Jeremy Forgie and Kathy Bush of our
Pensions, Benefits & Executive Compensation group have set
out below answers to some frequently asked questions that our
pension clients have faced in light of the COVID-19 outbreak and
the effect on Canadian business and pension arrangements.
The Pensions, Benefits & Executive Compensation group has published a series of bulletins and alerts to keep you up to date on the many changes which have happened very quickly in the last month.
In addition, the Pensions, Benefits & Executive Compensation group will be releasing a podcast next week and publishing an accompanying comprehensive bulletin dealing with pension, benefits and wage replacement/subsidy issues, so we will not address those issues in this FAQ.
Finally, the Pensions, Benefits & Executive Compensation group will be presenting a webinar on electronic communication issues on May 5, 2020.
1. Can a defined contribution (DC) pension plan suspend employer and/or employee contributions?
There is no restriction on a DC pension plan suspending employee
contributions to a pension plan or making mandatory employee
contributions voluntary. Such a change would be accomplished by a
pension plan amendment.
With respect to employer contributions to a DC pension plan, the Income Tax Act (ITA) has required that an employer contribute at least one per cent of earnings to a DC pension plan. It will be necessary to seek a Canada Revenue Agency (CRA) waiver from this requirement, unless the CRA announces a general waiver. There is currently no guarantee that a waiver will be provided.
Notwithstanding the ITA waiver, many of the provincial pension regulators require that an employer contribute to a pension plan, or otherwise that pension plan can be ordered to be wound up. We have confirmed with the Ontario pension regulator, the Financial Services Regulatory Authority (FSRA), that in light of the current health emergency and resulting effects on employers, that FSRA will permit amendments that temporarily reduce employer contributions to zero, provided that the effect of such an amendment does not extend beyond the end of 2020.
It should be remembered that any amendment reducing future contributions to a DC pension plan would constitute an adverse amendment, and also, according to FSRA, the effective date of the amendment cannot be before the day the amendment is filed with the provincial pension regulator.
Accordingly, it is necessary to first obtain the appropriate approval to amend the pension plan, then draft the pension plan amendment, provide notice of the amendment to pension plan members with the appropriate adverse amendment language and then send the amendment with the appropriate filing form to the pension regulator (in Ontario, through the portal) and CRA, all before the effective date. However, then it is possible to stop employer contributions without awaiting the registration of the pension plan amendment.
The requirements in the other pension jurisdictions, if applicable, would need to be considered.
2. Is there any consideration being given to suspending the ITA borrowing limitation to permit pension payments and capital calls?
As a quick reminder, there is a registration requirement under the ITA which applies to any registered pension plan that restricts borrowing of money by the pension plan. The current regulation, under ITR 8502(i), does allow for some borrowing of money but within strict limits:
- The borrowing cannot exceed a period of 90 days
- The borrowing is not part of a series of loans or other transactions
- Pension fund property is not used as security for the loan, except where the borrowing is necessary to provide funds for the current payment of benefits without resort to a distressed sale of pension plan assets
A number of industry groups have been in discussions with the
federal Department of Finance regarding the possibility of amending
ITR 8502(i) in order to provide some more flexibility for pension
plans to borrow money, even on a time-limited basis. We think this
is an important issue and hopefully we will see a concrete proposal
from the Department of Finance.
For example, many pension fund trust and custody agreements have overdraft provisions, which, in our experience, pension funds are quite often reluctant to use because of the 90-day limit imposed under ITR 8502(i), and the risk of the pension plan being in a revocable position for income tax purposes.
In the current COVID-19 environment, we are hearing about some plans that are facing relatively acute liquidity problems in the short term, even to make benefit payments in the next few months. For larger and better-funded pension plans, an overdraft provision or other flexible borrowing facility would be also useful in order, for example, to raise cash to complete capital calls or other know cash outlays at a time when liquidity in other types of investments may be becoming a problem in the short term; some fixed-income portfolios, which a pension fund might normally try to liquidate to raise the cash, may be becoming less liquid and more difficult for the pension fund to sell in the short term.
Some relief from the 90-day limit and the series restriction under ITR 8502(i)—even if that relief were to apply for a fixed period of time, for example, 12 to 18 months—would be helpful for a number of pension funds.
3. What is the Office of the Superintendent of Financial Institutions (OSFI) "full freeze on portability transfers and annuity purchases" and how does it apply to multijurisdictional pension plans? Can an Ontario registered pension plan with some federally regulated members be affected?
Effective March 27, 2020, OSFI directed that there were to be no
further portability transfers and annuity purchases relating to
defined benefit pensions. OSFI conducted a technical briefing on
April 17, 2020, to discuss recent COVID-19 measures.
OSFI explained that they implemented the freeze to protect the benefits of plan members and beneficiaries, in light of the fact that current financial market conditions have negatively affected the funded status of pension plans.
It is important to first note what is not affected by the OSFI freeze:
- The payment of pensions to retirees and other beneficiaries
- DC pension plans
- Buy-in annuity purchases
- Small benefit commutations where the plan text provides that the small benefit must be taken in cash
- A death benefit payable to the estate of a member when there is no surviving spouse or common-law partner
- The commutation of a remaining guarantee period payable to a beneficiary following the death of a member
- A withdrawal of a member's additional voluntary contributions
- Shortened life disability payments
We will highlight some of the payments which are caught by the OSFI freeze:
- All transfers and annuity purchases involving the wind-up of a pension plan
- Transfers following a marriage breakdown
- Small benefit payments except where plan text provides that the small benefit must be taken in cash
- Annuity purchases in progress
- Unpaid transfer deficiency payments
- Any adjustments to be made to previously paid transfers
OSFI has been clear that it is still possible to request
Superintendent consent to a transfer or annuity purchase, and the
Superintendent will consider the consent for a transfer or an
annuity purchase depending on the circumstance of the pension plan.
OSFI has indicated that a plan administrator would need to provide
documentation that demonstrates that a transfer or annuity purchase
would not unduly impact the security of the benefits of the
remaining members and other beneficiaries of the pension plan. OSFI
noted in their updated FAQ document that any consent will likely
include a condition that the transfer or buyout annuity purchase
can only occur at a recent estimated solvency level of the plan,
unless the employer makes a payment to the plan representing the
difference between the recent estimated solvency level and a funded
solvency level of 100 per cent. OSFI has said that some consents
have been granted and that requests are being considered within a
week of submission.
Pension plans which have both members who are federally regulated and provincially regulated have to consider the effect of the OSFI freeze on the pension plan and the members. We understand the position of the regulatory authorities to be as follows:
- A commuted value (CV) transfer or marriage breakdown for a member who is in provincially regulated employment but is in a federally registered pension plan is not subject to the federal CV and annuity purchase rules. OSFI has also stated that plan administrators may discuss with them portability restrictions appropriate to federal members in such plans.
- OSFI has amended their directive to provide that a CV transfer or marriage breakdown for a member who is in federally regulated employment but is in a provincially registered pension plan—other than plans registered in Quebec or Newfoundland and Labrador—is not subject to the federal CV and annuity purchase rules. Plans that are registered in Quebec or Newfoundland and Labrador should speak to OSFI directly about their particular circumstance.
OSFI has advised that administrators should inform affected members of the portability freeze and its impact.
4. What are the different implications in layoffs versus leaves for registered pension plans?
There is some debate in the pension community regarding how
pension plan accruals are affected based on how the employee ceases
Across the country there are protected leaves, such as section 50.1 of the Ontario Employment Standards Act, which provides that an employee can take this leave for the duration of a declared infection disease emergency if the employee is:
- Under medical investigation, supervision or treatment
- In quarantine, isolation or because of a control measure
- Providing care or support to a family member
- Affected by travel restrictions
- Under a direction given by his or her employer in response to a concern that the employee may expose others in the workplace
The significance of such leaves across the country varies by
jurisdiction: some do not require any accrual under a defined
benefit (DB) pension plan or contributions in a DC pension plan;
some permit continuation of DB and DC provision if the employee
pays the employer contribution and any employee contributions; and
others require continued accrual under a DB provision and employer
contributions under a DC plan if the employee pays any employee
The minimum standards in each jurisdiction need to be considered.
In addition, where employees are laid off, as opposing to having elected to take a leave, there is an argument that the employee is not entitled to the leave provisions, and rather that the layoff provisions of the employment standards legislation apply with the corresponding pension and benefit requirements.
5. Are there any restrictions on the payment of commuted values in an Ontario registered DB pension plan? What about pension plans registered in the other jurisdictions?
We will focus mainly on Ontario as there is a fairly complicated
regulation in section 19 of the General Regulations under the
Ontario Pension Benefits Act (PBA). We will
also comment briefly on pension plans subject to the British
Columbia and Alberta pension legislation.
Subsection 19(2) of the PBA regulations provides that the amount that can be transferred is equal to the CV multiplied by the lesser of the plan's transfer ratio and one. As such, the general rule is that where a plan has a transfer ratio of less than one, the full CV cannot be immediately transferred. Where subsection 19(2) prohibits the immediate transfer of the full CV, subsections 19(7) and (7.1) require the amount not immediately transferred (plus interest) to be transferred within five years. This rule applies to all types of CV transfers from a plan, subject to some exceptions in section 19(8) of the regulation which are noted below.
A further restriction on CV transfers is contained in subsection 19(4), which applies in situations where the administrator knows or ought to know that the plan's transfer ratio may have been reduced to less than 0.9 since the valuation date of the most recently filed actuarial report. This is sometimes referred to as the "know or ought to know" rule. In this case, CV transfers cannot be made from the plan without the prior approval of the pension regulator, FSRA. This restriction applies to CV transfers under PBA sections 42 (portability), 43 (annuity purchases), 48 (pre-retirement death benefits) and 67.6 (marriage breakdown payments under the transitional rules).
There is a further restriction in subsection 19(5), which applies in situations where the plan's transfer ratio is less than 1.0 and the administrator knows or ought to know that, since the valuation date of the most recently filed actuarial report, the plan's transfer ratio may have declined by 10 per cent or more. In this case, the CV transfer cannot be made without the prior approval of the regulator. Although we think there is some ambiguity in the drafting of subsection 19(5), in our view the better reading is that it also applies to CV transfers under sections 42, 43, 48 and 67.6 of the PBA, which are discussed above.
In addition, there is an FAQ published by FSRA which confirms that the restrictions under both subsections 19(4) and (5) apply to the entire CV, including the locked-in portion and any excess amount which is paid in cash. Where the CV includes an excess amount, the reduction in the amount immediately transferred is to be applied equally to the locked-in portion and the cash payment portion.
Subsection 19(6) allows the plan administrator to transfer 100 per cent of a CV from a plan with a transfer ratio below 1.0 where (i) a top-up contribution is made; or (ii) where the five per cent of plan assets exception applies. However, subsection 19(6) is subject to the application of subsections 19(4) and (5) and, therefore, if either of those subsections apply to the particular CV at issue, the prior approval of the CEO of FSRA is still required before transferring the CV from the plan. Also, subsection 19(6) is permissive and, as such, the plan administrator needs to consider its fiduciary obligations as part of deciding whether to allow 100 per cent CV transfers in the circumstances.
Finally, for plans subject to the PBA, subsection 19 (8) provides that most of restrictions under section 19 do not apply to (i) amounts transferred under a reciprocal transfer agreement filed with FSRA; (ii) amounts paid under subsection 44(7) of the PBA—lump sum small benefits paid under a joint and survivor benefit (J&S) upon the death of the member—and (iii) payments under subsection 50(1) of the PBA—small benefits.
Turing briefly to some other provinces, both the Alberta Employment Pension Plans Act (EPPA) and the B.C. Pension Benefits Standards Act—sections 74(3) and 72(3), respectively—contain identically worded restrictions prohibiting administrators from making transfers from the plan in respect of pre-retirement death benefits, commuted value payouts and certain plan-to-plan transfers where doing so would impair the solvency of the plan fund, without first obtaining the consent or guidance of the applicable Superintendent. These provisions are in addition to the typical limitations on payouts when the plan is in a solvency deficiency—for example, top-up payments in respect of a transfer deficiency—and have generally been seen as a failsafe to be used in exceptional circumstances, rather than a provision to be employed in the ordinary course.
The Alberta regulator recently, in the form of an EPPA Update, reminded administrators of this provision, but has not—to our knowledge—to date imposed any form of freeze on commuted value payouts, death benefits, annuity purchases or family property equalizations following a marriage breakdown. Administrators who are concerned that payments from a plan fund, particularly multiple payments that are tied to an exceptional event such as a workforce reduction, may impair the solvency of the fund are invited to contact the Superintendent for guidance, but are, at this point in time, not required to seek pre-clearance of any death benefit or commuted value payouts.
In their release on April 16, 2020, Retraite Quebec stated that all transfers and refunds between April 17, 2020, and December 31, 2020, must take into account a degree of solvency that reflects the plans' current financial situation. The degree of solvency must be the estimated by an actuary based on the plan's estimated financial position, "by taking into account the real rate of return of the pension fund, changes in interest rates on a solvency basis and contributions that were made since the plan's last complete actuarial valuation. It is not necessary to provide the estimate unless Retraite Quebec requests it."
6. I hear that plan sponsors are considering off cycle valuations. Are there any limitations on such valuations in Ontario?
Yes, we are hearing the same thing. In many respects, the legal
considerations have not changed.
It is helpful to begin by noting paragraph 9 in Canadian Association of Pension Supervisory Authority (CAPSA) Guideline No. 7: Pension Plan Funding Policy Guideline which provides:
"The plan sponsor may establish standards for the frequency of valuations, subject to any legislative requirements. These are useful for internal monitoring purposes and for the production of reports that are filed with regulators."
The Supreme Court of Canada (SCC) decision in Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6 also needs to be considered in this context. In Indalex, the SCC discussed at length the conflicts that a plan administrator who is also the plan sponsor faces, and concluded that the difficulty was not the existence of the conflict itself, but that the conflict required that the plan administrator take steps to have member interests protected. The objective that the SCC set out was to place the members in the same position they would have been if the plan administrator was independent of both the sponsor and the members.
The conflict concerns will be even more acute in the context of an anticipated plan wind-up or where it is clear that the employer or plan sponsor is in financial difficulty.
It also should be noted that on April 16, 2020, Retraite Quebec included the following statement in its temporary easing measures release:
"The Supplemental Pension Plans Act provides for the funding of a pension plan to be based on an actuarial valuation that must be produced at least every 3 years. As a result, a plan could choose to produce an actuarial valuation as at 31 December 2019, regardless of whether it is required. The measure is already allowed under the Act and does not require any authorization from Retraite Québec."
For jointly sponsored pension plans and various types of multi-employer pension plans, there may well be other considerations on the topic of filing an off-cycle valuation including, in some cases, the plan's own governing legislation, what the governing plan documents say on this topic—if anything—and whether this topic is addressed in some fashion in a formal funding policy adopted by the particular plan.
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