- More News About Pension Reform
- Other Issues Arising Out of Economic Conditions
- Montreal Trust case
More News About Pension Reform
On January 9, 2009, the federal Minister of Finance, the Honourable Jim Flaherty, released a discussion paper on improving the framework for federally regulated private pension plans. This discussion paper follows an announcement in November that the federal government would provide temporary solvency relief (i.e. extend the payment period from 5 to 10 years) to federally regulated pension plans that have been affected by substantial declines in the equity markets. Similar relief has recently been proposed by other governments including Ontario, Alberta, and Quebec. The federal announcement also closely follows recent reform discussions in Ontario, Alberta, and Nova Scotia.
The federal government has invited submissions on the issues addressed in the discussion paper and will accept submissions until midnight, March 16, 2009. Minister Flaherty also announced that the federal government will consult with provinces and territories concerning pension regulation. A federal-provincial working group of senior officials has been established to discuss pension issues.
It appears that recent tumultuous economic events, coinciding with longstanding and repeated concerns about the structure of the pension system in Canada, may actually lead to some form of consensus and provide Canadian politicians with the opportunity and political will to make positive changes to the way in which pensions are regulated and operate.
Other Issues Arising Out of Economic Conditions
a. Comments from OSFI
Regulators have also responded to the recent downturn in capital markets. In December, the Superintendent of Financial Institutions (Canada) published a letter concerning the market downturn and ongoing market volatility which reiterated comments raised in PBSA Update 29 wherein OSFI encouraged pension plan administrators to understand their risk tolerances and to undertake scenario testing in order to help identify potential exposures and take initiatives to manage risks prudently to safeguard pension benefits. The Superintendent notes that it is "essential that plan sponsors and administrators carefully consider the implications of the market downturn on their pension plans."
b. Comments from Canadian Securities Regulators
At the same time, Canada's securities regulators are taking a closer look at the potential impact of pension liabilities on public issuers. On January 8, 2009 they published CSA Staff Notice 51-328 Continuous Disclosure Considerations Related to Current Economic Conditions. In the notice, securities regulators state that, if an issuer has a "material defined benefit pension plan", the management discussion and analysis ("MD&A") that is required to be filed with an issuer's financial statements and provided to investors should discuss such issues as the anticipated impact of the funded status on future contributions and pension expenses, risks associated with the pension plan (including any expected increase in future contributions). Plan sponsors that are public issuers should carefully consider these disclosure issues. We are aware of a number of situations where sponsors have been specifically requested by the Ontario Securities Commission to address the status of potential pension liabilities.
In the current economic environment, when it comes to pensions provided by public companies, sponsors must be prepared to address concerns of all stakeholders - plan beneficiaries, investors and regulators.
c. Financial and Other Covenants
Employers who sponsor defined benefit plans need to consider whether recent economic conditions have any implications for them in the context of commercial covenants related to such plans that they may have given to lenders or others.
Montreal Trust case
On January 7, 2009, the Financial Services Tribunal of Ontario (the "FST") released its decision in the case involving Montreal Trust Company of Canada ("Montreal Trust"), Montreal Trust Member Surplus Committee (the "Committee") and the Superintendent of Financial Services (the "Superintendent").
While the Montreal Trust case is prima facie a case which is concerned with the ownership of pension plan surplus (and for that reason alone perhaps not terribly germane in the current economic conditions), it is an important case in light of comments made by the FST concerning issues relating to concurrent jurisdiction between the regulator and the Court.
Montreal Trust sponsored a defined benefit pension plan (the "Plan") which, as at November 2006, had approximately $29 million in surplus. Montreal Trust entered into a surplus sharing agreement (the "Agreement") with the Committee which, subject to certain adjustments, provided for the surplus to be split between Montreal Trust and plan members. The Plan was registered in Quebec but had Ontario members. Those entitled to share in the surplus numbered 3,615 and 1,219 of those people were subject to the jurisdiction of the Ontario pension regulator ("FSCO"). As of June 2008, 83% of the Ontario members had retained counsel to the Committee and voted in favour of the Agreement.
In March 2008, Montreal Trust commenced a court application for a declaration that it was entitled to receive surplus from the Plan on the terms set out in the Agreement. Montreal Trust and the Committee went to Court together to certify a class proceeding in respect of the issue of whether Montreal Trust was entitled to surplus in the Plan. The Court certified the class proceeding. The parties subsequently brought a motion for approval of settlement of the class proceeding based on the terms of the Agreement. The Court approved the settlement and an amendment to the Plan (the "Amendment") to provide for the payment of surplus in accordance with the Agreement (the "Settlement Order").
When the parties applied to the Ontario Superintendent of Financial Services (the "Superintendent") for the necessary regulatory approval under the Pension Benefits Act, the Superintendent issued a notice of proposal indicating his intention to refuse approval on the grounds that the Plan did not provide for payment of surplus to Montreal Trust as required by subsection 79(3)(b) of the Pension Benefits Act. The Superintendent took the position that the Settlement Order did not vary the trust which governs the Plan as the Settlement Order was based on the Agreement, not an historical analysis of the terms of the trust. The Superintendent was of the view that an historical analysis of the Plan and trust provisions would lead to the conclusion that Montreal Trust was not entitled to the payment of surplus from the Plan. Montreal Trust and the Committee took the position that an historical analysis was not necessary since the Amendment was valid and binding by virtue of the Settlement Order.
The FST, while making no finding on the issue, acknowledged that if an historical review of the Plan and trust provisions were undertaken, it is possible that the conclusion might be reached that the Amendment was invalid. The FST held, however, that the Court has jurisdiction on behalf of all interest parties to sanction a compromise where the rights of beneficiaries under a trust are subject to doubt or "real or serious" dispute. The FST determined, based on evidence before it, that this was the case here, and that given that all affected beneficiaries were bound by the Court order and in light of a number of other factors, it would not be appropriate to look behind the Settlement Order.
The FST was clear that its conclusions were based on the specific facts and the terms of the Settlement Order. While the FST indicated that it would be hesitant to disregard a court-ordered plan or trust amendment, it did not need to decide the issue as to whether the Superintendent or the FST is bound to accept such amendments in all circumstances. As such, the specific facts of this case should be carefully considered before relying upon it with respect to another set of facts. The decision does not stand for the proposition that historical analysis of trust provisions can be ignored or avoided in all cases.
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.