Cool summer hot on pensions

Courts, policy-makers set the stage for a busy autumn of legal changes

Although Canadian legislatures by and large took the summer off, courts and policy-makers have continued setting the stage for what’s sure to be a busy autumn of legal changes.

Two of the summer’s biggest developments were in pensions case law, with both decisions emanating from the Supreme Court of Canada. Both decisions also involved issues of pension plan reorganization, either through pension mergers or partial windups.

First, the Supreme Court denied ING Canada Inc. leave to appeal the Ontario Court of Appeal’s decision in Aegon Canada Inc. v. ING Canada Inc. The case involved the merger of two pension plans, one of which was in surplus, the other in a deficit position at the time of merger. The Ontario Court of Appeal in Aegon ruled that the surplus from the one pre-merger plan could not be used to provide contribution holidays for all members of the merged plan. The surplus was subject to a trust requiring that it be used only to benefit the members of that pre-merger plan.

The Supreme Court’s denial of leave to appeal means the appeal court’s decision is final. In response, the Financial Services Commission of Ontario (FSCO) released a note on its website stating that it is “reviewing the implications of this development.”

Meanwhile, FSCO’s policy remains as it was announced in May 2004, before the Supreme Court decision. A pension plan sponsor wishing to transfer pension assets upon a corporate sale or merger must show that:

•none of the pension plans is subject to a trust;

•all of the pension plans involved are defined contribution plans, with no defined benefit liabilities of any kind; or

•the Aegon Court of Appeal decision does not otherwise apply.

The Supreme Court’s second important pension decision this summer is Monsanto Canada Inc. v. Ontario (Superintendent of Financial Services). The decision marks the first time the high court has addressed the issue of what to do with a pension plan surplus when a defined-benefit plan is partially wound-up. The decision confirms the original ruling by the Financial Services Commission of Ontario that pension plan surplus assets must be distributed upon a partial plan windup.

However, the Supreme Court’s decision in Monsanto does not address the issue of who the recipient of the pension surplus must be — the plan sponsor or the plan members. Since that question was not raised in the initial hearing, the court did not rule on the point.

In response to the Supreme Court decision, FSCO posted a notice on its website on July 29, stating that “within 30 days, FSCO will send letters requesting current compliance information from each plan administrator who filed a partial plan windup report but who has not yet dealt with the related surplus.” Those letters have now either been sent or are in the process of being sent. Any plan sponsor that has undergone a partial plan windup will likely want to determine whether there was an actuarial surplus in the plan at that time; and if so, whether there was a distribution of surplus at the time. If not, plan sponsors will probably want to seek advice to determine ownership of the surplus.

Model pension law

Model laws attempt to state a standard set of terms, with the hope that they will be adopted by a majority of provinces and territories, thereby creating uniform rules. In the pensions arena, this would certainly be welcome, as it can be difficult to interpret and apply lifetime rights like pensions to people who move between places with different laws.

The Canadian Association of Pension Supervisory Authorities (CAPSA) is trying to start the process by publishing Proposed Regulatory Principles for a Model Pension Law. Most of the submissions, sought from the public, are posted on CAPSA’s website at www.capsa-acor.org under the “What’s New?” link. The result should be a good debate on some important pension principles such as pension committees, plan funding, surplus ownership, and more. Hopefully the debate will generate a model law that actually finds some acceptance throughout Canada.

Alberta, Manitoba pursue reform

At the same time that CAPSA is pursuing its pension policy re-examination, several provinces are also investigating possible pension law changes.

Alberta Finance issued a series of discussion papers last November on possible pension law amendments, entitled Strengthening Risk Management, Disclosure and Accountability; Pension Division on Marriage Breakdown; and Access to Locked-In Accounts. Responses have been received and tabulated, and the province is now considering what legislative and regulatory action to take.

Most of the people who responded to the proposals in the risk management paper supported most of the proposed changes. Therefore, it seems likely Alberta will eventually increase reporting and disclosure obligations, strengthen the powers of the superintendent of pensions and increase penalties for non-compliance. In addition, it seems likely that greater flexibility will be provided for the division of pensions upon marriage breakdown, and for financial options upon retirement.

Responses to the discussion paper, Access to Locked-In Accounts, indicate majority support for a number of reforms classed as “moderate” changes. There appears to be strong support as well for the “major” change of introducing a creditor-protected Registered Retirement Income Fund (RRIF), whose value would not be accessible to creditors even after transfer out of a locked-in fund into a RRIF.

Manitoba also has proposed pension reforms on the table, although they have not yet been incorporated into law. Included among some of the more important suggested changes in the report, The Pension Benefits Act of Manitoba Reforms, are:

•surplus distribution rules that permit employers to negotiate surplus distribution with members and beneficiaries;

•immediate, retroactive vesting of all pension benefits, applying to all members except those who are inactive or retired;

•expansion of part-time employees’ pension rights, and a rule against separate pension plans for part-time employees;

•new phased-retirement provisions;

•new optional ancillary contribution and ancillary benefits rules;

•reduction of survivor benefits to 60 per cent (from the current 66.67 per cent) and a requirement that only co-habiting spouses or common-law partners be entitled to survivor benefits and pre-retirement death benefits;

•increased disclosure to members;

•adoption of pension committees as the standard plan administrator; and

•new provisions for multi-employer pension plans.

For more on the Supreme court rulings, see Aegon Canada Inc. v. ING Canada Inc., 2004 CarswellOnt 2994 (S.C.C.) and Monsanto Canada Inc. v. Ontario (Superintendent of Financial Services), 2004 CarswellOnt 3172 (S.C.C.).

Sari Sanders is a lawyer and the head of Hewitt Canada’s research group. She may be contacted at (416) 225-5001 or [email protected].

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