Ontario Government Proposes Amendments to Pension Legislation - Bill 236
On December 9, 2009 the Pension Benefits Amendment Act, 2009 (“Bill 236”), received first reading in the Legislative Assembly of Ontario.
Bill 236 will amend the Pension Benefits Act (the “PBA”) in a number of areas. In its press release, the government stated that Bill 236 is part of a multi-step process and that another bill is planned for 2010. It also stated that Bill 236 builds on the recommendations of the Expert Commission on Pensions.
Some of the more notable amendments in Bill 236 include:
Immediate Vesting – Currently the PBA provides for vesting after two years of plan membership. The amendments provide for immediate vesting of a member’s pension benefit.
Extended “Grow-In” Benefits – Currently the PBA provides special early retirement benefits for members who are affected by a full or partial wind up and whose age plus years of continuous employment or plan membership equals at least 55. These are referred to as “grow-in” benefits. Effective January 1, 2012, “grow-in” benefits also would have to be provided to all plan members whose employment is terminated by the employer except in specified circumstances. “Grow-in” benefits will not have to be provided when employment is terminated (other than in the event of plan wind up) “if the termination is a result of wilful misconduct, disobedience or wilful neglect of duty by the member that is not trivial and has not been condoned by the employer or if the termination occurs in such other circumstances as may be prescribed.”
This amendment could be controversial in that it extends a benefit that does not apply in all jurisdictions (Nova Scotia is the only other jurisdiction that requires “grow-in” benefits) and potentially increasing the cost of providing a defined benefit pension plan. There is also the potential for litigation in the event of employment terminations of persons who satisfy the “55 points” criterion if the employer characterizes the termination so as to impact on the person’s entitlement to “grow-in” benefits.
“Grow-in” benefits will not have to be provided in a jointly sponsored pension plan if the employers and members elect not to provide such benefits under the plan. Likewise, “grow-in” benefits may be excluded from a multi-employer pension plan if the administrator so elects.
Phased Retirement – Pension plans will be allowed to provide for phased retirement subject to certain eligibility criteria. This will allow members to continue working after they are eligible for early retirement while receiving benefits from the pension plan and, at the same time, accruing benefits under the plan. Eligible members must be at least 60 years of age, or 55 and entitled to an unreduced pension, and not have reached normal retirement age. The amount of benefits paid to a member during phased retirement cannot exceed 60% of the pension payments the person would be entitled to if retired.
Eliminate Partial Wind Ups – Effective on a date to be proclaimed, partial wind ups of pension plans will no longer be permitted. There are transitional provisions for partial wind ups that were effective prior to the date of repeal (“Transitional Partial Wind Ups”).
In a decision dated December 2, 2009, the Financial Services Tribunal (the “FST”) ordered the Superintendent of Financial Services (the “Superintendent”) not to proceed with proposed orders against Imperial Oil Limited (“IOL”) that would have required IOL to annuitize the pension entitlements of those members affected by certain partial wind ups and who did not elect to transfer the commuted value of their pensions out of the pension plan. The FST ruled that, in the circumstances of the case before them, the PBA permits a plan administrator to meet its obligation to provide pensions for members affected by a partial wind up by providing those pensions through the on-going plan. Bill 236 essentially would codify the result of the FST decision by specifying that plan administrators are not required to annuitize pension entitlements related to a partial wind up.
Surplus Sharing Agreements – The PBA provides that surplus cannot be paid out of a pension plan to an employer in the event of a full or partial plan wind up without the prior consent of the Superintendent. There are certain prescribed conditions to the Superintendent’s consent, including that the pension plan must provide for payment of surplus to the employer. This condition requires a review of the historical plan documents and a consideration of trust law and contract law as they may relate to the plan throughout its history. Bill 236 will permit the Superintendent to consent to the payment of surplus to an employer without consideration of historical plan language if the employer, members and other beneficiaries enter into a written surplus sharing agreement that meets prescribed conditions. For Transitional Partial Wind Ups the Superintendent’s consent will still be subject to the plan providing for payment of surplus to the employer on wind up.
This amendment raises an interesting issue.
Bill 236 will have the effect that the Superintendent does not have to look at plan language and does not have to be satisfied that, under the plan/trust documents, the employer owns the surplus. Instead, he can look solely to the surplus sharing agreement between the parties. Bill 236 speaks only to the process the Superintendent has to follow and does not expressly state that the PBA (or the Superintendent’s approval) overrides the trust law/rules that may apply to a particular pension plan. If a pension plan is governed by trust law, and the trust does not provide for reversion of surplus to the employer, payment of surplus to the employer could constitute a breach of trust. Given the type of language in many older plans (as evidenced by numerous reported cases of courts and tribunals related to surplus withdrawal), it is possible that parties still may have to proceed to court to deal with surplus withdrawal issues. The end result in a particular case could be: the regulator approves a surplus sharing deal, but the court directs the plan administrator to ignore what the Superintendent says, because the Superintendent's consent (which is a prerequisite to surplus withdrawal) is at odds with the trust principles that apply to the pension fund/surplus in question.
Prior Notice of All Plan Amendments – At present the PBA does not require prior notice of plan amendments to be provided to plan members and beneficiaries unless an amendment reduces subsequent pension benefit accruals or otherwise adversely affects the rights and obligations of members or other beneficiaries. Bill 236 requires prior notice to be given of all plan amendments members, former members and retired members (Bill 236 introduces the term “retired member” and related amendments with respect to the use of the term “former member” throughout the PBA). The requirement for prior notice of a plan amendment is a significant change and has the potential to alter the dynamics of plan administration.
Establishment of Advisory Committees – Bill 236 imposes new obligations on a pension plan administrator to help members (or the union representing them) or retired members that wish to establish an advisory committee. In particular, the administrator must provide the names and addresses of members and retired members to those wishing to establish an advisory committee. The administrator also will be required to provide additional information and other assistance as may be prescribed. Furthermore, once an advisory committee is established, the administrator is required to (a) provide such assistance as may be prescribed to help the advisory committee carry out its purposes, and (b) give the advisory committee or its representative such information as is under the administrator’s control and is required by the committee or the representative for the purposes of the committee.
CAPSA Publishes Consultation Paper on Prudence Standard and Pension Plan Funding and Investment
On November 30, 3009, the Canadian Association of Pension Supervisory Authorities (“CAPSA”) published for comment a consultation paper entitled The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment.
The purpose of the consultation paper is to provide guidance to pension plans with respect to their funding and investment activities. CAPSA has also requested comment on certain specific questions related to the issues of funding and investing.
The comment period ends on January 29, 2010.
Investment Management Services to be GST/HST Taxable - The Department of Finance Responds to the Federal Court of Appeal
As we anticipated in our most recent edition of Pensions@Gowlings, the Department of Finance has announced legislative changes that will reverse the decision of the Federal Court of Appeal in Her Majesty the Queen v. The Canadian Medical Protective Association (the "CMPA Decision") from earlier this year. In the CMPA Decision, the Court had found that investment management services provided to CMPA were exempt from GST/HST as a service of "arranging for" a "financial service".
Investment management services, including discretionary investment management services, will be GST/HST taxable going-forward. In addition, these services will be subject to GST/HST where the investment manager charged GST/HST. Since nearly all investment managers continued to charge GST/HST on their services following the CMPA Decision, the result is that the legislative changes are, practically speaking, retroactive to the introduction of the GST in 1991. Plans and employers that have applied for a refund of tax paid in error on investment advisory services can expect their applications to be denied by the Canada Revenue Agency in due course.