Pooled registered pension plans
By Christopher Mayer, Blake, Cassels & Graydon LLP
In December 2010, the federal government released a framework for Pooled Registered Pension Plans in its on-going efforts to strengthen Canada’s retirement income system.
Halliburton Group Canada Inc. v. Alberta
By Kim Ozubko and Mark Firman, McCarthy Tétrault LLP
In 2010, the Alberta Court of Appeal rendered a decision that will be of interest to pension plan sponsors who are considering converting their registered pension plans from defined benefit to defined contribution and/or amending the definition of “final average earnings” as it relates to the plan.
Pension-related arbitrations
By Jordan N. Fremont, Hicks Morley Hamilton Stewart Storie LLP
Often pension issues are decided in the context of a dispute under a collective agreement. Two recent arbitration awards will be of interest to unionized employers that sponsor DB pension plans.
Update on plan administration
By François Parent, Lavery, de Billy S.E.N.C.R.L.
Recent survivor benefits-related pensions cases illustrate the importance of careful documentation of survivor entitlements while the member is alive and careful analysis of these entitlements upon the death of the member.
Pooled registered pension plans
By Christopher Mayer, Blake, Cassels & Graydon LLP
In December 2010, the federal government released a framework for Pooled Registered Pension Plans (“PRPPs”) in its on-going efforts to strengthen Canada’s retirement income system. The impact of PRPPs and whether their implementation will contribute to a significant increase in the retirement savings of Canadians is difficult to assess without further detail as to their operation.
PRPPs will be flexible capital accumulation plans (“CAPs”) established and administered by financial institutions (although there is some question about whether the permitted administrators will be expanded). An employer may choose to offer any particular PRPP to its employees and may choose whether employees or it is required to make contributions to that PRPP. Jurisdictions may also decide to require employers to offer PRPPs to employees.
PRPPs will accommodate multiple employers, self-employed individuals, and individuals whose employer does not offer a pension plan. PRPP membership will be divided into two categories: “Employed Members,” which will include employees of an employer offering a PRPP; and “Individual Members,” which will include self-employed individuals and employees of an employer that does not offer a PRPP. While investments will be common to both, there will be certain administrative and regulatory differences between the two classes which will likely be set out in draft legislation when released.
The administration of PRPPs by financial institutions, and possibly others, should lighten the burden of offering a pension plan. Administrators will be responsible for the bulk of plan operations, such as investing the assets, evaluating the investment options offered in the plan, and most member communications. The administrator of a PRPP may also have a fiduciary duty to plan members. When employers offer a PRPP, it appears that they will have only residual administrative duties such as selecting the particular plan, enrolling employees, determining contribution levels, and collecting and remitting contributions.
Portability has been touted as a major benefit of PRPPs. Portability rights of Employed Members will be similar to the present registered pension plans framework, while portability rights for Individual Members will carry fewer restrictions. The PRPP framework will facilitate easy transfers between PRPPs. An employee terminating employment with a particular employer will be able to choose to continue participating in his or her current PRPP, or to transfer his or her entitlement to another PRPP or retirement vehicle. At the same time, the federal framework indicates that employers will be able to change the particular PRPP offered to their employees at any time, and in so doing employers will have the right to transfer all employees’ accounts to the new plan, whereupon employees will have to follow new enrolment processes and select new investments. As draft legislation has not been released with respect to PRPPs, it is difficult to consider the practical aspects of an employer forcing employees to change plans. Also noteworthy is that the federal framework indicates that employer contributions will be locked-in.
It appears that employer contributions to PRPPs will not be mandatory and that employers offering PRPPs will likely be able to select the default contribution rate, if any, for both employers and employees. Furthermore, as noted earlier, each jurisdiction (i.e., the provinces, and the federal government for federally regulated industries) will determine whether the offering of a PRPP by employers will be mandatory. These are significant factors in assessing the impact of PRPPs as the “default” option in any CAP mechanism often captures a large number of participants. As such, default rates and whether PRPPs are mandatory will significantly influence the extent to which PRPPs increase the retirement savings of Canadians.
Another significant issue is the applicable fees. Certainly the pooled aspect of PRPPs will encourage economies of scale, and competition between administrators will also work to keep fees low. Whether a cap on fees will be legislated in any way remains to be seen.
Ontario and Quebec both recently affirmed their intention to work towards implementing PRPPs in conjunction with the federal and other provincial governments in their budgets (Quebec’s “voluntary retirement savings plans” being based on the PRPP framework). This is certainly a step in the right direction since harmonization of PRPP legislation will be key in a simplified regulatory regime, which will in turn help keep fees (and other administrative costs) low.
Another interesting option would be allowing certain large registered pension plans to also manage PRPP assets, or to even establish and act as PRPP administrators. This would be akin to recent steps taken in Ontario allowing some large pension plans to manage smaller pension funds. Undoubtedly, allowing large plans to also administer PRPPs will increase competition among PRPP providers.
PRPPs might be a step in the right direction. However, without draft legislation it is difficult to know just how far they will take us. And certainly, no draft legislation will be forthcoming until after the federal election on May 2, 2011.
 Read the CBA Submission to Finance Canada
Halliburton Group Canada Inc. v. Alberta, 2010 ABCA 254
By Kim Ozubko and Mark Firman, McCarthy Tétrault LLP
In 2010, the Alberta Court of Appeal rendered a decision that will be of interest to pension plan sponsors who are considering converting their registered pension plans from defined benefit to defined contribution and/or amending the definition of “final average earnings” (or similar definition) as it relates to the plan. In Halliburton Group Canada Inc. v. Alberta, the Alberta Court of Appeal considered whether the plan sponsor could freeze earnings at the date of plan conversion for the purposes of calculating a defined benefit amount at retirement.
Background
Halliburton sponsors several pension plans registered in Alberta under the Employment Pension Plans Act (Alberta) (“EPPA”). Effective January 1, 2002, Halliburton amended its final average-earnings defined benefit (“DB”) plan to convert it to a defined contribution (“DC”) plan. Specifically, it amended the plan to: (i) close the DB component to further accruals effective January 1, 2002 (at which point members were required to enrol in the DC component); and (ii) freeze earnings levels for DB calculations as at the date members were required to join the DC component (the “2002 Amendments”).
The Alberta Superintendent of Pensions (the “Superintendent”) registered the 2002 Amendments and, as a result, Halliburton administered the plan on the basis of the earnings freeze.
Subsequently, in 2005, Halliburton filed an amendment to the plan pursuant to which the definition of “Best Average Compensation” was amended to reflect the 2002 earnings freeze (the “2005 Amendment”). The Superintendent rejected the 2005 Amendment on the grounds that it interfered with members’ vested rights under the plan and constituted a retroactive reduction of members’ benefits in violation of the EPPA. In so doing, the Superintendent ordered Halliburton to:
- rescind the previously-registered earnings freeze provision of the 2002 Amendments;
- prepare revised cost certificates and actuarial valuations projecting DB members’ earnings to retirement; and
-
fund the plan in accordance with the revised actuarial valuations.
Halliburton applied for judicial review of the Superintendent’s orders. The Alberta Court of Queen’s Bench found that the Superintendent’s decision was reasonable and, in September 2010, the Alberta Court of Appeal agreed.
Decision
In its decision, the Court of Appeal considered whether the formula for calculating the DB pension under the plan created a vested right or was a provision that could be reduced by amendment. The Superintendent argued that because the pension plan, unlike other Halliburton pension plans, did not include a provision for tying a determination date (i.e., the date of an amendment) to the formula, the formula must be taken as a vested right. Halliburton argued that a benefit is vested only if the member would be entitled to it if he or she retired today. According to Halliburton, the amendment reduced only future benefits, not vested rights.
The Court of Appeal rejected Halliburton's arguments and agreed with the Superintendent. It found that at the point any employee became a member of the DB component of the plan, he or she was entitled to have his or her DB benefits calculated in accordance with the DB formula. The DB formula required that the compensation number used be the one that was the highest for five of the member’s last 10 years of employment “prior to [the employee’s] normal retirement date.“
As a result, the court held that affected members had a vested right to benefits based on their projected five years of employment preceding their normal retirement date. According to the court, to freeze earnings at an earlier date (i.e., the date of the conversion amendment) would be to retroactively reduce members’ benefits in violation of the EPPA.
Halliburton did not appeal the decision of the Alberta Court of Appeal.
Implications
As a result of this decision, an employer who sponsors an Alberta-registered DB plan or who has employees employed in Alberta may now be prevented from freezing earnings of Alberta plan members on conversion. Whether a plan sponsor may do so or not depends on the terms of the current and historical plan documents and the extent to which the decision in Halliburton can be distinguished. If, as in Halliburton, the plan documents do not include a provision for tying a determination date to the defined benefit formula, an Alberta plan sponsor will likely be prohibited from freezing earnings on plan conversion. If the plan documents include a provision for tying a determination date to the defined benefit formula, the plan sponsor, should, subject to any other restrictions in the plan documents or applicable legislation, still be permitted to freeze earnings.
An Alberta employer considering a plan conversion should carefully review the terms of its current and historical plan documents in order to determine whether it could fall into the Halliburton trap and be prohibited from freezing earnings on plan conversion. In addition, although the decision is binding only in Alberta, sponsors in other provinces should also be on the lookout for similar challenges in their home provinces and for regulatory pronouncements on the case.
Pension-related arbitrations
By Jordan N. Fremont, Hicks Morley Hamilton Stewart Storie LLP
Often pension issues are decided in the context of a dispute under a collective agreement. Two recent arbitration awards will be of interest to unionized employers that sponsor DB pension plans.
1. Communications Energy and Paperworkers Union, Local 672 v. Dow Chemical Canada ULC
On February 1, 2011, Arbitrator Laura Trachuk released her decision in Communications Energy and Paperworkers Union, Local 672 v. Dow Chemical Canada ULC. The case involved a union grievance, alleging that Dow Chemicals violated the collective agreement between the parties by providing pension benefits in respect of certain severance payments under Dow Chemical’s Supplemental Income Plan (“SIP”) – an unfunded and unsecured arrangement - rather than providing such benefits from a registered pension plan (“RPP”), or from some other secured trust fund.
Background
The grievance stemmed from a Letter of Understanding between the parties (the “LOU”), respecting voluntary early retirement enhancements (“VERE”), which provided for 3 weeks of severance pay for each year worked to a maximum of 78 weeks. Under the LOU, eligible employees were also to receive pensionable service for the entire severance period.
The parties had previously agreed to provide Union members with the same pension plan benefits as salaried employees. The salaried employees participated in a RPP, but pension benefits that could not be provided under the RPP due to Income Tax Act (Canada) (“ITA”) limits, were instead provided under the SIP.
Dow Chemicals had taken the position that the pensionable service in respect of VERE severance payments could not, due to ITA restrictions, be provided under the RPP, and that this extra service was instead properly provided under the SIP. The SIP benefits were paid from the operating revenues of Dow Chemicals, and the union was clearly concerned with the security of the SIP benefits.
Decision
Arbitrator Trachuk rejected the union’s argument that Dow Chemicals had acted in violation of the collective agreement. The Arbitrator found that not only did the LOU not specify where the extra pensionable service was to be credited, this was not the focus of the LOU. Instead, she found that the LOU:
…was an agreement to provide benefits to retirees that reflect an extra period of employment. As long as the company provides pension benefits that reflect that extra service, it is in compliance with [the LOU]1.
The Arbitrator found that when the parties were in negotiations, their focus was on securing the benefits, not the source of those benefits.
Further, Arbitrator Trachuk held that the SIP constituted a pension plan. Regulation 909 to the Pension Benefits Act (Ontario) (“PBA") exempts pension plans that provide benefits in excess of the maximum benefit available under the ITA from the registration requirements of the PBA. As a result, Arbitrator Trachuk concluded that the PBA specifically contemplates unregistered pension plans and that, contrary to the union’s position, there is no requirement that a plan be registered in order to constitute a pension plan.
Also, the Arbitrator found that any ambiguity as to what was meant by “pensionable service” could be resolved by reference to Dow Chemical’s past practice which had been consistent since 1995. Specifically, the company presented evidence showing that its historical practice had been to credit such additional pensionable service to the SIP.
Arbitratror Trachuk determined that even if there was a misunderstanding between the parties, there was nothing in the collective agreement stipulating the source of the additional pension funds, and concluded therefore that Dow Chemicals did not breach the collective agreement. Arbitrator Trachuk stated:
…there is no evidence that the union would have negotiated something different even if it had known. Crediting the extra service in the RPP was not possible. Securing the benefits outside the registered plan would have been very costly. It cannot be assumed that [the LOU] would be different if the union had realized that the extra pensionable service was not being credited in the RRP2.
As a result, the union’s grievance was dismissed.
Implications
This case affirms that a plan may constitute a pension plan even if not registered for purposes of the ITA or pension standards legislation. Thus, where pension benefits are negotiated, unless there is clear and prescriptive language dictating a particular plan design or structure, the circumstances may allow for the plan sponsor to determine how those pension benefits are to be provided.
2. Regional Municipality (Durham) v.Canadian Union of Public Employees, Local 1764
This 2010 case concerned an employee’s (the “Grievor’s”) claim to post-retirement benefits to age 65. The collective agreement between the Canadian Union of Public Employees, Local 1764 and the Regional Municipality of Durham (the “Region”) mandated union member participation in the Ontario Municipal Employees’ Retirement System (“OMERS”) Also, Article 23.05 of the collective agreement provided that a union member would be entitled to post-retirement benefits, up to age 65, if he 1) retires early (before age 65), 2) achieves a factor number of 90 or have at least 15 years of service at the time of retirement, and 3) “take[s] a retirement pension”.
Background
The Grievor was a former employee of the Region and member of the union. At age 55, the Grievor notified the Region that he was retiring. The Grievor was offered the option to transfer the commuted value of his OMERS’ pension benefits to another retirement vehicle, or to receive a pension from OMERS. The Grievor elected to take the commuted value transfer.
Upon discovering that the Grievor elected to transfer the commuted value, the Region advised the Grievor that he would not be entitled to post-retirement benefits coverage. The Region claimed the Grievor was ineligible because he was not receiving an OMERS pension as required by Article 23.05.
In response, a policy as well as an individual grievance were filed alleging that the denial of post-retirement benefits - to the Grievor, in the case of the individual grievance, and to early retirees who take their pension in a way other than in the “traditional fashion”, in the case of the policy grievance – was a violation of article 23.05 of the collective agreement.
Decision
There was no dispute that the Grievor retired early and had at least 15 years of service at that time. Therefore, the only issue before Arbitrator Stout was whether the Grievor took a retirement pension as contemplated by Article 23.05 of the collective agreement.
Arbitrator Stout looked to the OMERS Primary Plan and the Pension Benefits Act (Ontario) (“PBA”) to assist with interpreting the term “take a retirement pension” in Article 23.05. He noted that the OMERS Primary Plan and PBA both define the term “pension” as an amount payable at periodic intervals. Thus, having regard to the relevant provisions of the collective agreement, the OMERS Primary Plan and the PBA, Arbitrator Stout interpreted the phrase “take a retirement pension” to mean the receipt of a periodic payment, and he concluded that a commuted value transfer to another retirement vehicle, payment from which might not commence until some future date, did not fall within the meaning of this phrase.
As the Grievor was not receiving any form of pension (from CPP, OMERS, or otherwise), Arbitrator Stout held that the Grievor did not “take a retirement pension” and did not therefore satisfy the final condition in Article 23.05.
The union’s policy and the Grievor’s individual grievances were both therefore dismissed.
Implications
This case demonstrates that an entitlement which is conditional on the receipt or taking of a pension is not necessarily satisfied where pension benefits are paid out as a commuted value transfer.
1 At page 42-43.
2 At page 47.
Update on plan administration
By François Parent, Lavery, de Billy SENCRL
Recently, there have been a number of pension cases dealing with survivor benefits issues. The following article summarizes some of these recent cases. These cases illustrate the importance of careful documentation of survivor entitlements while the member is alive and careful analysis of these entitlements upon the death of the member.
1. Faucher v. SSQ, Life Insurance Company Inc. (available in French only)
Background
Following the death of Mr. Fernand Vachon (“Vachon”), a former Quebec public official, Ms. Monique Faucher (“Faucher”) wrote to SSQ, the administrator of the Plan for survivors of Quebec public officials (the “Plan”), indicating that she was Vachon’s common law spouse at the time of his death and asking for the payment of the survivor pension provided under the Plan. About one month later, Ms. Suzanne Lagueux (“Lagueux”) wrote to SSQ indicating that she was still married to Mr. Vachon at the time of his death and asking for the payment of the survivor pension (Lagueux and Vachon were separated from bed and board but not divorced).
According to the definition of “spouse” provided under the Plan, a Quebec public official who is legally married may designate another person as his spouse, instead of his legally married spouse, provided that this person qualifies as “common law spouse” as defined in the Plan, by notifying the Plan administrator of such designation. At the time of his death, Vachon had not notified SSQ that he wanted to designate Faucher instead of Lagueux.
SSQ first decided that Faucher was entitled to the survivor pension and started to pay her the pension, but later concluded that Lagueux was the one really entitled to the survivor pension. SSQ informed Faucher of its decision and also asked her to reimburse the pension payments received.
Faucher then filed a claim against SSQ before the Superior Court of Québec and SSQ responded by filing a cross-claim against Faucher to seek reimbursement of the pension payments received. This cross-claim was based on Article 1491 of the Civil Code of Québec which provides that a person who received a payment made in error is obliged to reimburse same.
Decision
On September 1, 2010, the Superior Court of Québec dismissed both Faucher’s claim and SSQ’s cross-claim.
The Court concluded that, based on the definition of “spouse” provided under the Plan, Vachon had to notify SSQ of his decision to designate Faucher as his spouse instead of Lagueux. Since Vachon did not do so, Faucher could not qualify as Vachon’s spouse.
The Court also ruled that SSQ had, from the outset, all the relevant information to determine who, between Faucher and Lagueux, qualified as Vachon’s spouse under the Plan and that a basic analysis would have allowed SSQ to make the right decision from the start. Since the error made by SSQ was, in the circumstances, inexcusable, its cross-claim based on Article 1491 of the Civil Code of Québec had to be dismissed.
2. Tower Estate v. Tower Estate
Background
As an employee of Correctional Services Canada, Mr. Cédric Tower (“Tower”) acquired entitlements pursuant to the provisions of the Public Service Superannuation Act (the “Act”)1. In 1977 and 1978, he designated his wife, Mrs. Shirley Grant (“Grant”), has the beneficiary of the benefits provided under the Act.
Tower and Grant separated in January 1992 and, at that time, they entered into a Separation Agreement which provided general terms purporting to settle all issues between them2. Grant died without a will in May 2004. He was then living alone and the beneficiary designation he had made in 1977 and 1978 had never been changed. The benefits payable pursuant to the Act were paid to Grant as the designated beneficiary.
Tower’s sons filed an action claiming that Grant, their mother, was not entitled to the benefits since the terms of the Separation Agreement precluded her from the entitlement and that the money had therefore to be paid to the estate.
Decision
On December 17, 2010, the New Brunswick Court of Queen’s Bench ruled that on the basis of Section 55 of the Act, Section 26 of the Supplementary Death Benefit Regulations (the “Regulations”)3 and the judgment rendered by the Ontario Court of Appeal in Gagnon v. Sussey4, the designation of Grant as beneficiary could not be revoked by the Separation Agreement.
More specifically, the Court concluded that Section 26 of the Regulations, which would have allowed Tower to remove Grant as designated beneficiary by duly completing the form provided under the Regulations and by forwarding it to the Minister, is part of a complete code and that it would have been necessary for Tower to comply with the requirements of this Section to remove Grant as beneficiary. Since Tower did not do so, Grant was entitled to receive the benefits.
The Court also rejected the constructive trust argument made by Tower’s sons since, in its view, there was no evidence that Tower did not want Grant to receive the benefits and that there was a juristic reason for the enrichment of Grant, namely her designation as beneficiary pursuant to the requirements of the Act and the Regulations.
3. King v. King
Background
Mr. Robert King (“King”) retired from OMERS in January 1992. In July 1992, he and his wife, Mrs. Marlene King (also known as Marlene Raines, hereinafter “Raines”), separated and, in November 1992, they entered into a Separation Agreement. Section 14 of the Separation Agreement provided, among others, that King was “entitled to the sole use, ownership and benefit of all (…) pension plans registered in his name as at the date of separation, free of any claim or interest therein by the wife. Included in such assets are the husband’s OMERS Pension Plan (…)”. Moreover, Section 24 of the Separation Agreement provided that “The husband and wife will each execute any documents required to give effect to the terms and intent of this agreement”.
King subsequently remarried and wrote to OMERS to appoint his new wife as his beneficiary under the OMERS Plan. OMERS replied that the Separation Agreement did not clearly stated that Raines had relinquished her entitlement to the joint and survivor pension as eligible spouse and that if OMERS Form 156 were to be signed by Raines and returned, OMERS would accept that as sufficient evidence that Raines had relinquished her entitlement to said survivor pension. Raines refused to sign such form. King then filed an application before the Ontario Superior Court of Justice for a declaration that Raines had waived her entitlement to the survivor pension.
Decision
The specific issue in this case was whether the terms of the Separation Agreement were sufficient to constitute a waiver of Raines’s entitlement to the survivor pension. On September 10, 2010, the Court ruled that they were not. The Court mainly based its decision on Section 46 of the Ontario Pension Benefits Act (the “PBA”) and on the Smith v. Casco Inc. case (“Smith”)5.
Section 46 provides, among others, that the persons entitled to a survivor pension may waive their entitlement by delivering to the plan administrator a written waiver in the form approved by the superintendent (the “Prescribed Form”). According to the Court, Smith underscores the need to use the Prescribed form in order to take advantage of the exception created in Section 46. Since the terms of the Separation Agreement did not mirror the Prescribed Form in any respect, the Court concluded that the said exception did not apply.
1 R.S.C. 1985, c. P-36.
2 Tower and Grant divorced in 1995.
3 C.R.C., c. 1360.
4 1994 CanLII 1276.
5 (2010), 319 D.L.R. (4th) 641.
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