With evidence that the value of pension fund assets have declined significantly in recent months, companies that sponsor registered pension plans are assessing their legal and fiduciary obligations. For many plan administrators, this will involve the following questions:
- What is the impact of the current market volatility on our funding obligations?
- What are our fiduciary duties surrounding the investment of pension fund assets?
- What, if anything, should we be communicating to our plan members?
This article highlights the applicable legal requirements and some suggested responses to these issues.
Plan administrators – and their pension committees – will want to consider these issues carefully and document their deliberations in response to the current market turbulence. Even where a plan sponsor decides that no immediate action is warranted, it will want to be able to demonstrate that it provided appropriate information to the company's board of directors to ensure that the company meets its fiduciary obligations as plan administrator as well as any relevant disclosure obligations. Both defined benefit (DB) and defined contribution (DC) plan sponsors are affected.
First, a brief overview of the legal regime respecting funding obligations as well as pension fund investment. While the focus here is on Ontario law requirements, the pension statutes of other jurisdictions are similar.
Funding and Reporting Requirements
Sponsors of DB pension plans in most jurisdictions in Canada (including Ontario) must file regular actuarial valuation reports that disclose the funded status of the plan on both a going concern and solvency basis. Actuarial valuation reports are generally required every three years, unless a previously filed report with the regulator discloses a solvency concern, in which case valuations are required annually.
The filed valuation report determines a company's contribution requirements to a DB plan. If the value of the pension fund assets has declined significantly as of the valuation date, the plan's solvency position will also likely have deteriorated, potentially creating a solvency deficiency or exacerbating a pre-existing deficiency. In either case, this will result in increased contributions by the company over the period covered by the report.
Sponsors of DB plans must also file annual financial statements for the pension plan or fund, and in Ontario, must also file an "Investment Information Summary" as part of the financial reporting process.
Sponsors of DC pension plans will not have their contribution requirements affected by a drop in pension fund assets, as their contributions to the plan are a fixed amount (typically a percentage of the employee's earnings) as defined in the pension plan document. In these plans, employees bear the investment risk.
Pension Fund Investment Requirements
Pension fund investment requirements are regulated under pension legislation. While a number of quantitative restrictions exist, the main requirement is that the plan administrator invest the pension fund in a prudent manner, in accordance with a written statement of investment policies and procedures established for the plan. It is the investment policy statement that, among other things, sets asset mix ranges for the fund, rate of return expectations, and specific categories of investments that may be made.
Plan administrators are required to act in a fiduciary capacity when they are setting investment policy and must exercise prudence in the selection of investments for the plan. Clearly, this exercise will be affected by the volatility in equity markets resulting from the current economic turmoil, as DB plan sponsors explore techniques such as asset-liability matching and consider whether their current asset mix and investment policy remain appropriate.
For DC plan sponsors, the selection of investment options and funds is also guided by the statutory standard of prudence. DC plan sponsors must also take into account the "Guidelines for Capital Accumulation Plans" (CAP Guidelines), which set out specific principles respecting the selection, monitoring and termination of investment options and funds for the plan (including the default option), as well as member disclosure. The current market volatility will heighten the need for such monitoring and likely for increased member communication as well.
What Does This Mean for Plan Administrators?
Plan administrators must ensure that they are acting in accordance with their fiduciary obligations towards plan members by ensuring a "good governance" approach to the current market volatility. This may include:
- Ensuring accurate and timely monitoring of developments and reporting on the value of pension fund assets;
- Considering any possible changes to the investment mix (under a DB plan) or the investment options (under a DC plan);
- Revisiting the plan funding policy (for a DB plan);
- Recording their deliberations and any decisions fully and accurately;
- Monitoring questions and concerns from their plan membership; and
- Developing appropriate responses or communications to members.
The extent of disclosure to members will first be guided by statutory disclosure requirements, as well as the CAP Guidelines in the case of DC plans. The current volatility likely increases the need to communicate with DC plan members in particular. Many DC plan sponsors have relied upon the comments issued by their service providers for dissemination to their plan member. DC plan sponsors should also consider reviewing their existing investment education and information materials for members to ensure that they continue to be appropriate.
Obtaining advice from professional advisors (such as investment advisors) will also be important to demonstrate fulfillment of a company's fiduciary obligations. Plan administrators need to tread carefully in these difficult times, ensuring that their pension governance process is operating to ensure compliance with statutory requirements and to address their fiduciary obligations.
Case Law Updates
Buschau Appeals Continue
After more than a decade of litigation and regulatory consideration, Buschau v. Th e Attorney General of Canada and Rogers Communications Inc. continues with an appeal to the Federal Court of Appeal.
In 2006, the Supreme Court was asked to determine whether or not the plan in question, which had been frozen in 1984, could be ordered terminated and the remaining surplus distributed. The Supreme Court found that the decision to order a plan termination belonged not to the courts but to the pension regulator. The federal regulator, the Superintendent of Financial Institutions, subsequently determined that the statute neither required the termination of the plan nor prohibited the continued taking of contribution holiday and declined to order the plan terminated. The members sought judicial review of the OSFI decision.
In September 2008, the Federal Court found the determination not to order the termination of the plan unreasonable and ordered the Superintendent to reconsider her decision. Th e court relied on comments from the Supreme Court that contribution holidays that are otherwise permissible can be illegitimate if pursued in bad faith as part of an improper refusal to terminate a pension plan.
If not overturned on appeal, members of other "frozen" plans in surplus (whether federally or provincially regulated) may bring similar actions seeking a plan termination. A copy of the Federal Court's September 2008 ruling can be found here.
Supreme Court Denies Leave to Appeal in Slater Steel Case
The Supreme Court of Canada recently denied leave to appeal of a decision that permitted claims to proceed against certain directors and officers of a bankrupt company in respect of their actions relating to the pension plan.
The Ontario Court of Appeal in March 2008 allowed third party claims to proceed against former directors and officers who served as members of a committee administering the Slater Steel pension plans, notwithstanding the fact that an order previously issued under the Companies' Creditors Arrangement Act released the directors and officers of Slater Steel from any claims. The decision was made on the basis that the directors and officers, when serving on the committee responsible for administering the plans were acting not as directors and officers of the corporation (in which capacity they were protected by the stay order), but in their capacity as employers and agents of the plan administrator.
The committee members sought leave to appeal the decision to the Supreme Court of Canada. The Supreme Court dismissed the leave application in September 2008 without comments.
Supreme Court Upholds Pension Plan Mandatory Retirement Age in New Brunswick
The Supreme Court of Canada has confirmed that exceptions to age discrimination prohibitions contained in New Brunswick human rights legislation for "bonafide" pension plans allow for mandatory retirement provisions so long as the plan is not a sham.
A complaint had been filed with the New Brunswick Human Rights Commission by a miner employed by Potash Corporation of Saskatchewan Inc., who had been forced to retire at age 65 as a result of a mandatory retirement policy contained in the Potash pension plan. The complaint alleged discrimination on the basis of age contrary to the provincial Human Rights Act. However, the Human Rights Act contains an exception for mandatory retirement provisions contained in a "bonafide retirement or pension plan".
After contrary decisions by the Human Rights Commission and the lower courts, the Supreme Court ruled that the employer need only demonstrate that the plan was not a sham in order to rely on the "bonafide" exception. In reaching this conclusion, the Supreme Court rejected arguments that the exception was only available where the pension plan's mandatory retirement age was related to legitimate work-related purposes.
It is important to note that this decision was determined on the basis of the New Brunswick Human Rights Act and whether it applies in other jurisdictions will depend on the human rights legislation in those other jurisdictions. It may be of particular interest to Alberta plan sponsors since Alberta's human rights legislation also contains an exception for a "bonafide" retirement or pension plan.
Pension Reform Updates
CAPSA Proposes New Multi-Jurisdictional Agreement
The Canadian Association of Pension Supervisory Authorities (CAPSA) recently released a consultation paper on a proposed agreement regarding multi-jurisdictional pension plans.
Currently, multi-jurisdictional issues are addressed by the Memorandum of Reciprocal Agreement. The Reciprocal Agreement was established in 1968 and effectively provides that a multi-jurisdictional plan should be registered in the jurisdiction where the plurality of members is employed. Given that the Reciprocal Agreement is now quite dated, CAPSA has looked to modernize it. The Proposed Agreement is significantly more detailed than the Reciprocal Agreement and, if adopted, will bring greater clarity for multi-jurisdictional plan sponsors. Among its proposals is to require the use of the "final location" approach instead of the "checkerboarding" approach for determining the benefit entitlements of members who have been employed in multiple jurisdictions.
CAPSA will be conducting consultation sessions across the country for the balance of 2008 and is accepting comments from stakeholders by January 30, 2009. A copy of the Proposed Agreement can be found here.
Ontario and Alberta/B.C. Expert Panel Reports Released
Expert panels established to review pension legislation in Ontario, Alberta and British Columbia have recently released their reports.
The Ontario Expert Commission on Pensions delivered its report on November 20, 2008. The report will likely form the basis of subsequent legislative reform, although it is not known when and if draft legislation will be introduced. A copy of the report can be found here.
A similar review process took place in Alberta and British Columbia, where the Joint Expert Panel appointed by the Alberta and B.C. governments submitted its report on November 14, 2008 (although the report has not yet been made public). It is anticipated that the Alberta and B.C. governments will respond to the report with legislative reform proposals in 2009. A copy of Bennett Jones's submission to the Joint Expert Panel can be found here.
Bennett Jones will review the expert reports and provide an update to clients and friends of the firm on the panels' key recommendations and governmental responses.
Interim Report Released by Nova Scotia Pension Panel
The Nova Scotia Pension Review Panel recently released an interim position paper that set out its position on key issues. With the final report due in December 2008, the Nova Scotia interim paper perhaps provides a preview of the recommendations to come in that province and perhaps other jurisdictions as well.
The interim report contains a number of significant responses to submissions made to the Review Panel. Chief among them is a rejection of safe harbour rules that would shield defined contribution plan sponsors from liability and a recommendation that an optional province-wide defined contribution plan be established with adjustable contribution rates for employers of any size who wish to participate. The interim report also suggests that the concept of partial wind-ups be removed from pension legislation, but that members on termination (whether individual or group termination) have full portability rights, with the sponsor responsible for making up any resulting deficit if the withdrawal occurs while the plan is less than fully funded. A copy of the interim Nova Scotia report can be found here.
The Canada Revenue Agency has announced the year's maximum pensionable earnings under the Canada Pension Plan (CPP) for 2009, setting the limit at $46,300, up from $44,900 in 2008. The basic exemption amount for 2009 remains at $3,500, below which no CPP contributions are required.
Contribution rates also remain unchanged, with employee and employer rates at 4.95 percent, to a maximum of $2,188.60.
Does Benefits Fraud Concern You?
Benefits fraud is on the rise in Canada and is increasingly an issue of concern for plan sponsors. "Fraud Squad", an article on this topic by Sean Maxwell published in the October 2008 issue of Benefits Canada, can be found here.
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.