Recent economic developments suggest that the Canadian economy is facing a painful contraction. This has significant implications for sponsors of defined benefit pension plans1.
Dramatic declines in equity values since the beginning of 2008 have caused investment losses that could ultimately result in significant increases in employer contributions and reduced benefit security. At a minimum, the plan administrator needs to determine to what extent the plan’s asset value has been reduced. This should be done in conjunction with a review of the terms of the Statement of Investment Policies and Procedures (“SIPP”) to determine if asset mix and quality of investments continue to comply with the SIPP. Click to see our bulletin on Pension Fund Investment in Challenging Times.
Pension plan contributions are not like other payables, and ceasing or delaying contributions can have significant legal consequences for the employer. Whether an employer is seeking to improve its cash management or an employer is in financial peril, pension plan contributions are not a starting point for extending payables.
If the employer delays or does not make its required contributions or does not remit employee contributions, the Pension Benefits Act (Ontario) (the “PBA”) deems that a trust is created over the contributions that are due and not paid. As well, the PBA gives the administrator of the plan (which is often also the sponsoring employer) a lien and charge over these contributions.
The PBA has a built in notification system to alert the regulator to unpaid contributions. The administrator of the plan and the pension fund trustee are obligated to notify the Superintendent of Financial Services (the “Superintendent”) that contributions have not been paid. The trustee’s obligation to notify the Superintendent also applies if the amount contributed is not in accordance with the amount that the employer previously set out in a schedule to the trustee.
Failure to pay required contributions is an offence under the PBA and the potential liability is broad. The offence extends not only to the employer but also to any director, officer, employee or agent who acquiesces or participates in the failure to contribute or does not take all reasonable care in the circumstances to prevent the employer from failing to contribute. There is no requirement that the employer be convicted of an offence in order for an individual to be charged and convicted. In addition to fines on conviction, the accused can face personal liability for the unpaid amounts.
The Most Recently Filed Actuarial Valuation Report
The PBA contemplates that the employer will contribute in accordance with the most recently filed actuarial valuation report2. Depending on the extent of the pension fund’s investment losses, some employers will question whether it is appropriate to contribute in accordance with that report. If the report sets out a range of contributions, some employers might consider whether to change the contribution rate.
In other jurisdictions, the regulator can order higher contributions. For example, under the federal pension standards legislation, the regulator can issue a direction of compliance if a course of conduct, such as a contribution holiday, is “contrary to safe and sound financial or business practices”. It used that power to order Air Canada to end a contribution holiday, which precipitated the airline’s restructuring proceedings.
Although the Superintendent does not have a similarly worded power, there may be other actions it will take.
Will the Pension Benefits Guarantee Fund help?
Defined benefit pensions in respect of employment in Ontario are protected by the Pension Benefits Guarantee Fund (the “PBGF”) up to specified maximums. The PBGF will not assist employers in making contributions that the employer is unable to make or otherwise assist in funding plan deficits. The PBGF exists for the direct benefit of members and is funded by employer assessments, and, in its discretion, the Government of Ontario. It applies only if the plan is wound up, the funding requirements cannot otherwise be satisfied, and the Superintendent declares that the PBGF applies to the plan. The Superintendent has a lien and charge over the employer’s assets equal to any payments made from the PBGF. The exposure of the PBGF may also give Ontario a financial stake in any restructuring.
Pension standards regulators have a strong interest in ensuring that pension plans are appropriately funded. Employers and administrators should expect greater scrutiny from regulators, including more detailed review of investment information returns and valuation reports.
In addition to its interest in the security of member benefits, the Superintendent also has the public purse at stake, in the form of the PBGF. It presumably does not want to draw on the PBGF unless absolutely necessary. Because of the weak financial position of the PBGF, the Superintendent might not want to force the wind up of a plan and thereby trigger the possible application of the PBGF if there is a reasonable prospect that the employer will continue to operate.
For more information on the subject of this bulletin, please contact a member of the Toronto Pensions and Benefits group: