2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) 2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires Session/séance: PD6 Speaker(s)/conférencier(s) : J. David Vincent and Martin Rochette

Evolution of the Law of Pension and Benefits: Courts and Legislatures Grapple with the Growing Importance of Retirement Savings and Other Employee Benefit Plans in the Workplace Speaker(s)/conférencier(s) : J. David Vincent and Martin Rochette Ogilvy Renault LLP

2009 developments in the Ontario and Federal Jurisdictions The Kerry case The Slater Steel case The Burke v. Hudson’s Bay case Ontario pension reform Federal pension reform 2009 General Meeting Assemblée générale General Meeting Assemblée générale 2009

Nolan v. Kerry (Canada) Inc. “Soft” DB to DC conversion Cross-subsidization of DC plan using surplus in DB portion permissible, not revocation of trust Payment of plan expenses from pension fund permitted, not revocation of trust Adversarial claims will not qualify for costs award from plan trust fund

Nolan v. Kerry (Canada) Inc. (cont’d) Case is important for several reasons SCC decision – highest court Trust law principles circumscribed in application to pension trusts Ontario C.A. decision written by Eileen Gillese upheld DB to DC conversions popular with employers

Slater Steel Inc. Liability of plan actuary and employer’s board of directors for underfunding pension plan in period before bankruptcy Charges against plan actuary for offences against PBA were dismissed Third party administrator appointed by Superintendent suing plan actuary for negligence

Slater Steel Inc. (cont’d) The actuary claimed over for contribution and indemnity against the directors and officers of Slater The claim over against the directors and officers was quashed in lower Court Court of Appeal (per Eileen Gillese) overturned, allowing claim over to proceed

Slater Steel Inc. (cont’d) Courts have not yet ruled on the main issue in this case, namely the liability of plan actuary or the directors and officers to fund some portion of the wind-up deficiency in the pension plan

Slater Steel Inc. (cont’d) In effect, the plan actuary’s defence is: assumptions used in the valuation to determine the company’s required contributions to the pension plan were permissible, but if not I am not responsible since the Board of Directors instructed me to use these assumptions Case has had a chilling effect on directors’ decisions regarding pension plan funding

Burke v. Hudson’s Bay Co decision of the Ontario Court of Appeal written by Eileen Gillese Issue was whether seller of a business is obliged to transfer a pro rata share of pension surplus to the purchaser Court of Appeal reversed the lower Court decision and held the transferred employees had no entitlement to surplus at the time of the sale

Burke v. Hudson’s Bay Co. (cont’d) The Supreme Court of Canada recently granted leave to appeal this case

Why are these cases important? Ontario Court of Appeal and Supreme Court of Canada decisions – two of Canada’s best Courts They are “employer friendly” decisions They mark significant evolution of the application of trust law principles to pension trusts Eileen Gillese is the common thread

Ontario pension reform Harry Arthurs report released in October, overshadowed by financial crisis Ontario has promised pension reform in two stages the first promised for November, 2009 is expected to address simpler issues the second more comprehensive reform promised in 2010

Ontario pension reform (cont’d) Speculation on some expected reforms? PBGF reform Increase Superintendent’s powers to address pension issues in corporate insolvency

Ontario pension reform (cont’d) Surplus distribution on partial wind-ups (Monsanto) Surplus sharing Regulation (1991 temporary amendment) Rules on plan splits, mergers, sale transactions (Burke v. Hudson’s Bay and Aegon v. ING cases)

Ontario pension reform (cont’d) Ontario government implemented temporary pension solvency funding relief measures in August, 2009 A less well publicized amendment requires Superintendent approval for commuted value transfers from pension plans if last filed transfer ratio less than 1.0 and it has since declined by 10% or more

Federal Pension Reform October, 2009 news release and backgrounder from Minister of Finance Legislative package expected before December 31 Numerous changes to PBSA, Income Tax Act and investment rules Mostly housekeeping but a few small surprises

Federal Pension Reform (cont’d) Some of the housekeeping changes Employers to fully fund plans on wind-up Plan sponsors cannot partially wind-up pension plan Immediate vesting More information disclosure to members including annual statement to deferred vested members Increase surplus threshold under ITA from 10% to 25% of liabilities Change investment rules to eliminate direct self- investment and apply 10% rule to market, not book value

Federal Pension Reform (cont’d) Surprises “workout scheme for distressed pension plans” – aka “Let’s make a deal” Sponsors, plan members and retirees can negotiate funding arrangements which are not in conformity with regulations, subject to approval of the Minister If Board of Directors of plan sponsor declares an upcoming special payment cannot be made, becomes eligible for immediate moratorium on special payments, to permit negotiation of longer term solution

Federal Pension Reform (cont’d) Surprises It is unclear whether the negotiated workout could include benefit reduction in addition to funding relief (in April, 2006 OSFI published a policy outlining its views regarding “Reducing Amendments”) Proposal is modelled on the Air Canada and Canadian Press precedents These precedents show that the federal government is more willing than other pension regulators to bend the rules, as long as it believes the employees and the unions understand and agree with the plan sponsor’s postponement of its pension obligations

Federal Pension Reform (cont’d) The Canadian Press deal Precipitated by looming insolvency of CP and December 31, 2008 solvency deficit of $37 million One year deferral of 2008 normal and special payments Special payments for first two years ($10 million) deferred, deemed trust subordinated to $5 million new debt 13 year amortization of solvency deficit Consent early retirement benefits excluded from calculation of solvency deficit

Quebec Legislative and Regulatory Changes New measures for plan funding (effective January 1, 2010) (Regs: 2009, G.O. 42, 3515) Bill 68 (June 2008) Bill 1 (January 2009) (Regs: 2009, G.O. 45, 3649) Member-Funded Pension Plan

New Measures for Plan Funding Provision for adverse deviation –Funded by actuarial gains –Generally around 7% of plan liabilities Letters of credit Annual actuarial valuations 90% Rule (Plan amendments) Equity principle (if surplus is used to fund an improvement)

BILL 68 Phased retirement benefit Prohibition of suspensive conditions Recognition of retiree associations Housekeeping changes affecting funding measures

Phased Retirement Benefit Different from early benefit Working time need not to be reduced Voluntary (plan must be amended) Eligibility: –At least 60 years ; or –At least 55 years and eligible to unreduced pension; and –Under 65 years Maximum benefit: 60% of pension

Prohibition of Suspensive Measures RRQ’s response to the Quebec Court of Appeal decision in the Multi-Marques case That decision challenged one of the pillars of the SPPA Benefits may not depend on factors which could lead to limitation or reduction of benefits Any provision of a plan that has the effect of reducing the obligations of the employer upon plan termination or employer withdrawal is void

Bill 1 – Funding Relief Temporary measures Immediate adoption of new CIA standards of practice for calculating pension commuted values Consolidation of unfunded liabilities Extension of amortization period (Members consent not required) Assets smoothing

Bill 1 – Special Option (Bankruptcy) Applies when benefits are reduced upon plan termination or employer withdrawal Applies to events occurring between December 30, 2008 and January 1, 2012 Applies to retirees and those eligible to retire Such members will have the option of transferring their commuted value to the RRQ who will administer their pension The Government guarantees that benefits cannot be further reduced and pays for the administration of the measure Will be extended to some CCAA situations

Member-Funded Pension Plan A response to DB plans crisis? Established by employer or union Must be a career earnings or a flat benefit plan Employer contribution is fixed Employees bear the risk, i.e., benefits are reduced if there are insufficient assets Existing plans cannot be converted into a MFPP Plans with Quebec members only

Case Law Beaulieu v. Abitibi-Consolidated AbitibiBowater insolvency cases

Beaulieu v. Abitibi-Consolidated DB plan converted to DC Several employees elected to transfer to DC component Employer represented that the DB component would not be improved in the future DB component was subsequently improved The court ruled in favour of the employees

AbitibiBowater Insolvency Cases Confirmed that CCAA cannot set aside collective bargaining agreement obligations Employer must proceed with implementation of agreed upon benefit improvements Special payments can be suspended

QUEBEC : WHAT’S NEXT?