Norton Rose OR's pension and benefit plans practice team publishes this bulletin on a quarterly basis. Focusing on topical issues and recent case law developments, the bulletin also includes commentary on various legal questions relating to pension and benefit plans in Quebec, including federally regulated pension plans.
The Office of the Superintendent of Financial Institutions (OSFI) has just published the final version of the Stress Testing Guideline for Plans with Defined Benefit Provisions. The Guideline, which had been published in draft form at the beginning of the year, is intended to inform plan administrators about stress testing, particularly in regard to the scenarios that should be considered and OSFI's expectations on the use of stress testing exercises as a risk management tool and the frequency of such testing.
Benefits subject to consent
OSFI has also just published a Policy Advisory aimed at providing further detail on OSFI's expectations with respect to benefits subject to consent. According to the policy, in order to be considered a consent benefit, an administrator, in its fiduciary role, must have the discretion to grant or deny the benefit. Where an administrator does not have such discretion, the benefit is not a consent benefit but rather a promised pension benefit. The distinction between a consent benefit and a promised benefit is interesting primarily in that a consent benefit usually does not have to be funded until consent to pay the benefit is granted, whereas funding of a promised benefit is mandatory. OSFI expects pension plans to have documented procedures in relation to the administration of consent benefits. These procedures should clearly:
- Demonstrate that the administrator has discretion to grant or deny consent to pay the benefits;
- Describe the administrator's considerations when exercising its discretion; and
- Demonstrate that the administrator's considerations are consistent with its fiduciary role.
While logic might suggest that decisions relating to such consent should be made by the employer as such, OSFI considers that decisions of this kind are to be made by the employer in its capacity as plan administrator and that, in such cases, the employer has a fiduciary duty to its employees.
Media reports of investor lawsuits are becoming increasingly commonplace. Recently, it was reported that two Canadian pension funds had filed class action proceedings against Sino-Forest Corp. and its directors and officers, along with its auditors and financial advisors. The proceedings allege, among other things, misrepresentation in public disclosure documents and call into question the role of the company's auditors and financial advisors. While the pension funds in this case are acting as claimants, it is easy to imagine situations where, in similar circumstances, a pension committee or other plan administrator would be the target of a lawsuit filed by the plan members, serving to highlight the risks to which they are exposed.
In such a case, the pension committee would need to be able to show that it complied with the law and acted with prudence and diligence, i.e., that it took the necessary steps to discharge its fiduciary and/or other obligations. To that end, pension committees would do well to validate their investment procedures on a periodic basis. Note also that the Supplemental Pension Plans Act (SPPA) provides that the pension committee is presumed to have acted with prudence where it acted in good faith on the basis of an expert's opinion.
Amendments reducing benefits
Section 20 of the SPPA provides that an amendment that reduces pension benefits may have retroactive effect where the affected members or beneficiaries have agreed to the amendment and where the Régie des rentes du Québec (Régie) has authorized the amendment. However, the SPPA does not set out any specific criteria that the Régie is to use for purposes of granting or denying such authorization. In a dispute over the authorization of certain amendments reducing pension benefits to which the members had agreed, the Régie had stated that while there was no regulatory standard, policy or directive specifying when amendments to reduce benefits could take effect retroactively, it was up to the Régie to analyze each case on its own merits and issue its decision based on that assessment. The Régie affirmed that amendments that operated to reduce the value of members' benefits by more than 5%, which it considered significant, were usually not authorized.
This decision by the Régie refusing to authorize amendments reducing pension benefits was maintained by the Administrative Tribunal of Québec (ATQ). A motion for judicial review of the ATQ's decision filed by the employer was subsequently granted by the Superior Court, which quashed the Régie's decision refusing to authorize the amendments and ordered the amendments registered.1 In the absence of a legislative standard, the Régie had relied on its discretionary power to refuse to allow the amendments. The Court held that the Régie's discretionary power was not absolute and had to be exercised in a fair, reasonable and equitable manner. It went on to note that it was up to the lawmaker to specify whether certain amendments reducing benefits could not have retroactive effect, and that the Régie could not arbitrarily decide that some amendments reducing benefits were significant and others were not, or that some such amendments could take effect retroactively and others could not.
Grievance arbitrator has no jurisdiction over the pension committee
A recent arbitral award2 has confirmed that a grievance arbitrator is not competent to hear a grievance relating to the administration of a pension plan even if the plan is incorporated in the collective agreement. The case involved a grievance disputing a decision of the pension committee regarding the payment of a death benefit. The pension committee being a separate entity from the employer and the union and not being a party to the collective agreement, it cannot be subject to the arbitrator's jurisdiction.
Air Canada: Board of Arbitration chooses the union's proposal
In connection with the renewal of the collective agreement of its customer sales and service employees, Air Canada and the union had been unable to agree on the pension plan that would apply to new employees. Air Canada was proposing a defined contribution plan while the union wished to maintain the advantages of the defined benefit plan. The parties had agreed to submit the dispute to final offer mediation/arbitration. The Board of Arbitration had to decide which of the final offers would best ensure the long-term sustainability of the Air Canada pension plan, as it pertains to the pension arrangements of new employees. Air Canada was of the view that the best offer was the one that entailed no additional deficit risk, and thus proposed a defined contribution plan, as it had done during the bargaining process.
For its part, the union put forward a hybrid DB/DC proposal, under which the defined benefits were reduced significantly from those under the current plan, and went on to argue that its proposal posed no risk to the long-term sustainability of the Air Canada pension plan.
The Board of Arbitration found that long-term sustainability of the plan did not necessarily imply an arrangement that would completely eliminate any risk of a deficit and acknowledged that both the employer and union proposals allowed the long-term sustainability of the Air Canada pension plan to be ensured. That being the case, the Board of Arbitration had to choose which was the better of the two offers. Based on the well-established principles of "replication, gradualism and demonstrated need," the Board opted for the hybrid DB/DC proposal put forward by the union.3
As reported in the June 2011 Legal Update, Ontario has been progressing toward new rules governing pension division on marriage breakdown. Since our last publication, the regulations necessary to implement this change have now been finalized and go into effect January 1, 2012. The regulations to implement this change are complex but essentially the lump sum amount which the former spouse may receive in settlement of the pension division is to be derived from a mix of three commuted valuation calculations: assuming termination of employment at the time of separation; assuming the person commences receiving the pension at the normal retirement date; and assuming commencement at the earliest unreduced retirement date assuming continued membership to that date. An average of these commuted values is then determined based on the member's proximity to early retirement and prorated for the amount of service while married. We understand that the Ontario pension regulator, the Financial Services Commission of Ontario, will soon be publishing the necessary forms for administrators and plan members to effect such division on marriage breakdown. Consequently, plan administrators with Ontario members should be looking at their systems and policies to ensure that pensions will be divided in accordance with these new rules and forms on and after January 1, 2012.
1 Synertech Moulded Products c Tribunal administratif du Québec, 2011 QCCS 4770.
2 Syndicat des chauffeurs d'autobus du Réseau de transport de Longueuil (SCFP-3333) et Réseau de Transport de Longueuil, Mtre Pierre Laplante, May 27, 2011.
3 Air Canada and National Automobile, Aerospace, Transportation and General Workers Union of Canada (CAW-Canada) Local 2002 (Re: Final Offer Selection – Pension Arrangements for New Hires), Board of Arbitration, Kevin M. Burkett, Chair, September 16, 2011.
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