Quebec proposes a framework to allow pension plan contribution holidays

Quebec employers may finally get their wish if proposed changes to the Supplemental Pension Plan Act (SPPA) are passed. Bill 102 introduces a framework that will give employers the legal right to take contribution holidays. An employer takes a “contribution holiday” by using a portion of a pension plan’s surplus assets to reduce all or part of the company’s contribution to the plan.

Background
The right of an employer to take contribution holidays is not recognized or prohibited under the existing provisions of Quebec’s SPPA. Employers have essentially relied on plan documents as authority for taking contribution holidays, even though the applicable wording is fairly vague.

The contribution holiday debate began in 1993 when the Singer case started to make its way through the Quebec courts. The case involved a dispute over entitlement to surplus remaining on the full termination of a pension plan. At trial, the Quebec Superior Court determined that the employer, TSCO of Canada Ltd. (formerly The Singer Company of Canada), had illegally been taking contribution holidays for nearly 20 years. Not surprisingly, the employer appealed the decision.

While the Quebec Court of Appeal was hearing arguments in Singer, the Supreme Court of Canada (SCC) released a landmark decision in Schmidt v. Air Products in 1994. The SCC ruled that an employer is entitled to take contribution holidays unless expressly or implicitly prohibited under the pension plan documents.

The Quebec Court of Appeal released its decision in Singer on Feb. 27, 1995. To the astonishment of most employers, it confirmed the lower court’s ruling. It determined that contribution holidays were illegal because they were not authorized, either explicitly or implicitly, by the wording in the plan documents. The ruling directly contradicted the SCC’s ruling in Air Products that the right to take a contribution holiday may exist even where the plan documents are silent.

Proposed legislative

framework

To help alleviate the uncertainty surrounding this issue, Bill 102 proposes to amend the SPPA to include a legislative framework for taking contribution holidays. This new legal protection will apply to future contribution holidays taken after Dec. 31, 2000. However, this protection is not a bar to legal action taken by members in other provinces. Employers will be presented with a number of choices if they wish to take a contribution holiday.

Maintain the status quo

Bill 102 does not oblige an employer to follow the newly prescribed rules. An employer will still be able to take a contribution holiday with reliance placed on the provisions of its pension plan. However, because of the often vague wording in current and previous plan documents, an employer faces the risk of a lawsuit where there is a contrary interpretation of the plan’s provisions. Employers should keep in mind that protection will not be offered for either past or future contribution holidays.

Employer’s proposal to amend the plan (option A)

This option involves making an amendment expressly granting the employer the right to take a contribution holiday. Such an amendment will be subject to approval by all employees’ associations (labour unions) that represent plan members and, where applicable, by all participating employers of a multi-employer plan.

Unilateral Amendment To The Plan (Option B)

This option will allow an employer to unilaterally amend a plan’s provisions with respect to contribution holidays. However, it comes with a price. An employer will have to retroactively grant one of the two following plan improvements to all members (active and inactive) and beneficiaries:

•credit the pension fund’s rate of return to all member contributions and additional voluntary contributions for the purpose of calculating refunds or pension benefits; or

•apply the 50 per cent cost-sharing rule that requires an employer to fund at least one half of the value of pension benefits for all the years of credited service of the plan members.

Furthermore, this option is not available for a plan where:

•the plan expressly prohibits contribution holidays;

•the plan contains an express obligation for the employer to make a specified minimum contribution;

•an application for union certification involving plan members is pending (this option can only be used after the first collective agreement is signed); or

•a collective agreement is in effect on Jan. 1, 2001, as long as a new collective agreement has not been signed.

The Régie des rentes du Quebec estimates that less than five per cent of employers will choose this option. It will be of particular interest for employers with non-contributory plans.

Mandatory Disclosure —

Either Option

Employers who wish to amend their plans pursuant to either Option A or B mentioned earlier, must inform every member, beneficiary and employee association of the amount of contribution holidays taken in the past four years. They must also inform them of the existing plan provisions that were the basis for the contribution holidays and the text of the new provisions.

While an employer will have protection against legal action by Quebec members for future contribution holidays, past contribution holidays are still subject to a legal challenge, and the three-year statute of limitations period prescribed under the Civil Code of Quebec applies. Thus, employers that wish to take advantage of the new legal protection offered by Bill 102 should carefully examine current and previous plan provisions if they took contribution holidays in the past.

In summary

The framework proposed by Bill 102 is a welcome measure that should help eliminate the state of uncertainty faced by some employers with Quebec members.

As with any new piece of legislation, however, there will unquestionably be some disenchanted individuals or groups who will find themselves adversely affected by the proposed new provisions.

Having said that, the passage of Bill 102 could bring more lawsuits with regard to past contribution holidays as a result of the new disclosure rules.

Allen Minuskin is a lawyer with Watson Wyatt’s Canadian Research and Information Centre in Toronto. He can be reached at (416) 943-6081 or [email protected].

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