Canada: Update on Pension Case Law and Regulatory Trends

This article was originally published in Blakes Bulletin on Pension & Employee Benefits-August 2004

A final version of "best practices" guidelines for Capital Accumulation Plans, new income tax, CPP and EI provisions, and a case on the members’ right to terminate a pension plan may be headed to the Supreme Court of Canada.

The Joint Forum of Financial Market Regulators released a final version of the Guidelines for Capital Accumulation Plans at the end of May, 2004. Concurrently, the Canadian Association of Pension Supervisory Authorities (CAPSA) adopted those Guidelines as CAPSA Guideline No. 3, Guidelines for Capital Accumulation Plans.

The Guidelines supplement any legal requirements for a capital accumulation plan (CAP), but do not replace those requirements. Generally, the Guidelines suggest best practices for CAP sponsors and administrators in the establishment, maintenance and termination of a CAP and, in particular, in 

• Selecting and reviewing service providers,

• Selecting, reviewing and communicating information on investment options,

• Establishing and reviewing record creation and retention policies,

• Providing investment information and decision-making tools (such as asset allocation models) to members, and

• Providing other plan information to members including information on fees and expenses.

While these are voluntary guidelines and, therefore, do not have the force of law, the regulators have clearly indicated that they expect the guidelines to be followed in full by December 31, 2005.

To the extent that the Guidelines reflect or become the industry standard, it can be expected that they will be used by the courts in the future to determine if a plan administrator or sponsor has acted prudently in establishing, administering or terminating a defined contribution pension plan or other CAP. To the extent that the guidelines are not followed, an administrator or sponsor should at least have considered the Guidelines and documented the reasons for choosing not to follow them in that particular case.

There has been some discussion as to whether the Guidelines provide a "safe harbour" similar to that provided under the Employee Retirement Income Security Act (ERISA) in the United States. A plan sponsor who complies with the rules under ERISA is relieved from liability respecting investments made by participants in a defined contribution plan. Since the Joint Forum provisions are being implemented as guidelines rather than being incorporated into the relevant statutes, there can be no safe harbour in the sense of ERISA. There will be no statutory bar to litigation and, therefore, no guarantee that members will not sue sponsors who follow the Guidelines. However, it can be expected that following the Guidelines will greatly reduce the chance of a finding of negligence or of a breach of fiduciary duty by a court.

After extensive consultations, focus group sessions and industry submissions, the final version of the Guidelines has changed somewhat from the April 2003 draft. For example, the Guidelines apply only to plans defined as capital accumulation plans. These are "tax assisted, investment or savings plans that permit the members of the CAP to make investment decisions among two or more options offered within the plan." Examples of a CAP include a defined contribution registered pension plan, a group registered retirement savings plan and a deferred profit sharing plan.

The guidelines do not appear to cover plans that are not tax assisted, such as employee profit sharing plans or supplementary pension plans which provide only the benefit in excess of the Income Tax Act (Canada) maximums. The application of the Guidelines to tax assisted plans only is a significant change from the 2003 draft. It appears to have been made in response to concerns that the Guidelines might discourage employers from establishing certain types of benefit plans whereas with tax assisted plans there is clearly an incentive to do so anyway. However, a court is unlikely to consider the tax treatment of a plan to be material in determining the general standard of prudence that should apply to its administration. To the extent that the Guidelines become the standard for prudence, a court is likely to consider them to be relevant to both tax assisted and similar non-tax assisted plans.

The Guidelines also do not cover plans where the member does not make investment decisions. It is not relevant under the Guidelines whether or not the member contributes to the plan.

The Guidelines now make it clear that CAP members are responsible for making investment decisions within the plan, and for using the information and decision making tools made available to assist them in making those decisions. The Guidelines also provide that CAP members should consider obtaining investment advice from an appropriately qualified individual in addition to using the information and tools the sponsor provides. There is no requirement that the plan sponsor test the investment knowledge of its members.

The final version of the Guidelines provides that all fees, expenses and penalties relating to the plan that are borne by members must be described to them. Where appropriate, the fees, expenses and penalties may be disclosed on an aggregate basis, provided the nature of the fees, expenses and penalties is disclosed. However, fees, expenses and penalties may not be aggregated where they are incurred by members by virtue of member choices.

The Guidelines describe standards in the selection of investment options, the review of investment options and disclosure of information concerning investment options, including providing members with performance reports for each investment fund at least annually. Given all of these "requirements," it can be expected that CAPs will provide more limited investment options to members in the future.

The Guidelines have been revised to remove a reference to taking member preferences into account in the selection of investment options. Instead, in deciding what action to take on a review of investment options, sponsors should consider member complaints. In addition, the reference to investment funds being monitored has been replaced with a reference to a periodic review based on criteria established by the sponsor. 

It, of course, would be prudent for plan sponsors and administrators to carefully review their governance practices and identify improvements where required. The Guidelines provide that all decisions on establishing and maintaining the plan, as well as information about how those decisions are made, should be properly documented. As noted above, if a different procedure is adopted then that suggested in the Guidelines, it will be particularly important for the rationale to be fully documented. In 2006, the Joint Forum plans to evaluate the success of the Guidelines.

In Buschau v. Rogers Communications Inc., members of a trusteed pension plan sought to terminate the plan to access surplus.

The original plan was established in 1974 for Premier Cablevision Ltd. employees and funded by a trust agreement with Canada Trust.The original trust agreement contained a provision prohibiting any amendment that authorized or permitted "any part of the Fund to be used for or diverted to purposes other than for the exclusive benefit" of members and their estates. In 1984, Premier was acquired by Rogers. At this time, the plan was closed to new members, it was in a surplus position and Rogers began taking a contribution holiday. In 1992, the plan was merged with four other pension plans that existed for the benefit of Rogers’ employees.

This fact-scenario has prompted a series of challenges and decisions. Earlier decisions dealt with Rogers’ ability to take a contribution holiday and merge the plans. In the past six months, there have been two additional decisions dealing with the ability of plan members and beneficiaries to invoke the rule in Saunders v. Vautier to cause the termination of the trust.

 In brief, Saunders v. Vautier provides that, if all trust beneficiaries are legally competent to give their consent and do give their consent to the termination of the trust, the trust will be terminated. This rule was created in the context of personal trusts and had never before been applied to a pension trust in Canada.

While the B.C. Court of Appeal expressed reservations as to whether Saunders v. Vautier should apply to a pension trust, it held that it does apply based on the Supreme Court of Canada’s finding in Schmidt v. Air Products Canada Ltd. that a pension trust is a "classic trust" and subject to all applicable trust law principles. In the Court’s view, the applicability of Saunders is implicit.

The Court held that Rogers’ right to take contribution holidays, and its powers of amendment and termination did not constitute a beneficial interest in the trust. Therefore, Rogers did not have the right to consent, or withhold its consent, to the termination of the plan. A right to surplus would have been considered a beneficial interest requiring the plan sponsor’s consent before termination of the trust could occur.

The Court placed emphasis on its view that this was a "closed plan" as it had not allowed new members since 1984. While Rogers might have had the power to reopen the plan to new members, the Court held that this power was subject to a duty of good faith. Here, Rogers could not in good faith amend the plan to add new members after the employees commenced an application to terminate the plan.

The Court also relied on the federal Pension Benefits Standards Act, which provides that where the interests of the employer as administrator of the plan and its role in any other capacity are in conflict, the employer must "act in the best interests of the members of the pension plan."

The Court did not, however, terminate the trust as not all of the beneficiaries had consented (consents were not obtained from 25 designated beneficiaries).The Court held that it could not consent on their behalf as there was no evidence to show that the designated beneficiaries did not have legal capacity. However, the court delayed its order for three months to give the members time to revoke their designations or to designate beneficiaries who would consent.

Rogers filed a notice of motion requesting that the order be entered without the three month delay, but the members had already taken the advice of the Court. All members who had previously designated the missing beneficiaries had either located the beneficiaries and obtained their consents to the termination of the trust or had revoked their designation and designated other beneficiaries who had consented. 

In a May 2004 decision, the B.C. Court of Appeal held that the beneficiaries had the authority to terminate the trust as all relevant consents had now been obtained. Rogers is seeking leave to appeal to the Supreme Court of Canada.

In February 2004, draft technical amendments to the Income Tax Act and its regulations were released. Many of the amendments were revised versions of those originally released for consideration in December 2002.

Payments From DC Plan. One of the changes affects the type of payments that can be made from a defined contribution pension plan. A new paragraph, section 8506(1)(e.1), permits retirement benefits (referred to as variable benefits) similar to those permitted under a registered retirement income fund (RRIF) to be provided from a defined contribution plan. Under this option, a minimum amount must be paid to the retired member each year based on the balance in the account and the member’s age. This provides greater flexibility to retiring members than the earlier provision that only allowed the benefits to be provided by means of an annuity purchased from a licensed annuities provider.

Maximum Lifetime Pension Limits. The maximum lifetime pension limits for a registered defined benefit pension plan increased from $1,722.22 per year of service in 2003 to $1,833.33 per year of service in 2004. In 2005, the limit will be $2,000. After that date, it will be automatically increased in relation to increases in the average industrial wage. 

A draft regulation has been introduced to give plan sponsors an incentive to amend their plans, if necessary, in 2004. Plan sponsors of defined benefit pension plans that do not automatically adjust to the new limits will not be required to report PSPAs for members as a result of amending their plans with respect to the increased limits if the plan is amended in 2004. There is partial relief from PSPA reporting for plans amended in 2005.

For plans amended after 2005, there will be no special PSPA relief. It is important for plan sponsors to review their plans and prepare amendments this year, if required.

The federal Budget 2004 dealt with the "overpayment" of matching employer Canada Pension Plan contributions and Employment Insurance premiums in a corporate reorganization or sale of a business situation.

Usually, an employee’s contributions commence at the beginning of a calendar year and continue until the annual maximum employee limits are met. The matching employer contributions and premiums are paid to the government at the same time as the employee contributions.

However, when an employee commenced employment with a new employer, both the employer and employee contributions to the Canada Pension Plan and Employment Insurance began again and continued until the limit had been met in respect of the new employment, without regard to any previous employment during that calendar year.

Previously, an employee could file under their income tax return for a refund of any amount in excess of the annual maximum employee limit. However, there was no equivalent refund for the employer contributions in excess of that limit. This resulted in an extra expense for a mid-year transfer of employees either as part of an internal corporate reorganization or on a sale of a business to a third party.

Amendments to CPP and EI legislation received Royal assent and became law on May 14, 2004.The relief (with respect to both CPP and EI contributions) is available where "one employer immediately succeeds another as the employer of an employee, as a result of the formation or dissolution of a corporation or the acquisition – with the agreement of the former employer or by operation of law – of all or part of a business of the former employer." In such situations, the employees will be deemed to have been continuously employed by the new employer throughout the year (and, therefore, the new employer will be able to take into account contributions made by the old employer in that year).This change brings the CPP in line with existing Québec Pension Plan provisions.

The changes apply to transactions in a year after 2003. One must keep in mind that, for this law to apply, there must be either a winding up or a transfer of all or part of a business. It does not apply to all inter-corporate transfers of employees in all circumstances and does not apply to individual employment changes. 

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.