Originally published in Blakes Bulletin on Pension and Employee Benefits, August 2007
On December 13, 2006, the Québec National Assembly adopted Bill 30, An Act to amend the Supplemental Pension Plans Act, particularly with respect to the funding and administration of pension plans. This Act brings important modifications to the Supplemental Pensions Plans Act (SPPA). A revision of funding rules for defined benefit pension plans was expected, however, the extent of modifications pertaining to the administration of pension plans was somewhat surprising.
In Québec, as elsewhere, many defined benefit pension plans present important solvency deficiencies. It is generally agreed these deficiencies are not caused by mismanagement of assets or by bad investment decisions made by pension plan administrators, but by economic circumstances beyond their control.
The Québec National Assembly adopted the Act respecting the funding of certain pension plans in 2005. This Act provided temporary rules on the funding of solvency deficiencies, such as the possibility of combining prior solvency deficiencies with a newly disclosed one and a maximum amortization of 10 years for solvency deficiencies, if specific conditions were met. Those measures somewhat eased the financial burden of employers participating in defined benefit pension plans.
As these provisions were meant to apply for a limited time, a revision of the funding rules for defined benefit pension plans provided in the SPPA was expected. The Régie de rentes publicly expressed the view that funding rules should not be relaxed in order to protect the benefits of members and beneficiaries. Other pressure groups, however, had clearly indicated that making defined benefit pension plans an attractive fringe benefit was only possible if employers were given some leeway in terms of the funding of such plans. Also, both the Régie des rentes and the Québec government were under increasing pressure to find a solution to shield members of pension committees from legal recourses in relation to the administration of pension plans. As well, the decision of the Court of Appeal in Association provinciale des retraités d’Hydro-Québec v. Hydro-Québec did not satisfy retirees who were claiming that modifications to an ongoing pension plan should be equitable. After that decision was rendered, retirees made it publicly known they would lobby for changes to the SPPA to protect what they perceive to be their legitimate interests.
New Rules Pertaining To Funding
Under Bill 30, effective January 1, 2010, defined benefit pension plans will have to submit an annual actuarial evaluation, unless the plan is fully solvent and funded, in which case a partial evaluation may be performed. A provision for adverse effects will also have to be created. This provision will accrue from the actuarial gains that are expected to appear over time. The Régie des rentes is of the opinion that the creation of the provision for adverse effects will not require the payment of additional contributions by the employer. However, until such provision for adverse effects is fully accumulated, the employer will be prevented from taking any contribution holiday.
Any modification that will make the solvency level of a defined benefit pension plan fall below 90 per cent will require a special amortization payment payable to the pension fund. Such payment will be payable in full on the day following the date of the evaluation and will have to be sufficient to bring back the plan’s solvency level to 90 per cent. The amortization period for a solvency deficiency is maintained at five years, but an employer will be allowed to provide a letter (or letters) of credit that will be considered part of the assets of the pension plan for determining its solvency. The total amount of the letter (or letters) may not exceed 15 per cent of the value of the plan’s liabilities.
Additional Amendment Requirements
The lobbying efforts of retirees bore fruit. Bill 30 specifically provides for new requirements in relation to modifications to a pension plan. Effective January 1, 2010, all members and beneficiaries of a pension plan must receive a notice explaining the nature of the amendment to the pension plan affecting any surplus assets before such an amendment can be registered. If 30 per cent or more of the members of a specific group oppose such an amendment, it is deemed not to be equitable and not to comply with the applicable legal requirements.
Even though Bill 30 contains no language to that effect, it is believed that factors that will be taken into consideration to determine whether an amendment is equitable or not will be similar to those used in the context of an arbitration for the allocation of surplus assets in the event of the termination of a pension plan. Experience, however, has shown the application of such rules is not easy and it is expected that any litigation contesting the equitable nature of any plan modification would be long and costly.
Even though these provisions will come into force in 2010, they already create discomfort for many parties involved in the administration of a pension plan. Employers will face additional constraints when deciding on modifications to a pension plan. In a unionized context, it will be very difficult, if not impossible, to negotiate amendments to a pension plan funded from surplus assets when members are represented by different associations of employees or where there are both unionized and non-unionized members.
Even though section 146.3.3 of the SPPA, as modified by Bill 30, provides the sending of notices to all members and beneficiaries and the counting of the return ballots does not apply to amendments made in accordance with section 146.5 of the SPPA (which deals with modifications negotiated with associations of employees), the approval of each association of employees will only be valid for active members of the plan covered by the relevant bargaining certificates. Non-active members or members who are not unionized will still have to receive the notice and, if they oppose the modification (in sufficient numbers), it will be deemed not to comply with applicable legal requirements.
It is also difficult to imagine how an association of employees could consent to an increase of benefits for members of the plan not covered by a bargaining certificate or how the association of employees could claim to negotiate on behalf of the non-active members. Negotiating, however, an increase in benefits that would not appear to be equitable would be counter-productive as it could be contested by other groups of members. If pension plan members are covered by different bargaining certificates, it may also be impossible to hold common negotiations with all the associations of employees as the expiry date of relevant collective agreements may vary. Reopening existing collective agreements may not prove a viable or interesting solution for most employers.
These new provisions also put the pension committee in a somewhat uncomfortable situation if more than 30 per cent of the members of a specific group oppose the amendment. The pension committee cannot change the amendment and it has, under the SPPA, the obligation to file modifications brought to the plan by the employer.
The pension committee must also administer the plan in accordance with the law. If 30 per cent of the members of a specific group oppose a given amendment, it is deemed not to be equitable and not to comply with the requirements of the SPPA. Unless the SPPA is further revised, it appears a pension committee would have no choice but to file the modification to the plan and then administer the plan in accordance with such modification, even though members of the pension committee know it is deemed not to comply with applicable legal requirements.
New Administration Requirements
Bill 30 imposes additional obligations for pension committees. Each committee must establish an internal by-law providing rules pertaining to its workings and governance, which must be enacted before December 13, 2007.
The list of topics to be covered by the internal by-laws is found at section 151.2 of the SPPA, including:
- Duties and obligations of the committee members
- Rules of ethics to which those persons are subject
- Rules governing the appointment of the chair, vice-chair and secretary
- Procedure for meetings and the frequency of meetings
- Measures to be taken to provide professional development to committee members
- Measures to be taken to ensure risk management
- Internal controls
- Books and registers to be kept
- Rules to be followed when selecting, remunerating, supervising or evaluating delegates, representatives or service providers
- Standards that apply to services rendered by the pension committee, including standards applicable to communications with plan members and beneficiaries.
Such rules may prevail over the provisions of the pension plan itself, except for: (i) rules governing the appointment of the chair, vice-chair and secretary of the pension committee, as well as their duties and obligations; (ii) quorum and the granting of a casting vote at committee meetings; and (iii) the proportion of committee members who must participate in a decision in order for it to be valid.
The new wording of section 151.2 of the SPPA allows the pension committee to effectively modify the text of the pension plan in relation to its operation and governance. Even though such encroachment to the usually exclusive power of the employer to change a pension plan may appear to be minor, it constitutes a disturbing precedent.
Section 150.1 of the SPPA now provides that the pension committee chooses and retains the services of the delegatees, representatives and service providers. We are not certain of the effect that this new wording will have on the common practice to delegate all or most of the pension committee’s powers, including the power to retain the services of service providers to the employer. However, it appears to be the legislature’s intent to make the pension committee the party ultimately responsible for the choice of the service providers.
In view of this additional provision, many pension committees may have to revise all past delegation of authority and discuss the agreements entered into with different services providers. It should be noted that we generally recommend that service agreements be reviewed regularly as a rule of proper governance in the context of the administration of a pension plan.
Legal Responsibility Of Service Providers And Delegatees
Bill 30 includes several provisions seeking to protect members of a pension committee from potential lawsuits. As previously noted, legal recourses filed recently against members of pension committees made it increasingly difficult to recruit persons to sit on such pension committees. It appears the solution chosen was to transfer liability to other parties involved in the administration of pension plans.
Section 151.1 clearly provides for the transfer of the pension committee’s liability: "The pension committee is presumed to have acted with prudence where it acted in good faith on the basis of an expert’s opinion." We first note this presumption can be reversed and evidence may be adduced before a court of law to demonstrate the pension committee did not act with prudence. We expect experts will be very cautious when drafting any opinion or making recommendations to a pension committee.
As the primary responsibility will automatically fall on the expert, the wording of any recommendation will have to be carefully studied and a description of the facts disclosed to the expert and the documents it was provided with will very likely be included in any recommendation or opinion. We also expect experts will refrain from making recommendations in specific circumstances, such as when insufficient information is available or when the expert will not have had sufficient time to review all the relevant material.
Bill 30 also adds a paragraph to section 153 of the SPPA that clearly imposes a fiduciary obligation to service providers and representatives who exercise a discretionary power of the pension committee. As making recommendations or rendering opinions could be interpreted as exercising a discretionary power of the pension committee, it can be argued that experts will have to render those opinions or prepare recommendations in the best interest of members and beneficiaries. The interactions between pension committee members and service providers accordingly acquire some additional levels of complexity.
Bill 30 allows for indemnification of the members of the pension committee for any prejudice they suffer in the exercise of their tasks if they did not commit any fault. If the members of the pension committee committed a fault that is not intentional or grave and if they are covered by insurance, the pension committee may also indemnify them for the franchise provided under the insurance plan.
The provisions of section 162.1 of the SPPA accordingly allow a pension fund to be used as default liability insurance for members of the pension plan. It is also interesting to note that a member of a pension committee who is covered by an insurance policy will be protected only to the extent of the franchise provided under the insurance plan, while the member with no insurance can be indemnified for all the prejudice he or she may suffer.
Section 162.1 of the SPPA provides that the pension committee will make the decision to compensate members who sustained a loss in the performance of their duties and who have committed no fault. This power of the pension committee, like any other power, must be exercised in the best interest of the members and the beneficiaries. It may accordingly be difficult for pension committee members to justify any such decision to indemnify one of the pension committee members in the context of their fiduciary obligation.
Bill 30 contains provisions that prohibit the use of clauses limiting the liability of service providers. The scope of this provision is quite broad and affects not only contracts to be negotiated but also existing and expired ones. We note the scope of the prohibition is broad enough to possibly include both classic clauses limiting or excluding a service provider’s liability, as well as indemnification provisions. It can be argued that indemnifications not affecting the pension plan’s assets (such as indemnifications given by the plan’s sponsor) would not fall within the scope of section 154.4 of the SPPA.
Section 154.4 of the SPPA provides that clauses limiting or excluding a service provider’s liability in an existing or expired contract may be declared null and void if abusive. In order to determine if any such clause is indeed abusive, the SPPA refers to the clauses of Québec’s Civil Code in relation to consumer contracts and contracts of adhesion.
As the rules applicable to consumer contracts and contracts of adhesion found in the Civil Code are intended to protect the consumer or party who is assumed to have had no possibility to negotiate the terms of the contract it entered into, it will be very interesting to see how the courts will apply these rules in the context of the administration of a pension plan. Even though it is possible that service providers could justify the reasonable nature of a clause limiting or excluding their liability in the context prevailing when the contract was negotiated, we fear the standard of review to be used by the court may be difficult to meet.
This prohibition will very likely apply to contracts in relation to the administration of pension plans that were not negotiated by the pension committee itself, as the rules applicable to delegation of powers will come into play. It appears it will accordingly be difficult to argue that such prohibition will not apply if the service agreement was negotiated with the employer or if the "fair negotiations" between the parties occurred in relation to a possible relationship between the service provider and the employer that sponsors the plan.
Bill 30 renders the administration of defined benefit plans even more demanding and, over time, more costly. Over and above the financial burden caused by the prevailing economic environment, employers participating in a pension plan will also have to bear additional costs in relation to Bill 30 arising from the funding requirements that will come into force in 2010, as well as additional requirements in the plan’s administration. Bill 30 could also trigger unwanted effects as some service providers could avoid entering into contracts with pension plans that are not properly administered or require the payment of additional fees to accept the risk associated with dealing with such plans.
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