Canada: Solvency Reserve Accounts – Further Considerations For Alberta And BC Plans (Part II)

In Part I of this series, we considered issues related to setting up a solvency reserve account (SRA) for an Alberta (and eventually British Columbia) defined benefit plan, SRA withdrawals and multi-jurisdictional plans.  In this post we will discuss sponsor versus administrator roles and who is authorized to establish and make withdrawals from an SRA.

Sponsor vs Administrator Roles

Who is authorized to establish and make withdrawals from an SRA?  Section 54 of the EPPA provides that the "administrator" may set up a separate SRA within the plan's pension fund and that prescribed actuarial excess or surplus in the SRA may be withdrawn by a "prescribed person" in accordance with the EPPA regulations.  Sections 65 and 66 of the EPPA regulations state that the prescribed person is the administrator of the plan and contemplate that the administrator will provide all required information to the Superintendent and make all required applications and filings in relation to such withdrawals.

It is unclear whether the drafters of the EPPA and EPPA regulations turned their minds to the differences in plan sponsor and plan administrator roles in the context of making these decisions.  How do these provisions reconcile with the plan administrator's fiduciary obligations to members?  What, if any, role does the plan sponsor play in establishing the SRA?  Is there a potential conflict of interest where, as in many plans, the employer is both the sponsor and the plan administrator?

These are important questions to resolve, both when establishing an SRA as well as when contemplating a withdrawal.  In all cases, it is essential for the employer to understand whether such decisions are being made within its powers as sponsor (in which case there is no fiduciary duty owed to members in the pension context), or within its powers as plan administrator, in which case the decision must be made in accordance with the plan terms having regard to what is in the best interests of members.  Based on the EPPA and Guideline #07, strong arguments can certainly be made that even if the decision to establish the SRA is made by the administrator, it is reasonable that having an SRA as part of the plan's funding structure is, in fact, in the members' best interests because it encourages higher funding levels and better benefit security.  However, the withdrawal of funds from the SRA by an "administrator", even in compliance with the regulated safeguards and limits, may raise more difficult questions as to the compatibility of such withdrawals with the administrator's fiduciary responsibilities.

To the extent there is any doubt created by the references in the EPPA and regulations to the administrator performing these SRA-related tasks, we believe it is advisable to clarify the employer's role through initial amendments made to the plan in conjunction with establishing the SRA.  In this regard, an employer who is acting as both sponsor and administrator should be able to eliminate, or at least minimize, any potential conflict by inserting appropriate SRA wording in the plan, funding policy and related trust agreement to authorize/direct the administrator to establish an SRA and to apply for a withdrawal on the sponsor's behalf if so instructed by the board of directors in compliance with regulatory requirements and limitations.  In this way the establishment and operation of the SRA is dealt with under the plan terms, rather than being left to the administrator's discretion as a permitted action under the EPPA which could raise issues of fiduciary compliance.

Proposed BC SRA Provisions

As we noted in our earlier post, we expect that the BC SRA rules will be administered in a similar manner as the Alberta rules, however, we will have to wait and see once the BC pension reform legislation becomes law.

Next Steps

Administrators of Alberta and BC registered defined benefit plans should carefully consider taking advantage of recent (and in the case of BC forthcoming) legislation permitting them to establish SRAs as an effective way of funding their plans and avoiding "trapped capital" concerns that have historically discouraged full funding and undermined DB plan security.

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.