Last week, the Ontario government moved forward with its reform of the province’s pension system with the introduction of Bill 120, the Securing Pension Benefits Now and for the Future Act, 2010. Bill 120 follows the first stage of pension reform, Bill 236, which received royal assent earlier this year. (Please see our May 20, 2010 post for a summary of Bill 236.)

This is the second in a series of posts that we will be making on the draft legislation. I will focus on the proposed changes dealing with the payment of pension administration expenses from the plan fund, as well as the ability of an employer to take contribution holidays out of available plan surplus.

Plan Expenses

Bill 120 would, unless prohibited “or otherwise provided for, under the documents that create and support the pension plan or the pension fund”, permit reasonable plan and fund administration expenses to be paid out of the pension fund. The Bill would also clarify that, in addition to the fees of third party service providers, permitted expenses may include reimbursement of the administrator’s “internal” expenses. This is very helpful in principle, however, the highlighted exemption wording needs to be revised in two respects before Bill 120 becomes law if the government is to deliver on its stated objective of “improving plan administration”.

First, the phrase “the documents that create and support the pension plan” implies an intent to codify the existing common law with respect to pension plan expenses as laid down by the Supreme Court of Canada in the Kerry case. This is not an “improvement” to plan administration. Rather, this wording would result in perpetuating an existing problem under which plan administrators may be required to obtain complex legal opinions on the historical merits of charging expenses to their funds making plan administration even more difficult and costly.

In addition, the phrase “or payment of the fees and expenses is otherwise provided for,” is far too ambiguous and arguably introduces a new compliance test. Expense provisions in pension plans often permit the payment of expenses from the fund “unless (first) paid by the employer”. It has been generally accepted that an administrator who first paid the expenses from its own revenues could then seek reimbursement from the fund based on this language. Will such wording now operate to bar or restrict expense reimbursement? If the wording of Bill 120 is passed unaltered, plan administrators may face a whole new round of uncertainty and expense-related litigation.

Second, Bill 120 provides that “the administrator is not permitted to pay from the pension fund to an agent, employer or other person...fees and expenses...if payment to the administrator is prohibited” etc. On a literal reading the administrator may not pay expenses incurred by third parties if the plan documents prohibit payment to the administrator. This makes no sense and is likely not the intended result. There could be situations where the plan documents prohibit the administrator from charging internal expenses to the fund, but do not prohibit payment by the fund of certain third party expenses. The wording should be clarified.

If Bill 120 is not changed, the likely result will be new, more onerous, regulatory requirements and checklists for plan administrators which seems to run counter to the stated intent of the reforms.

Contribution Holidays

In the same vein as my plan expenses comments, Bill 120 makes the ability to reduce or suspend contributions dependent on the historical plan documents, effectively incorporating the common law trust analysis of contribution holidays into the PBA. Codification of the common law on this issue, like expenses, could result in onerous new regulatory requirements and additional costs for plan administrators without adding any value. This should not be the effect of the reforms.

Final Thoughts

If the government is serious about improving plan administration, a simple “fix” would be to clarify that all reasonable administration expenses can be paid from the plan fund and contribution holidays can be taken, without regard to historical plan documents, as long as the current or amended plan terms do not prohibit such actions. This would be a real step forward in achieving a more affordable defined benefit pension system that properly recognizes the priority of primary goals like improving pension coverage and delivering promised benefits ahead of perpetuating expensive stakeholder squabbles relating to the largely unintended results of historical plan drafting.

A final word on policy implementation. If there is any doubt about the need for carefully drafted legislation versus reliance on reasonable regulatory interpretation, experience shows that unless PBA/regulations wording is clear and unambiguous, FSCO will be pre-disposed to take positions based upon the most conservative interpretations that involve minimal risk to the regulator. Surprisingly, FSCO’s risk aversion is sometimes given priority over a result which may be clearly in the best interests of members and other stakeholders. If the government really wants to achieve a “fine balance” through pension reform, the wording of Bill 120 should be much clearer on these issues.