Warning for pension plan sponsors: (Legal view)

Keep an eye on your providers

If you are involved in managing or overseeing a pension plan, the importance of closely supervising providers cannot be overestimated. The need for objectivity in the administration of a pension plan and in the monitoring of service providers, such as actuaries, is essential. Objectivity must be exercised by both the “administrator” (defined below) and its agents.

The Ontario Court of Justice released its decision in Ontario (Superintendent of Financial Services) v. Norton on Feb. 23. Melvin Norton provided actuarial services to Slater Stainless Corporation in respect of two pension plans. Norton prepared actuarial reports as of Jan. 1, 2002, in May of that year. A year later, in June 2003, Slater filed for creditor protection under the Companies Creditors Arrangement Act.

Both pension plans were defined benefit plans and Slater made all contributions to the plans. Employees did not contribute to the plans. The preliminary valuation results showed a funding shortfall of about $20 million. Following some discussions between Norton and Slater, Norton used an asset-smoothing method to artificially inflate the value of the assets. The assets were inflated enough to eliminate the underfunding. As a result, Slater didn’t have to worry about additional contributions to amortize the deficits.

The chief actuary at the Financial Services Commission of Ontario (FSCO) questioned the use of the asset smoothing. It appeared to be overly aggressive and was a marked departure from the methodology used in the past. The chief actuary ordered that new valuations be prepared using methodology acceptable to FSCO. However, before a hearing could be held to determine whether Slater would be bound to comply with this order, the company filed for creditor protection.

FSCO began litigation against the officers and directors of Slater and the lawsuit was settled. FSCO also laid charges against Norton for failing to use actuarial methods and assumptions that were consistent with accepted actuarial practice. But the judge dismissed the charges against Norton on the basis the expert evidence introduced by FSCO was biased.

Pension legislation across Canada, as well as principles developed in court cases, set certain standards that must be met in the administration of a pension plan and a pension fund. Under the Ontario Pension Benefits Act, the administrator of a pension plan is required to use requisite care, diligence and skill that a person of ordinary prudence would use. The administrator is defined as the person or persons that administer a pension plan and, in many cases, is the employer, the employer’s board of directors or a committee established by the employer.

The administrator is also required to use all relevant knowledge and skill they possess or ought to possess. If the administrator does not possess the skillset, as is most often the case with actuarial services, the administrator may then employ agents.

There is a legal question whether or not an actuary is an agent of the administrator, or simply an advisor. Regardless, agents must use the same degree of care, diligence and skill as the administrator and use all relevant knowledge and skill they possess. Because of an actuary’s specialized knowledge, the bar is set higher for actuaries than administrators.

The act also clarifies that if an administrator employs an agent, they must personally select the agent. They must be satisfied of the agent’s suitability to perform the services for which they are hired and must also supervise the agent as is reasonable and prudent. It’s a common and prudent practice to evaluate all third-party service providers (agents and advisors) annually.

Under the act, administrators and agents “shall not knowingly permit” their interests to conflict with their duties and powers in respect of the pension fund. For example, if a plan sponsor’s business is failing, the administrator (who may be the board of the plan sponsor), either alone or in concert with the actuary, should not change actuarial assumptions and methods to accommodate their business to the detriment of the pension plan members.

Pension plan administrators depend upon the specialized expertise of actuaries, investment consultants, investment managers, custodians, record-keepers and legal counsel. While not all of these third parties are agents (legal counsel, for example, are clearly not agents), it is essential that the pension plan administrator closely and effectively monitors the quality, timeliness, cost and effectiveness of the services being provided. This is particularly the case when the fees of the third parties are being paid from the pension fund.

Mark Newton is a lawyer with Heenan Blaikie in Toronto and chair of the Ontario Bar Association’s Pension and Benefit Section. He can be reached at (416) 643-6855 or [email protected].

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