse, as they may request that the Superintendent initiate wind up proceedings.
Burke v. Hudson's Bay Co. – Transfer of Surplus Not Necessary on Sale of Division of Company
In October 2010, the Supreme Court of Canada in Burke v. Hudson's Bay Co. confirmed that a proportionate share of pension surplus in a defined benefit (DB) plan need not necessarily be transferred to a successor plan established for transferred employees on the sale of a division of a company. The Hudson's Bay Company (HBC) provided a contributory DB plan for its employees from 1961. When HBC sold its Northern Stores Division in 1987, the sale resulted in approximately 1,200 employees being transferred from HBC to the purchaser. As part of the transaction, the purchaser agreed to establish a new pension plan for the employees who were transferred, and HBC transferred assets sufficient to cover the defined benefits of the transferred employees. However, HBC did not transfer a share of the HBC pension plan surplus to the new plan. The transferred plan members claimed, among other things, that HBC should have transferred a pro rata share of the surplus. The Supreme Court noted that the threshold question was whether the employees in question had an entitlement to the surplus funds, and the applicable plan documents in this case did not entitle employees to the plan surplus. Since the employees were not entitled to the surplus, it was properly maintained in the original plan. The Court also held that there was no statutory or common law obligation preventing HBC from paying administrative expenses from the pension fund.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.