Termination of post-retirement benefits

The number of disputes resulting from the termination of retirees’ life and health insurance plans (medical care, prescription drugs, etc.) is on the rise.  There is no statute governing post-retirement benefits. Employers’ and retirees’ rights and obligations are essentially contractual. The Supreme Court of Canada established the basic rule nearly 20 years ago in Dayco (Canada) ltd v CAW Canada:1 a retired worker’s rights crystallize on his or her retirement and are deemed nonforfeitable unless the employer can demonstrate that they were granted on a terminable basis.

Since then, a number of decisions have defined the scope of that rule. Among other things, it now seems established that reserving the right to amend a plan does not allow an employer to end the plan. An employer’s right to terminate a plan must be evidenced by clear and unequivocal terms.

The nature of the retirees’ or employer’s rights therefore depends on what is in the individual or collective employment contracts, brochures, retirement letters, policies or practices of the employer or any other fact or document pertaining to post-retirement benefits. A characteristic of retirees’ rights is that they can differ according to when the employees retired. In this context, the Superior Court had refused to authorize a class action by retired employees because, among other things, a substantial number of issues required an individualized analysis for each class member. The Court of Appeal recently overturned that decision, finding the trial judge’s fragmentation of the class into subclasses excessive. Even though retirees’ initial rights may differ, the validation or legality of the employer’s amendments is an issue common to all class members and is sufficient to authorize a class action.2

New pooled retirement savings plans

The federal and Quebec governments are implementing a new type of retirement savings plan that, they believe, will foster retirement savings. The federal pooled registered pension plan (PRPP) and the Quebec voluntary retirement savings plan (VRSP) are intended for groups not already covered by a supplemental pension plan (registered pension plan), a group RRSP or a deferred profit sharing plan (DPSP). Employers who already provide employees with such plans are therefore not required to offer the new plans.

The PRPP was established by Bill C-25, tabled on November 17, 2011, while a bill is expected to be tabled shortly for the VRSP. The scheduled effective date for these plans is January 1, 2013.

Things to watch for when completing the annual information return

The annual information return that must be filed for registered pension plans with the Régie des rentes du Québec (Régie) contains several questions that concern the pension committee directly. Among other things, lines 502 to 503.1 ask how many times the committee meets and how often it monitors plan administration with its delegatees and service providers. The Régie recently issued letters to pension committees that, based on the answers given and the Régie’s assessment, do not meet enough times during the year and do not monitor administration with delegatees and service providers often enough, in order to remind them, for example, that it may be unwise for the pension committee to meet only once with the person to whom it has entrusted plan administration during the year.3

This raises the question of how often pension committees should meet. While a minimum frequency is not imposed by the Supplemental Pension Plans Act, it should be indicated in the committee by-laws. The Régie made the following comment on page 14 of Instalment 3 bearing the title Administering a pension plan well – How a pension plan operates: here

  • “The frequency of meetings must be provided for in the internal by-laws, and the committee must meet often enough to allow its members to carry out their duties. Holding only one meeting, just before the annual meeting, is not enough to adequately monitor plan administration.
  • A committee should meet as often as needed to properly supervise the day-today administration of the plan and the work of people to whom the committee has confided certain functions. Some committees meet once every three months to discuss current business and hold special meetings as need be.
  • A committee that delegates all of its functions will usually hold less frequent meetings. However, it must hold occasional meetings to ensure that the delegatee is properly carrying out the delegated functions.”

This passage suggests that four meetings a year is a good practice, but that a committee could meet less frequently if it has delegated all of its functions. Meetings do not have to be in person; they can be held via videoconferencing or teleconferencing.

Surveillance of pension committee governance seems to be increasing and pension committees would be wise to review their practices as a result.

A draft US tax regulation may have an adverse effect on certain Canadian pension plans

This news is of interest for Canadian pension plans that have members who are U.S. citizens.

The United States’ Internal Revenue Service (IRS) recently published for comment draft regulations relating to information reporting by financial foreign institutions (FFIs) and the withholding by U.S. financial institutions on certain payments to FFIs.  These regulations are part of the Foreign Account Tax Compliance Act (FATCA), which was signed into law in 2010 to address concerns that U.S. taxpayers with assets held by FFIs and invested in the U.S. were circumventing the U.S. tax withholding system.  FATCA requires U.S. financial institutions to apply a 30% withholding tax on payments they may make to certain FFIs on assets invested in the U.S. unless those same FFIs provide information regarding any U.S. taxpayers to whom the assets may relate.

The definition of an FFI under FATCA is broad and includes pension plans and other retirement savings vehicles outside the U.S.  Accordingly, if a Canadian pension or savings arrangement holds assets in the U.S., its U.S. assets may be subject to a 30% withholding tax if it does not report on whether any U.S. taxpayers are beneficiaries of such arrangements.  As the U.S. taxes on citizenship, any member of a Canadian plan who is a U.S. citizen, even if resident in Canada, may trigger this reporting requirement.

The proposed regulations, however, do attempt to exclude foreign retirement plans from the application of FATCA.  This is good news for many Canadian registered pension plans. The regulations, however, do not provide a blanket exemption for registered pension plans.  For example, a plan with a beneficiary who is entitled to more than 5% of the assets may not be exempt.  Furthermore, registered retirement savings plans, as well as investments held under a retirement compensation arrangement, may not be exempt from the application of FATCA. Please contact us if you have any questions or concerns.

If the excluded categories are not expanded under the final regulations, administrators of arrangements falling outside of the exempt categories may find themselves in the difficult position of having to report on whether there are U.S. citizens in their plans if the plans continue to hold assets in the U.S.