This past year saw the introduction of some exciting developments in pensions and benefits law. If the past is any indication of the future, this next year will be just as active. The topics outlined below are 2014's most noteworthy legal trends in pensions and benefits law.
Show Me the Money – The Return of the Surplus
The combination of strong stock market returns and rising long-term interest rates led to 2013 being a bounce-back year in the funded status of Canadian defined benefit (DB) pension plans. Previously, many Canadian DB plan sponsors found themselves dealing with significant funding deficits due to a combination of: (i) depressed markets; (ii) historically low interest rates; (iii) increases in life expectancy; and (iv) greater-than-expected payouts of retirement pensions. As of January 2012, nearly 50% of the DB plans in Ontario were less than 80% funded,1 and approximately 15% were less than 70% funded. Recently, those numbers have decreased to 6% and 2%, respectively.2 These recent developments mean that some plan sponsors will have to start thinking about how to deal with surplus for the first time in years. Newfound surplus may also result in the slowing of the current exodus from single-employer DB plans.
Playing it Safe – De-risking Tactics on the Rise
In 2014, pension plan sponsors and administrators will continue to implement various risk reduction strategies to avoid volatility in pension plan funding. For the better part of the last decade, employers in Canada's private sector have been moving away from DB plans and into defined contribution (DC) pension plans to minimize funding and investment risks. DC plans are typically seen as a more predictable, affordable and sustainable alternative to DB plans partly because the longevity and mortality risks are with the plan members. Plan sponsors who have opted to maintain their DB plans are increasingly relying on various de-risking tactics, including:
- risk-adverse investment strategies (e.g., liability-driven investing);
- alternative plan design options (e.g., future service DCs, reducing or removing early retirement and other ancillary benefits, and target benefit or shared risk plans); and
- risk transference options (e.g., lump sum transfers3 , annuity buy-ins4 , and annuity buy-outs5 ).
There is a number of legal and regulatory implications that must be taken into consideration when implementing de-risking tactics. The Office of the Superintendent of Financial Institutions (OSFI) has provided some relevant guidance.6 7 Plan sponsors should seek advice prior to selecting and implementing a de-risking option.
Are We There Yet? – Perpetual Legislative Reform
Legislation reform throughout Canada is the new normal. We expect to see continued statutory developments in 2014, many of which will be of significant interest to pension plan sponsors and administrators. Here are a few of the anticipated developments:
- Changes to the distressed pension workout scheme to improve the funded status of federally regulated pension plans.
- Introduction of Pooled Registered Pension Plans (PRPPs) for employees in federally regulated industries, the Yukon, Northwest Territories and Nunavut.
- Amendments to the regulations under the Pension Benefits Act (PBA) providing an exemption to the 30% Rule8 with respect to investment in certain Ontario public infrastructure projects and an exemption to the 10% Rule9 with respect to investment in certain government-issued securities.
- Proposals regarding: (i) an intention to proceed with a "made in Ontario" solution if an arrangement to enhance the benefits under the Canada Pension Plan (CPP) cannot be reached; (ii) regulatory changes related to target benefits; (iii) funding-related changes, including measures to impose limits on contribution holidays and accelerated funding of benefit improvements; and (iv) additional solvency relief for certain public sector single-employer pension plans.10
- Amendments to the PBA to clarify who qualifies as a "spouse" for the purposes of entitlement to pre-retirement death benefits and joint and survivor benefits where there is potentially more than one entitled individual.11
- Legislative overhauls in Alberta, British Columbia and Nova Scotia.
- Quebec's introduction of voluntary retirement savings plans (VSRPs) (Quebec's version of PRPPs) beginning July 1, 2014. All Quebec employees will be able to contribute to the VSRPs and certain employers will be automatically enrolled. Alberta's Pooled Registered Pension Plans Act is also expected to come into force by fall 2014 (after the proclamation of the new EPPA). Other provinces, including British Columbia and Saskatchewan, are likely to follow suit.
Now You See Me?... – Benefits Reductions
Before unilaterally changing employee benefits, employers should consider these recent court decisions:
In O'Neil v. General Motors of Canada12 , the Ontario Superior Court of Justice (Ontario Court) confirmed that employers may be able to unilaterally change an employee's post-retirement (non-pension) benefits, depending on various contextual factors. If an employer wants to be able to change retiree benefits, they must ensure that the provisions in their plan documents are clear and unambiguous so to avoid having the court consider the benefits to be a form of deferred compensation that cannot be altered, as opposed to a gratuitous benefit.
In Royal Ontario Museum Curatorial Association v. Ontario (Superintendent Financial Services) 13 (ROM), the Financial Services Tribunal (Tribunal) found that the PBA and the pension plan text at issue permitted the employer to introduce a less generous DB formula for active members, provided that it did not reduce the commuted value of the affected members' accrued benefits calculated as of the effective date of the amendment. The Tribunal characterized an employee's accrued benefit as not to include future service or earnings. In contrast, the Alberta Court of Appeal in Halliburton Group Canada Inc. v. Alberta14 (Halliburton), found that an employee's accrued benefit should take into account future service or earnings. However, the decision in Halliburton can be distinguished from that in ROM through subtle differences found in the Alberta and Ontario pension legislation and the terms of the current and historical plan documents at issue.
...Now You Don't – Insolvency Proceedings
In Sun Indalex Finance, LLC v. United Steelworkers15 (Indalex), the Supreme Court of Canada (SCC) held that (i) upon wind-up of a pension plan, the statutory deemed trust applies not only to the unpaid normal cost and special contributions but also to the entire pension wind-up deficiency; and (ii) a super-priority for debtor-in-possession lenders granted under the Companies' Creditors Arrangement Act will trump the deemed trust under the PBA. For more information, please see Torys' February 5 2013 Bulletin.
The SCC's decision in Indalex was recently endorsed by the Quebec Superior Court (Quebec Court) in Aveos Fleet Performance Inc. 16 (Aveos), in the context of federal pension legislation. The Quebec Court found that the priority of a secured creditor could not be surpassed by a statutory deemed trust created under the Pension Benefits Standards Act, 1985.
Contrast Aveos with the recent decision of the Quebec Court in Timminco Ltée17 which found that a statutory deemed trust had priority over a secured creditor in similar proceedings, but also held that the deemed trust under Quebec legislation did not include the actuarial deficit. Whether the decision in Timminco Ltée will be appealed remains to be seen.
These cases leave us with some uncertainty as to how priorities will be set between a secured creditor and a statutory deemed trust.
With these recent developments paving the way for future trends, 2014 promises to be an interesting year in pensions and benefits law.
1 Represents the ratio of a pension plan's assets to its liabilities.
2 Dan Ovsey, Will legislators allow effective defined benefit pension plan redesign before it's too late? (National Post) online: http://business.financialpost.com/2014/01/13/will-legislators-allow-effective-defined-benefit-pension-plan-redesign-before-its-too-late/.
3 Lump sum transfers involve a cash settlement equal to the lump sum value of the member's pension benefit.
4 Under an annuity buy-in, a premium is paid to the insurer and a single annuity contract is issued to the pension fund. The pensions are paid to retirees by the plan fund and not by the insurer. The annuity contract is considered an investment made by the pension fund.
5 Under an annuity buy-out, a pension plan administrator pays a premium to an insurance company to purchase an annuity contract on behalf of each retiree. The contract is owned by the retiree and the retiree's pension will then be paid directly by the insurer.
6 For more information, please see "Buy-in Annuity Products".
7 For more information, please see "Draft - Longevity Insurance and Longevity Swaps".
8 Section 11(1) of Schedule III of the Federal Investment Regulations (FIR) provides that an administrator of a plan must not invest the moneys of the plan in the securities of a corporation to which are attached more than 30% of the votes that may be cast to elect the directors of the corporation. The PBA incorporates by reference Schedule III of the FIR, including the 30% Rule.
9 Section 2 of Schedule III of the FIRprohibits more than 10% of the total book value of a plan's assets to be invested, directly or indirectly, in any one person or any two or more associated persons or affiliated persons. The PBA incorporates by reference Schedule III of the FIR,, including the 10% Rule.
10 Ministry of Finance (Ontario), Creating Jobs and Growing the Economy 2013, Ontario Economic Outlook and Fiscal Review, Fall 2013 online: http://www.fin.gov.on.ca/en/budget/fallstatement/2013/paper_all.pdf.
12 2013 ONSC 4654 (CanLII).
13 2013 ONFST 9 (CanLII).
14 2010 ABCA 254 (CanLII).
15 1 SCR 271 (CanLII).
16 2013 QCCS 5762 (CanLII).
17 (24 January 2014) Montreal 500-11-043844-121 (QCCS).
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.