Canada: Legal Challenges in Converting to Defined Contribution Pension Plans

Last Updated: October 5 2005

This article was originally published in Blakes Bulletin on Pension & Employee Benefits in September 2005

Article by Caroline Helbronner & Elizabeth Boyd, ©2005 Blake, Cassels & Graydon LLP

Employers that want to provide defined contribution pension plans (DCPPs) face administrative and other challenges not found with defined benefit pension plans (DB Plans). Many of these challenges stem from a lack of clarity in the law on DCPPs and legal issues, ranging from improper member communications to structuring funding arrangements, can arise.

Plan Conversions

Use of DB Surplus Under a DCPP. Many Registered Pension Plan (RPP) sponsors have chosen to convert their DB Plans to DCPPs. Typically, converted plans continue to provide defined benefits (DBs) to plan members at the date of the conversion who did not elect to convert their accrued DBs to defined contribution (DC) entitlements. Legal issues often arise in conversions, including member communication issues, regulatory compliance, integration of supplemental pension plans with the new registered plan structure, and structuring of funding arrangements for the converted plan, to name a few.

Employers converting a DB Plan to a DCPP may wish to use an existing surplus in the DB component of the plan to take contribution holidays under the DC component. The ongoing case of Nolan v. Ontario (Superintendent of Financial Services) and Kerry (Canada) Inc., however, offers a cautionary note.

The case involves a hearing before the Ontario Financial Services Tribunal on, among other things, a Notice of Proposal from the Ontario Superintendent of Financial Services rejecting registration of an amended plan text based on a conversion of the plan from a DB to a DC arrangement. The DC component was funded via an insurance contract that was held separate from the assets of the DB component, which were held pursuant to a trust agreement.

The Tribunal held the conversion breached the terms of the trust in that the revised plan text allowed surplus from the DB component to be used to fund contributions under the DC component. The trust agreement required plan assets to be held for the “exclusive benefit” of members and the Tribunal found members of the DC component were not beneficiaries of the trust fund in respect of the DB component. The Tribunal also ordered the Superintendent to require the employer to repay the amount of contribution holidays taken in respect of the DC component unless, within 90 days, the employer amended the plan text retroactively to the date of the conversion to make members of the DC component beneficiaries of the DB component trust fund.

An appeal of this decision was heard by the Ontario Divisional Court in early 2005. While we await the court’s ruling, it is worth noting the result in this case could have been different if another funding structure had been used. For example, if the insurance contract obtained with the DC component of the plan was held as an asset of the trust previously established for the plan’s DB assets, rather than being held by the company directly outside of the trust.

Restructuring SERPs. When an employer converts to a DCPP, it must deal with any related supplemental pension arrangements provided to affected members. Specifically, where a top-up commitment is in place in a DB Plan, the employer must decide if supplemental coverage will be provided in the DC environment and, if so, what form it takes.

Assuming the employer does not want to provide a funded SERP using a “retirement compensation arrangement,” a difficult question the employer will face is whether it wants to be committed to offering a DC SERP that provides a notional rate of return based on the performance of the investments chosen by employees in the underlying registered arrangement. An employer will likely not want the level of uncertainty in this arrangement and may consider providing a fixed rate of return. This, however, raises other concerns. For example, the potential application of the interest accrual rules and prescribed debt obligation rules under the Income Tax Act (ITA).

As a possible solution to these competing concerns, an employer might provide a notional rate of return based on the performance of a balanced fund or a fund selected by each participant from a short list of carefully selected funds (i.e., some, but not all, of the funds offered in the underlying registered DCPP).

Conversions in Sale of a Business. In a business sale structured as an asset sale, employees may be transferred from an employer that provides a DB Plan to one that provides a DCPP. In a sale structured as a share sale, the company being sold may have participated in the DB Plan of a parent or affiliate, whereas the purchaser will be providing a DCPP.

In either of these situations, there will be a conversion of the affected employees’ pension benefits to DC entitlements, at least for periods following closing. One of the many issues that can arise in such conversions is that, from an employment law perspective, the replacement of a DB Plan with a DCPP, especially for older longer-service employees approach-ing retirement, could be a significant enough change in their terms of employment to create potential liability for the employer. The entity with the primary liability is the employer of the affected employees immediately before the transaction. In the case of an asset sale this will normally be the vendor. In a share sale, the target company whose shares are the subject of the transaction will be the employer. There are a number of options to deal with this potential employment law liability, including allocating liability between the vendor and the purchaser in the purchase agreement, and compensating affected employees.

Various other issues, will also need to be considered by the parties to the transaction including:

  • employee communications relating to the change from a DB Plan to a DCPP;

  • in the event employees will be given the option of converting their accrued DBs under the vendor’s plan to DC entitlements under the purchaser’s plan, employee communications relating to such option;

  • the determination of transfer values;

  • regulatory compliance; and

  • general co-operation between the vendor and purchaser to implement the conversion.

Income Tax Impact on Conversions. There are numerous requirements under the ITA and relevant policies of the Canada Revenue Agency (CRA) relating to plan conversions.

In summary, the ITA is designed to ensure that, in the event of a conversion, transfers of surplus do not exceed the permissible tax limits, whether actual transfers of surplus in the case of the transfer of DB Plan members to a separate DCPP, or notional transfers, in the case of an amendment to a DB Plan to convert it to a DCPP for future benefits, and whether for benefit enhancements in connection with the conversion or subsequent contribution holidays.

In most cases, there is no need for a CRA approval of a transfer (inter-plan or intra-plan, depending on whether the conversion involves two separate plans or a single plan with DB and DC components). Instead, the ITA imposes negative tax consequences on the plan or requires an income inclusion for the affected members if the ITA inter-plan transfer rules are not respected. That said, there are exceptions, and care must be taken to determine which of the ITA transfer rules apply in a particular case and to comply with such rules to avoid penalties.

“Passive” Plan Participants

The theory of a member-directed DCPP is that members make investment decisions to suit their own risk tolerances and retirement savings objectives. In some cases, however, members are not “engaged” in making investment decisions. “Disengagement” frequently takes the form of allowing account balances to remain in a low-return, default investment option. In the case of terminated members, they may cease communicating with the plan administrator and/or recordkeeper about their accounts. In either case, these “passive” DCPP participants can create concerns for plan sponsors/administrators.

Overuse of Default Options. Many DCPPs specify that if a member does not select one or more investment options for contributions credited to his or her account, such contributions will be allocated to a “default” investment option. Traditionally, default options have been relatively secure, but low-yielding investments, such as money market funds.

Plan administrators are now realizing that many members have not selected specific investments for their DCPP account balances but have allowed their accounts to remain fully invested in the default option, in some cases, for years. It is not clear what legal obligation DCPP administrators in Canada have regarding members who allow accounts to remain invested in the default option under the plan. It is generally accepted, however, DCPP administrators have a fiduciary duty regarding plan investments and, in most cases, the administrator should provide members with appropriate investment options, information and education to enable members to make prudent decisions.

Where members appear to be making no investment decisions in their DCPP account balances, it may call into question the appropriateness of the administrator’s information and education program and, possibly, the investment options for the plan. Depending on the reasons for member inertia, it may expose the administrator to potential liability for breach of fiduciary duty. Moreover, it is unclear the DCPP is meeting its non-legal objectives (such as assisting employees to save reasonable amounts for their retirement and fostering positive employer-employee relations).

As an initial step, DCPP administrators need to determine whether the default option under their plan is being overutilized. They must have access to information about member investment choices. A question arises as to whether that information should be personalized, so the administrator will know precisely which employees are using the default option or whether the information should be generic.

Where DCPP accounts are maintained by a third-party recordkeeper, there may be a reluctance, out of privacy law concerns, to release information about individual plan member’s investments to the DCPP administrator (typically, the member’s employer). This can be addressed by ensuring members consent to the release of such information when they enrol in the plan or at a subsequent time. Practically, however, it may be difficult to obtain consents from existing members. Plan administrators may need to use more generic data.

If a DCPP default option providing a minimal rate of return is being heavily used by members, the plan administrator may wish to consider reviewing and revising its DCPP information and education program to make it more accessible and effective. It can also change the default option to an investment that is expected to provide a reasonable rate of return with a low to moderate level of risk. Alternatively, a plan administrator may wish to consider using lifestyle funds (i.e., a series of funds targeted at members at different life stages) as defaults.

Missing & Former Members. Administrators of DCPPs are frequently faced with the problem of what to do with the account balances of “missing” terminated members. Generally, DCPP members who terminate employment or retire from a DCPP have the following options with respect to their DCPP account balances:

  • Transferring the account balance to a locked-in RRSP (or LIRA);

  • Transferring the account balance to a form of locked-in RRIF (LIF or LRIF) that may or may not require annuitization at age 80;

  • Transferring the account balance to an insurance company for the purchase of an immediate or deferred life annuity that complies with the terms of the plan; or

  • Transferring the account balance to the RPP sponsored by another employer, if that plan permits.

All the above options contemplate a transfer of the DCPP benefits out of the plan on termination or retirement, as opposed to any form of periodic payments from the DCPP accounts. In some cases, however, former members fail to elect a transfer option for their DCPP benefits and cease to communicate with the administrator or recordkeeper about their DCPP accounts (“missing” members).

While these amounts remain in a former member’s DCPP account, the administrator remains subject to the obligations imposed by pension standards legislation and the common law. In particular, the administrator remains subject to fiduciary duties imposed under legislation.

There are some options available to plan administrators for dealing with the account balances of missing members who fail to provide transfer instructions or investment instructions for their DCPP benefits after terminating from the plan, including:

Purchase of Annuities. In the plan text, provide for the administrator to purchase a pension with the member’s account balance.

Change Investment Options. Have the plan provide that, in the event that a member fails to make an election to transfer his/her account balance out of the plan upon termination, the account balance would remain invested in the funds previously elected until such time as the account balance is transferred out pursuant to the member’s election. Or, in some cases, a better approach may be for the plan to provide a default investment option with a better return, such as a balanced or money market fund.

Self-Annuitization. There are currently no provisions under the ITA or the PBA that would permit periodic payments to be made to members on retirement from a DCPP. However, amendments to the ITA regulations have been proposed that would permit RRIF-type payments from a DCPP so this may change in the coming years.

Commutation of Small Benefits. We are aware of situations in which plan administrators have established an administrative practice for determining small benefits under DCPPs for Ontario members. Typically such methods employ actuarial principles to determine the annual benefit payable at normal retirement date based on the DCPP account balance of the member at the date of termination of employment.

While there are options for dealing with the DCPP account balances of missing members, the plan administrator could be exposed to liability for using any particular option if it is not provided for in the DCPP text or at least authorized by applicable pension standards legislation. Even if an option is provided for in the text or under legislation, if it is not expressly communicated to members, it is conceivable the administrator could still be held liable.

Another issue for a DCPP administrator in dealing with missing members is the extent of the efforts that the administrator must make to locate such missing members before taking any steps to distribute or transfer their account balances. Since the need to annuitize, commute or transfer a missing member’s account in an ongoing plan is arguably less pressing, it is possible a pension regulator or court would take the position that the plan administrator had a greater duty to try to locate a missing member before paying out or transferring the DCPP account balance.

In Summary

Many plan sponsors who established DCPPs in recent years believed that, in contrast to DB Plans, these arrangements would simplify administration, control costs and limit their liability. As can be seen, however, these plans bring their own challenges and risks. As the DCPP environment matures further, it will be important for all DCPP stakeholders to monitor these and other emerging issues.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
1 Nov 2016, Seminar, Toronto, Canada

What is the emotional culture of your organization?

Every organization and workplace has an emotional culture that can have an impact on everything from employee performance to customer or client satisfaction.

3 Nov 2016, Seminar, Toronto, Canada

Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.

3 Nov 2016, Other, Vancouver, Canada

“Risk” is the new black. It’s on the lips of every CEO, CFO, GC and board member — as it should be. Can you spot it? How do you analyze it? Are you equipped to manage it?

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.