Canada: Pensions @ Gowlings - June 17, 2009

Last Updated: August 19 2009

Edited by Daniel Hayhurst


  • Increased Scrutiny of Retirement Plans Means Increased Risk of Personal Liability
  • Federal Solvency Funding Relief Regulations
  • Proposed Changes to Canada Pension Plan

Increased Scrutiny of Retirement Plans Means Increased Risk of Personal Liability

In these times of unprecedented economic upheaval and restructuring, employer-sponsored retirement plans have moved to centre stage in the business world. This is particularly true for stakeholders in defined benefit pension plans ("DB Plans"), but is equally true for the stakeholders in defined contribution plans (including pension plans, deferred profit sharing plans and group RRSPs) ("DC Plans"). Unprecedented declines in the investment markets have had a material impact on the funded status of DB Plans and on the adequacy of DC Plan account balances to provide for a comfortable retirement. Historically low interest rates have had a material adverse impact on the valuation of DB Plan liabilities.

As one might expect, given the potential for losses to the various stakeholders, more and more plan sponsors and administrators are being questioned about the past, present and future administration of the plans they sponsor and administer. This increased scrutiny results in increased legal risk for those involved in plan governance and plan administration.

Individual directors, officers and employees who are involved in plan governance and administration need to understand that, in most cases when they are acting in these roles, they are acting in a fiduciary capacity. This means that they must act in the best interest of the beneficiaries of the plan. Sometimes this may be overlooked if administering a plan is seen simply as an extension of an employer's human resource or corporate finance functions. Although a plan is an important component of an employer's approach to attracting and retaining employees, it is much more than that. While it is also true that plans can represent a significant cost centre for employers - particularly in troubling times - the focus on cost without regard to the employer's fiduciary obligations will increase legal risk and, ultimately, costs.

Areas of Legal Risk

The areas of legal risk are diverse and include (but are not limited to) the following:

Plan Investments

In these difficult times, the investment of DB Plan assets is an area of heightened sensitivity and risk. Increasingly, plan administrators will be subject to accusations that investments were inappropriate or imprudent or that there was insufficient oversight of fund assets or investment managers. Investment opportunities and plan demographics are changing. With these changes comes a need to reassess the asset-liability dynamic, review the plan's statement of investment policies and procedures, reassess weaker performing managers, and ensure that all plan documentation governing the investment process is drafted to modern day standards with a view to mitigating the legal risk that the plan and those who govern and administer it are exposed to.

For a number of years there has been a movement away from DB Plans to DC Plans, in large part because of a perception that DC Plans have limited potential for corporate liability. However, the recent losses and volatility in the financial markets highlight that the risks associated with DC Plans may be greater than first thought. Once DC Plan members begin considering the impact of poor market returns on their retirement savings, it is reasonable to expect that some will begin to question the administration of their plans. To put this in perspective, imagine that you were a plan member and retiring today: would your DC Plan account balance give you the retirement that you expect? If the answer is "no", you might have questions about how the plan was administered. Were the investment options provided to members appropriate? Were the members given sufficient tools to be able to make their own investment decisions? Have the service providers selected for the plan provided satisfactory services? Did the plan administrator comply with the Guidelines for Capital Accumulation Plans (discussed in a previous issue of Pensions @ Gowlings)?

Funding and Transfer Issues

Most DB Plans are now in deficit. Employers who administer DB Plans may face competing goals (fiduciary and corporate) when deciding whether to file a valuation report that technically may not need to be filed in the calendar year. This is particularly the case where the employer knows that the funded status of the DB Plan has materially declined. We note that attempts to balance these competing interests, as regards solvency deficiencies, in the current environment have been promulgated or proposed (see a previous edition of Pensions @ Gowlings and the commentary below). Technical rules under some pension benefits standards laws may prohibit the transfer of the full commuted value of a member's pension entitlement on termination of plan membership, without regulatory consent, where the administrator knows or ought to know that the funded status of the plan has fallen below a prescribed threshhold. Any response to such situations should be based on a careful consideration of all legal and regulatory requirements and an assessment of the various risk factors.

Conflicts of Interest

Plan administration can lead to situations of perceived or actual conflict between the interests of the employer and those of the plan beneficiaries. For example, where a DB Plan has suffered significant investment losses, increasing contributions to address such losses may conflict with the needs or desires of the employer to use any available cash to enhance its operations or to simply survive the recession. Also, investing plan assets in employer-issued securities is fraught with legal issues, including but not limited to potential conflicts of interest. Again, any response to such situations should be based on a careful consideration of all legal and regulatory requirements and an assessment of the various risk factors.


Apart from the readily obvious (above), there are numerous areas of plan governance that give rise to legal risk for those individuals who are involved in plan administration. These include:

  • proper delegation of authority to committees, officers/employees and third parties and appropriate reporting "up the chain"
  • the appropriateness of charging expenses to the plan
  • validity of plan amendments
  • plan conversions and mergers
  • member communications
  • partial wind ups
  • inclusion/exclusion of appropriate commercial terms in agreements relating to the plan (custodial, consulting, currency trading, investment management, securities lending etc.)

Where decisions made or taken in the context of plan governance and administration are challenged, a common feature is that, far more often than not, the plan administrator failed to seek legal advice in connection with the issue in dispute.

Methods of Challenge

Given the amount of money involved and the stakes for beneficiaries, the potential for plan litigation and/or regulatory proceedings should be kept top-of-mind by plan sponsors and administrators and their directors, officers and employees who are involved with the plan. In these volatile times, all individuals involved in plan administration need to be vigilant and respond prudently to the numerous risks that may ultimately confront them.

The courts have repeatedly said that pension claims are well suited to be handled as class actions. While not every claim in respect of a retirement plan is suitable for a class action proceeding, the availability of such proceedings materially increases the risk that disgruntled stakeholders will challenge the actions of plan administrators. This type of proceeding encourages claims where the individual claims may be low but the aggregate claims of the members of the class may be quite high.

In addition to using the courts, disgruntled pension plan stakeholders may seek to use regulators to challenge decisions made or actions taken or omitted to be taken. Once a complaint is filed with a pension regulator, a plan administrator can be faced with a long and difficult process of responding to allegations made against it. Given the regulator's role of protecting the interest of plan beneficiaries, they tend not to dismiss allegations without a thorough review. Such reviews can be costly and time consuming for a responding organizations and individuals.

Fines, Penalties etc.

In Ontario, persons convicted of contravening the Pension Benefits Act or the regulations thereunder are liable to a fine of up to $100,000 for a first offence and $200,000 for each subsequent offence. Moreover, a director, officer, official or agent of a corporation (or person acting in a similar capacity in an unincorporated association) is guilty of an offence if they cause, authorize, permit, acquiesce or participate in the commission of an offence, or if they fail to take all reasonable care in the circumstances to prevent the corporation from committing an offence. Where the offence relates to a failure to submit or make payment to a pension fund, the individual convicted can be ordered to pay an amount equal to the amount not submitted to the pension fund. Similar provisions exist under comparable legislation in other Canadian jurisdictions.

While these numbers may appear large, the potential exposure through civil action generally will be much higher.

What is the best defence?

The best defence is pro-active risk mitigation, taken in advance. It is far better to avoid a claim than to defend a claim, even if the defence is ultimately successful. Receiving appropriate legal advice is the first step.

Federal Solvency Funding Relief Regulations

On June 4, 2009 the federal Superintendent of Financial Institutions published a letter announcing an extension of the deadline for filing actuarial reports for those sponsors waiting for the final version of the proposed solvency funding relief regulations for federal pension plans and who are required to file an actuarial report by June 30, 2009. Specifically, the deadline for filing actuarial reports required to be filed for a plan year-end date of November 1, 2008 up to October 31, 2009 will now be the later of August 14, 2009 or six months after the plan year-end date. Also, OSFI indicates that it will accept voluntary reports filed to take advantage of the proposed funding relief if such voluntary reports are filed by the later of December 31, 2009 or nine months after the plan year-end date.

On June 12, 2009 the federal Minister of Finance announced the coming into force of the solvency funding relief regulations. A Regulatory Impact Analysis Statement was also published.

Proposed Changes to Canada Pension Plan

On May 25, 2009 the federal, provincial and territorial Ministers of Finance proposed changes intended to modernize the Canada Pension Plan including the following:

  • remove the Work Cessation Test so that individuals would be able to take their benefit as early as age 60 without any work interruption or reduction in hours worked or earnings
  • increase the percentage of low income years to be dropped from the calculation of "average career earnings"
  • require those under 65 who receive a CPP retirement benefit and continue to work, as well as their employers, to make CPP contributions (voluntary for those over 65; mandatory for employers of those over 65 who opt to participate)
  • gradually increase the early pension reduction and late pension augmentation actuarial adjustments.

The proposed changes will begin to come into force in 2011 following approval by federal and provincial governments with the majority of changes being phased in gradually. An information paper describing the proposed changes was published.

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.

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