This article was originally published in Blakes Bulletin on Pension & Employee Benefits in September 2005
Article by Scott Sweatman, ©2005 Blake, Cassels & Graydon LLP
British Columbia pension regulators are stepping up enforcement measures and monitoring high-risk pension plans more closely. There has also been a notable court ruling on the discretion of trustees to reduce benefits.
At a May 31, 2005 meeting of the Pension, Benefits and Compensation Section of B.C.’s Canadian Bar Association, Michael Peters, Deputy Superintendent of Pensions for British Columbia, reported on the state of pension plans in the province. As in many jurisdictions, “choppiness” in the markets is hurting employer plans heavily impacted by low returns and low bond rates, combined with a change in the Canadian Institute of Actuaries methods for calculating commuted values.
Eight B.C. plans were recently required to reduce benefits to meet the funding and solvency tests imposed by the regulations of British Columbia’s Pension Benefits Standards Act (PBSA). Not only are multi-employer plans affected, said Peters, but also single-employer plans are facing increased costs and seeking changes to funding and solvency rules through extension of amortization periods or alternative funding methods.
The Pension Standards Branch is now looking at better ways to identify and assess high-risk pension plans. This will likely involve a program to shift, at least in part, from the current “desk document review” approach in assessing plan risk to a more risk-based, on-site review methodology using pre-determined risk criteria. A similar approach to identifying high-risk plans has been adopted in other jurisdictions (e.g., OSFI and FSCO).
B.C. Enforcement Measures
Another development Mr. Peters noted was the recent use of enforcement provisions of the PBSA. Like elsewhere in Canada, B.C. pension law contains a provision permitting the Superintendent to apply to the court for an order compelling a person to do anything required by the Act or pension plan. The order can also prohibit a person from doing anything prohibited by the Act or pension plan if, in the Superintendent’s opinion, a person is not compliant with the Act or the pension plan rules as registered.
For the first time since the enactment of the PBSA in 1993, the enforcement provision was recently exercised. A former owner and CEO of a shipyard in Victoria has pled guilty to three charges under the PBSA after breaches of the Act were brought to the attention of the Pension Standards Branch by the fundholder of the plan, who had reported numerous non-remittances of pension plan contributions.
While sentencing is not until later in 2005, a person who contravenes the PBSA is liable to a fine of not more than $25,000 or, if a corporation, up to $100,000. The B.C. regulator is also taking an increasingly harder stand on late remittance of contributions.
Trustee Discretion to Reduce Benefits
A recent B.C. case of interest is Neville v. Wynne, a decision of the province’s Supreme Court under a Rule 18A application. The case questions the discretionary power of trustees to effect a pension benefit reduction in a union-sponsored multi-employer pension plan. The plaintiff claimed the trustees were in breach of trust since the reductions imposed on non-retired members were greater than those imposed on retirees.
Given the number of pension plans being forced to reduce benefits, the Neville case is significant as an example of how the court arrived at its decision in analyzing the nature and extent of discretion all trustees must, by their very office, have to fulfil their duties. What is clear from this case is that the courts are reluctant to overturn decisions made by trustees unless there is evidence of bad faith, or evidence the trustees considered “irrelevant,” “improper” or “irrational” factors in arriving at their decision.
Plaintiff Ian Neville was a member of the local union of the Plumbing and Pipe Fitting Industry of United States and Canada. The plan was administered by seven trustees, all of whom were defendants, including four union representatives and three from the Mechanical Industrial Relations Association.
Employers made all contributions to the plan with a level contribution rate negotiated with the union based on the number of hours an employee worked. The trust fund suffered significant losses of over $51 million from October 2000 to September 2001, and additional losses over $19 million by September 2002. Due to these losses, the trustees could not maintain the contribution and benefit structure.
Typical of most of these negotiated cost plans, the amendment section of the plan prohibited the trustees from reducing benefits paid or accrued prior to any amendment. The plan was registered under the PBSA, which also prohibits a reduction in benefits. An exception, however, is provided under the law where a “Board of Trustees of a negotiated cost plan, may, with the written consent of the Superintendent, reduce benefits or entitlements, if the circumstances of the plan require reduced benefits or entitlements.”
In August 2002, the Superintendent approved a proposed benefit reduction scheme. The actuary consulted by the trustees to bring the plan into compliance with the Act, presented a number of options to reduce benefits. The trustees were unanimous in choosing an option that allocated more of the reduction to the non-retired members than the retired members. It is worth noting the option chosen by the retirees reduced pensions being paid to retired members and pensions accrued to non-retired members equally by 13.5%.
The trustees, however, went on to make changes to the plan that affected only the non-retired members, including changes from “joint with 50% survivor benefit” to life pension only, unreduced early retirement for members with 15 years changed from age 60 to 62, and elimination of certain early retirement subsidies and pre-retirement death benefits.
Neville alleged the trustees had breached their duty owed to him by favouring one group of beneficiaries over another. However, the court hearing his case, relying on the 1998 case of Edge et al. v. Pension Ombudsman, held the trustees had in fact acted in their discretion and had properly discharged their duty.
The court ruled that due to the fact trustees had no power to increase the contributions to the plan to meet the funding crisis, as all the contributions to the plan were made by the employers as part of a collective agreement, the trustees only option was either to wind-up the plan or reduce benefits.
In the application filed, the trustees said “relevant factors” considered by them included: past patterns of increases and decreases in pension contributions and enhancements; pensions under the plan had not been indexed for inflation; and non-retired members were still accumulating pension benefits. These considerations were the proper ones, held the court.
Given the precarious financial position of many multi-employer pension plans in Canada, the decision in Neville may prove significant for other plans facing similar benefit reductions. An appeal of this decision was filed on April 29, 2005.
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