Originally published February 5, 2007
On December 13, 2006, the Québec National Assembly adopted an Act to amend the Supplemental Pension Plans Act, particularly with respect to the funding and administration of pension plans ("Bill 30"). This legislation is expected to have relevance for any pension plan with members in Québec. Effective on the date of its adoption, Bill 30 imposes on all pension committees new governance standards which will materially affect the manner with which those committees administer pension plans and the committee members’ responsibilities. In addition, as of January 1, 2010, defined benefit plans funding standards will be substantially amended. Finally, Bill 30 will impact relationships between the employer and plan members, both active and retired, in all cases where plan amendments will be funded from surplus.
DECEMBER 13, 2006 – NEW GOVERNANCE STANDARDS
Effective on the assent of Bill 30, new governance standards came into force. These standards affect the pension committee’s responsibility and its relationships with delegates, representatives and service providers.
Responsibility of pension committee members
In order to properly understand the impact of the provisions of Bill 30 on the duties and responsibilities of the pension committee, it is useful to briefly review the current provisions of the Supplemental Pension Plans Act (SPPA).
The SPPA provides that a pension plan must be administered by a pension committee which acts as trustee. Moreover, the SPPA requires the pension committee to "exercise the prudence, diligence and skill that a reasonable person would exercise in similar circumstances". In addition, the pension committee must act "with honesty and loyalty in the best interest of the members or beneficiaries". Lastly, the SPPA specifies that the members of the pension committee must "use in the administration of the pension plan all relevant knowledge or skill that they possess or, by reason of their professional business, ought to possess".
Behind these obligations are the provisions of the Civil Code of Québec which apply to persons acting as trustees. In this respect, we note the trustee has "the control and the exclusive administration of the trust patrimony" and that any interested party may take action against the trustee to compel him to perform his obligations or to perform any act which is necessary in the interest of the trust, to enjoin him to abstain from any action harmful to the trust or to have him removed.
Certain recourses that have been commenced in Québec against pension committees or their members seem to have contributed to the growing concerns expressed by pension committee members in respect of their personal liability. The large number of plans with deficits has also fuelled these concerns.
Bill 30 proposes two measures to address this situation by establishing a particular liability regime for pension committees that rely on the advice of an expert and by permitting its members to be indemnified from the pension fund.
1. Expert advice
The pension committee will be presumed to have acted prudently if in good faith it relied on the advice of an expert. Similarly, the pension committee will not incur any liability concerning the compliance of an investment with the requirements of the law if it relied on the advice of an expert.
Bill 30 does not define the concept of expert. Generally, an "expert" is a specialist who is called upon to provide advice on a technical issue. Pension committees will therefore need to pay particular attention to the professional qualifications of persons retained as experts if they want to benefit from these provisions of Bill 30.
2. Indemnification of pension committee members
Pension committee members may in certain circumstances be indemnified from the pension fund.
Thus, the pension committee will be required to indemnify its members "who sustained a loss in the performance of their duties and who have committed no fault". Practically speaking, this particular regime will apply to pension committees whose members will not be covered by a fiduciary liability insurance policy. The application of this regime may be somewhat difficult, particularly regarding the determination of the absence of fault and of the loss sustained by the pension committee members which may put pension committee members in a conflict of interest situation.
If the members of the pension committee are covered by a fiduciary liability insurance policy and if they are found to have committed a fault (other than a deliberate or gross fault), the members may be indemnified up to the policy deductible. In such a case, the pension committee will be required to take into account the financial impact on the plan assets of such indemnification as well as any other relevant circumstance. We note that the indemnification regime does not seem to cover the situation where the fault leads to an award which exceeds the policy coverage.
It is therefore clear that all members of a pension committee should ensure they are adequately covered by a fiduciary liability insurance policy.
Delegates, representatives and service providers
The SPPA has always authorized the pension committee to delegate to a third party most of its duties and functions. When it acts in this manner, and provided it was authorized to delegate the powers in question, the pension committee will only be responsible for the care taken in the choice of the delegate and the manner with which it provided oversight of the delegate. It should also be noted that anybody acting in a delegated capacity assumes the same obligations and responsibility that the pension committee would have assumed if it had itself exercised the delegated powers.
Bill 30 introduces four important changes to the SPPA.
1. The choice of service providers
New Section 154.1 of the SPPA provides that the pension committee selects and hires the delegates, representatives and service providers.
Prior to the introduction of this provision by Bill 30, the SPPA did not specify that the pension committee had this particular power. It was widely assumed that the committee implicitly had this power as the entire administration of the plan was entrusted to it. The fact that the legislator has now seen fit to specify this particular power could affect the widespread practice of delegating in large measure the powers of the committee to the sponsoring employer, including the power to retain service providers. A number of pension committees may have to review delegations currently in effect. We note the requirement under the SPPA to review delegations when a new member of the committee with voting power takes office.
2. The exercise of a discretionary power by a service provider
Bill 30 considers that service providers who "exercise a discretionary power belonging to the pension committee" are delegates of the pension committee. As a result, the service provider will assume the same obligations and responsibility that the pension committee would have assumed if it had exercised the delegated powers. Bill 30 does not specify which powers of the committee will be considered to be "discretionary".
The application of this provision could potentially cover a number of situations. Consequently, service providers could find themselves with additional liability in connection with the services they have agreed to render.
3. Exclusion or limitation of responsibility
Bill 30 renders void any provision which limits or excludes the responsibility of a delegate, a representative or a service provider. This nullity is also extended to contracts that were in effect on December 13, 2006 or were terminated prior to that date if the provision is considered to be "abusive". In this respect, the abusive nature of the provision will be determined with reference to the provisions of the Civil Code of Québec on consumer contracts and contracts of adhesion.
The Civil Code of Québec provides that a clause of a consumer contract or a contract of adhesion is abusive if it is "excessively and unreasonably detrimental to the consumer or the adhering party and is therefore not in good faith; in particular a clause which so departs from the fundamental obligations arising from the rules normally governing the contract that it changes the nature of the contract is an abusive clause".
Pension committees may want to examine service contracts currently in effect to determine whether they need to be revised, particularly if they contain provisions which limit or exclude the liability of the service provider.
4. Reports by service providers
Lastly, Bill 30 extends to all delegates, representatives and service providers the obligation of reporting to the pension committee any situation "that might adversely affect the financial interests of the pension fund and that requires correction". Prior to Bill 30, this requirement was only applicable to the accountant. The pension committee will be required to take immediate corrective measures failing which a copy of the report must be sent to the Régie des rentes du Québec by the delegate, representative or service provider, as the case may be. This "whistle blowing" obligation could be problematic for certain service providers whose code of conduct requires that information obtained in the course of their services be kept confidential.
DECEMBER 13, 2007 – ADOPTION OF AN INTERNAL BY-LAW
Pension committees have until December 13, 2007 to adopt an internal by-law covering ten topics. This requirement appears to be the Québec legislator’s response to the governance standards that had been proposed on a voluntary basis by the Canadian Association of Pension Supervisory Authorities (CAPSA) in 2004.
The prescribed content of the internal by-law may, in certain respects, create difficulties as it addresses issues which are quite complex. Thus, the internal by-law must identify the means by which the pension committee will "manage risks". Moreover, the pension committee must determine the rules applicable to the choice, remuneration, supervision and evaluation of delegates, representatives and service providers. The internal by-law will also need to take into account the plan’s investment policy as the latter will prevail should there be an inconsistency with the internal by-law.
No doubt many pension committees will find the establishment of the internal by-law to be a complex exercise. They would be well advised to seek the help of external resources that have the appropriate expertise and knowledge in the area of employer sponsored pension plans.
JANUARY 1, 2010 – FUNDING OF AMENDMENTS FROM SURPLUS
Beginning January 1, 2010, any amendment to a plan which is intended to be funded from surplus must be established "in a manner that is equitable for both the group of active members and the group of non active members and beneficiaries".
We note that the Québec Court of Appeal had ruled in March 2005 in the matter opposing Hydro-Québec and its retirees that the employer was not required in law to act equitably in respect of retirees when it negotiated benefit improvements with its unions. Such an obligation might possibly belong to the unions themselves. Moreover, no consent by the retirees was required to give effect to such amendments. By adopting Bill 30, the Government has chosen to set aside these conclusions. For more information on the Hydro-Québec case, see our Osler Update.
When this provision takes effect, the relationship of an employer with its unions will be impacted as Bill 30 provides no exception for amendments that affect members subject to a collective agreement. All such amendments will be required to be submitted directly to the plan members and beneficiaries in accordance with the following procedure.
Any amendment which is intended to be funded from the plan surplus is subject to the Bill 30 provisions. Thus, benefit improvements, contribution holidays for active plan members and the payment of administration expenses from the plan fund, to the extent an amendment to the plan is required to give them effect, will be subject to these provisions. The equity factors that will need to be taken into account will include:
- the evolution of the plan;
- amendments made to the plan and the circumstances in which those amendments were made;
- the origin of such surplus and the use made in the past of any surplus assets;
- the characteristics of the benefits provided for in the plan and those of pensions in pay.
The employer who wishes to proceed with any such amendment must inform the pension committee who in turn will be required to advise all plan members and beneficiaries. The latter will have 30 days to oppose the amendment. At the end of this delay, the pension committee will tally the votes. If 30% or more of active plan members oppose the amendment, it will be deemed not to be equitable in respect of such members. The same will apply to the group of inactive members and beneficiaries who oppose the amendment.
However, Bill 30 provides that the employer may have recourse to a mechanism to obtain a permanent confirmation of its right to fund amendments to the plan from surplus. This mechanism was introduced in the SPPA on January 1, 2001 and it allows the employer to obtain confirmation of its right to use surplus for contribution holidays.
Finally, we note the requirement to take into account equity in respect of amendments funded from surplus, will only apply to plans in effect on December 31, 2009 or which result from a division of such plans. Any plan established on or after January 1, 2010 must contain a provision allowing the employer to fund any amendment from surplus.
Employers will therefore have three years to prepare for the coming into force of this new measure. During this period, they will need to consider a number of options and weight these options in light of the particular circumstances of each plan.
JANUARY 1, 2010 – NEW MEASURES AFFECTING FUNDING AND SOLVENCY
The Québec Government is proposing three new measures with Bill 30 which are designed to reinforce the funding of defined benefit plans. These measures follow the adoption of temporary funding relief measures which took effect in June 2005 when Bill 102 was adopted. We note that regulations have been adopted in order to exempt the pension plans of universities, municipalities and day care centers from most of the funding measures described below.
Provision for adverse deviations in solvency
Beginning January 1, 2010, a reserve must be established gradually such that the assets of a plan will exceed its solvency liabilities. The amount of such reserve will vary according to the risk profile of the plan which will be determined in accordance with regulations to be adopted. Such regulations will take into account the plan’s investment policy.
This measure will impact the funding of amendments and the amount of surplus required for contribution holidays.
It will therefore be necessary to wait for the publication of the regulations in order to determine the full extent of this measure.
Letters of credit
Bill 30 maintains the use of a letter of credit by allowing the employer which has provided it to suspend all or part of the solvency deficit special payments. The amount of the letter of credit will be limited to 15% of the solvency liabilities of the plan. Employers who are party to a multi-employer plan will not be allowed to avail themselves of this measure.
Funding of amendments on a solvency basis
Amendments that reduce the solvency ratio of the plan to less than 90% will require a special payment payable immediately in order to restore the solvency ratio of the plan to at least 90%.
We note also that the funding of solvency deficits over a ten year period, as provided under Bill 102, will no longer be permitted beginning January 1, 2010. All solvency deficits will be funded over a five year period.
IMPACT ON MULTI-JURISDICTION PLANS
It is quite clear that Bill 30 will add to the existing numerous differences between the Québec standards and those of other jurisdictions.
The application of Bill 30 to plans covering members in more than one jurisdiction, including Québec, could be quite complex.
In this regard we note that for plans registered in other jurisdictions which cover Québec members, current regulations under the SPPA allow the application of the funding standards of the province of registration. However, notwithstanding this exemption, the requirement to act equitably for the purposes of funding plan amendments from surplus might remain applicable to the Québec members of such plans.
Michel Benoit is a partner and Co-Chair of Osler's National and Cross-Border Pension and Benefits Department practising out of the Montréal office. Josée Dumoulin is a partner in the firm's Pension & Benefits Department also practising out of our Montréal office.
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