On March 29, 2010, the Canadian government introduced a series of proposed amendments to the legislation governing federally-registered pension plans, the Pension Benefits Standards Act, 1985 (PBSA). The amendments were slipped quietly into omnibus legislation (Bill C-9) covering a multitude of tax and other matters and stretching some 1,000 pages. However, this stealth introduction should not obscure the fact that these amendments constitute the most extensive reform of federal pension legislation, which applies to some of the largest pension plans in the country, since the PBSA was enacted all the way back in the mid-1980s.
The proposed amendments are designed for the most part to implement a number of the measures announced in the Department of Finance's October 27, 2009 backgrounder (which measures were considered in our November 5, 2009 newsletter entitled Ottawa takes a swing at pension reform). Because the federal government has decided to move to immediate vesting of pension benefits, it has become necessary to revise numerous provisions of the PBSA that currently contemplate the refund of employee contributions to unvested plan members. The deletion of the various references to such refunds, as well as certain changes around the notions of plan beneficiaries and former members, account for by far the largest number of PBSA provisions affected by Bill C-9.
Once those revisions (some of which will have quasi-material cost implications for plan sponsors) are factored out, the number of actual modifications and additions becomes much more modest. That being said, many of the remaining changes will have profound implications in certain cases.
Some of the key PBSA amendments, roughly in the order of their appearance in Bill C-9, are the following:
- the addition of new powers for the Superintendent of Financial Institutions (i.e. OSFI, the Canadian federal pension regulator) to appoint a replacement plan administrator and/or replacement actuary for particular pension plans.
- minor tweaks to the "deemed trust" provisions of the PBSA, which should have the effect of clarifying the application of those provisions in certain circumstances.
- an expansion and restatement of the funding requirements for pension plans, with a clear delineation of the requirements that will apply to single-employer plans versus those that will apply to multi-employer plans.
- detailed new rules around the provision by the employer of a letter of credit to cover a portion of the plan's liabilities. Whether or not the plan itself is structured as a trust, the letter of credit will have to be provided to a trustee. This requirement is similar in principle to the letter of credit provisions in the special 2006 and 2009 solvency funding relief regulations, albeit the new PBSA provisions contemplate somewhat different mechanics, plus an express waiver of civil liability against the trustee when it takes or omits to take certain actions in regard to the letter of credit in prescribed circumstances.
- an exemption for Crown corporations from certain, as-yet-unspecified PBSA funding obligations. While the extent to which Crown corporations may benefit from reduced funding obligations will be set out in new regulations, presumably any such reduction will apply only to solvency and/or going concern special payments, and not to current service contributions.
- two new "void amendment" rules pursuant to which pension plan amendments that would reduce the plan's solvency ratio below a prescribed level or would increase benefits when such ratio is already below this prescribed level will not be permitted, without express OSFI consent. It is expected that the prescribed solvency ratio level for these purposes will be 0.85.
- express permission for multi-employer plan administrators to make amendments that would reduce pension benefits or the value thereof, notwithstanding the PBSA's general prohibition against same.
- a new exemption from the requirement for OSFI consent to asset transfers between pension plans, where such assets relate only to defined contribution (DC) accounts. This will be a welcome development for plan sponsors that are party to commercial transactions involving pension asset transfers, as it will remove a regulatory impediment to prompt completion of the terms of such transactions. It should be noted that:
- the PBSA requirement for OSFI consent will continue in regard to plan assets backing defined benefits (DB); and
- the new exemption will apply to DC accounts both in pure DC plans and in hybrid DB-DC plans.
- the repeal of an outdated requirement for the filing with OSFI of information relating to pension indexing.
- a detailed new regime contemplating the payment of variable benefits out of DC plans and the periodic post-retirement right to transfer the remaining balance out of a DC account to another plan.
- a new statutory requirement for OSFI consent to transfer assets out of a pension fund in satisfaction of terminating members' portability rights, where OSFI believes such transfer could impair the pension fund's solvency.
- enhanced disclosure obligations to plan members, including a new requirement to give pensioners information regarding the plan's funded status.
- discretion for OSFI to declare the termination of a pension plan if "benefits" cease to be credited to plan members. It is interesting to note that the expression "benefits" is not defined in the PBSA, leading to some potential ambiguity as to the circumstances in which this new power could be exercised. Presumably, however, the use of such a broad term as opposed to, for example, the more narrow defined term "pension benefit credits" means that if credited service ceases but continuous service still accrues for purposes of benefit milestone eligibility, this provision should not apply.
- a modification to clarify that along with OSFI, the power to terminate a pension plan in full will rest not just with the plan administrator, but also with the sponsoring employer.
- the addition of a new requirement to fully fund a pension plan's wind-up deficit over an as-yet-unspecified period (but likely five years) following plan termination. The amendments state clearly that the deemed trust rules will not apply to the amount of this deficit per se. However, in what appears to be one of the most questionable and potentially controversial aspects of the amendment package, Bill C-9 goes on to provide that once each instalment on the deficit becomes due, any such instalment that is not remitted by the employer will henceforth become subject to a deemed trust. This provision appears to be inconsistent with the statement in Finance's October 2009 backgrounder that the new federal requirement to fully fund pension plans on termination would not give rise to any secured debt. While Bill C-9 goes on to state that the deemed trust will not apply in a bankruptcy context, such proviso could therefore have the unintended affect of triggering bankruptcies that might otherwise be avoidable.
- an extremely detailed code relating to the new concept of "distressed pension plan workout schemes". A thorough review of these new provisions lies beyond the scope of this newsletter. However, some of the highlights include:
- these rules will automatically become applicable to a plan upon election of the sponsoring employer;
- the employer must certify as to its financial need for the relief;
- the election will be followed by a mandatory, finite negotiation period that can be extended by the Minister of Finance by no more than three months;
- during the negotiation period, current service contributions must continue but other employer contributions will be deferred;
- the deferral will end and the missed contributions will become due immediately on the happening of certain events;
- a representative of the plan beneficiaries to negotiate a more definitive funding workout arrangement must be appointed by court order; and
- such definitive funding relief must be approved by the Minister of Finance and opposed by no more than one-third of the beneficiaries.
- enhanced regulation-making power.
It is unclear when Bill C-9 will be adopted by Parliament (it has just received second reading in the House of Commons), and details on the coming-into-force dates for the various provisions have yet to be released. Neither have the regulations that will be necessary to implement many of the measures yet seen the light of day. Accordingly, the path to actual pension reform still has many steps ahead.