BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe



Canadian pension plan sponsors receive and await court guidance

Too many choices equals paralysis

Ontario’s pension commission to explore updating plan regulations

Canadian pension crisis concerns ease due to improved funding: Study

Bucking a trend, pharmaceutical firm keeps DB pension plan

Toronto hosts pensions event

Canadian pension plan sponsors receive and await court guidance

Pending case focuses on administrative costs charged to fund


Published May 21, 2007

Canadian employers are seeing the impact of two high-profile Supreme Court of Canada rulings in pension disputes.

Plan sponsors and pension experts, though, are anxiously awaiting a decision from the Ontario Court of Appeal in a case that will decide several critical issues related to pension plan management, including the validity of charging administrative expenses to the plan fund.

Several recent court and administrative decisions have factored in the high court's analysis in the two pension cases, Monsanto Canada Inc. vs. Ontario (Superintendent of Financial Services) and Rogers Communications Inc. vs. Buschau, said Ian McSweeney, cochair of the pensions and benefits practice with Osler Hoskin & Harcourt L.L.P. in Toronto.

On a related front, a Federal Court of Canada judge ruled May 1 in Cousins vs. Canada (Attorney General) that federal pension legislation requires a proportional distribution of a surplus attributable to a partially wound-up pension plan. A partial wind-up refers to the termination and distribution of pension fund assets related to that part of the plan.

The federal judge in the Cousins case referred to the Supreme Court analysis in the Monsanto decision in which the high court upheld a regulatory determination that the Ontario Pension Benefits Act requires distributing a proportional share of actuarial surplus when a defined benefit pension plan is partially wound up (BI, Aug. 9, 2004).

Although the Supreme Court analyzed Ontario's pension statute in the Monsanto case, the federal judge ruled that the high court's reasoning applies to the federal statute as well, meaning that surplus must be distributed upon partial plan wind-ups of federally regulated plans, Mr. McSweeney said at the 2007 Pensions Summit: Striking the Right Balance, presented May 10-11 by the Conference Board of Canada in Toronto.

"The result is that, subject to appeal, federal plan sponsors join their provincial brethren in partial wind-up surplus misery," except in British Columbia and Alberta, which give plan sponsors an extension on mandatory distribution of surplus for partial wind-ups, he said.

Decisions such as Monsanto and Cousins feed plan sponsors' reluctance to make larger-than-required contributions to their pension plans, Mr. McSweeney said, citing a Conference Board of Canada/Watson Wyatt Worldwide survey that showed fewer employers (16%) are funding their plan deficits at levels higher than the regulatory requirements this year than last year (24%).

"Employers are loath to put more money in the plans than they need to because circumstances can change: Surplus pops up, and downsizing and other events cause a partial wind up, and they end up paying (the surplus) out," Mr. McSweeney said.

On April 27, the Office of the Superintendent of Financial Institutions denied a request by former members of a pension plan operated by Rogers Communications Inc. to terminate the plan and distribute surplus assets.

The OSFI decision followed a June 2006 ruling by the Supreme Court in the Buschau case that overturned a lower court ruling that would have allowed the plan members to invoke a common law rule to force termination of the trust that held the pension's assets and access the plan's surplus (BI, July 10, 2006).

The Supreme Court returned the case to OSFI, Canada's federal pension regulator, which has jurisdiction over pension plans in major financial sectors, such as banking, insurance, transportation and telecommunications. In its decision, the regulator ruled that the company's actions, which included closing and then reopening the plan to new members, complied with Ontario's pension statute. It also ruled that plan terms gave the sponsor—not the members—the right to amend and terminate the plan.

The OSFI decision was "very, very positive for employers," Mr. McSweeney said.

Meanwhile, the Ontario Court of Appeal is expected to rule shortly in the appeal of a lower court ruling in Nolan vs. Superintendent of Financial Institutions and Kerry (Canada) Inc.

In March 2006, a judge in the Ontario Superior Court of Justice Divisional Court ruled that an employer was not entitled to pay administrative expenses out of the pension fund because historical plan documents and trust agreement language prohibited it from doing so. The court also ruled that the plan sponsor could not use the surplus in its defined benefit plan to fund contributions to its defined contribution plan (BI, July 10, 2006).

The appellate court's view on these issues is critical for plan sponsors because the lower court ruling challenged common pension management practices, namely paying administrative expenses directly from the pension plan.

"We're all hoping that the Ontario Court of Appeal will shed some light on the proper way to analyze these expense cases from a legal perspective," Mr. McSweeney said.

Back to Top

Too many choices equals paralysis

Pension plan sponsors advised to match options and employee needs


Published May 21, 2007

TORONTO—Offering pension plan members numerous investment options can paralyze them with indecision, resulting in their investments being placed in funds that may not be conducive to successful retirement planning.

Plan sponsors in Canada should focus on selecting investment options, and particularly default options, that best match the member's investor profile rather than focusing on providing numerous funds from which employees can choose, investment experts say.

Many Canadian capital accumulation plans—tax-assisted investment or savings plans—offer 25 to 100 investment options, said Clark Steffy, account executive in the Group Savings & Retirement Solutions practice of Manulife Financial in Toronto.

Plan sponsors feel compelled to offer numerous investment options to plan members because of a common perception that people value the opportunity to make choices for themselves, Mr. Steffy said at the Assn. of Canadian Pension Management's regional conference held May 9 in Toronto.

When offered too many investment options, though, plan members often will choose the safest or easiest choice, such as a money market fund—a type of mutual fund that is required to invest in low-risk securities, he said.

Research by Columbia University has shown that for every 10 additional funds offered to plan members, allocations to money market funds increased about 4%, while allocations to money market and bond funds combined increased about 5.4%. In contrast, allocations to equity funds dropped about 7%, the research found.

Rather than focusing on the quantity of fund options, plan sponsors should concentrate on the quality of the funds, ensuring that they offer funds that meet members' varying degrees of investment sophistication, said Nadia Savva, an account executive in Manulife's Group Savings & Retirement Solutions practice.

"Don't focus on the number," she said.

If plan sponsors believe their members are hands-off investors—those that either do not have the time or do not feel they have enough investment knowledge to properly select funds—they should consider offering either asset allocation funds and/or retirement date funds, Ms. Savva said. The majority of CAP members likely fall into this category of investors, she said.

For asset allocation funds, employees complete a questionnaire to determine their risk tolerance and a prepackaged fund that meets their profile is selected, Ms. Savva said. Plan sponsors must realize, though, that members in asset allocation funds need to periodically reassess their investment profile because their risk tolerance will likely change over time, she said.

Retirement date funds are new to the Canadian marketplace, but may be a viable option for individuals who are unable or unwilling to choose among the numerous investment options, she said. For a retirement date fund, a member chooses a retirement date and invests in a fund that closely matches that date. The asset mix automatically rebalances and becomes more conservative as the retirement date approaches. "If I'm not a sophisticated investor, I don't have to think about it," Ms. Savva said. "Somebody is taking care of my investments for me based on a time horizon."

A high percentage of employees have their investments automatically enrolled in the default option, some operating under the belief that the plan sponsor chose that option because it makes the most sense, she said.

If plan sponsors think their members will simply default to a plan rather than making an informed decision, they may want to consider a balanced fund or a retirement date fund as the default option, she said. A balanced fund is a mutual fund that buys a combination of stocks and bonds to provide income and increase capital value but avoids excessive risk.

Back to Top

Ontario’s pension commission to explore updating plan regulations


Published May 21, 2007

TORONTO—Ontario's pension legislation is overdue for a major revamp that addresses the pressures driving employers away from defined benefit pension plans, a Canadian pension expert says.

The Ontario Expert Commission on Pensions is taking a hard look at the Ontario Pensions Benefits Act, which has not changed substantially since 1988 despite an aging workforce, the repeal of mandatory retirement in the province and the volatility of defined benefit plan costs that has led a number of Canadian employers to switch to defined contribution plans.

The statute "needs updating," said Robert Brown, director of research for the commission, a professor of actuarial science and director of the Institute of Insurance and Pension Research at the University of Waterloo.

The commission also is exploring the role of Ontario's pension guarantee fund, considering whether it is still appropriate in its current format, how well it is funded and what impact the fund has on defined benefit plans in the province, Mr. Brown said at the Assn. of Canadian Pension Management's regional conference in Toronto on May 9th.

Ontario is the only Canadian jurisdiction with a pension guarantee fund.

A critical issue that the commission will address relates to the dispute over who owns plan surpluses, which has been the basis of extensive litigation for employers in Ontario, he said.

Many issues, while critical to the health of defined benefit plans in Ontario, may be outside the commission's jurisdiction, Mr. Brown noted. Any discussion on funding, for example, would be incomplete without mentioning that federal tax laws limit contributions that employers can make to their plans.

"That is one of the issues we are grappling with," he said. "Where is our fence and where would we like it to be?"

The commission will hold public hearings in Toronto Oct. 17-19 to give stakeholders an opportunity to present oral arguments relating to pension issues. The commission will file its report with Ontario Minister of Finance Greg Sorbara in the summer of 2008.

Back to Top

Canadian pension crisis concerns ease due to improved funding: Study


Published May 21, 2007

TORONTO—Fewer Canadian executives believe the country is experiencing a pension crisis compared with a year ago, but a noticeable number of companies are changing their defined benefit plan designs to reduce the volatility and cost of their plans.

While two-thirds of chief financial officers currently believe there is a pension funding crisis in Canada, the number of CFOs expressing this concern declined from last year's 80%, according to a joint survey by the Conference Board of Canada and Watson Wyatt Worldwide.

Meanwhile, 59% of top human resource executives in Canada believe a pension crisis exists, down from 78% in 2006, according to the survey released at the 2007 Pensions Summit: Striking the Right Balance, presented by the Conference Board of Canada May 10-11.

Representatives of the two organizations attributed easing concerns about a pension crisis to the improved funding of pension plans in Canada, but they also noted that plan sponsors remain concerned about the future.

"We're not out of the woods yet," said Gilles Rheaume, vp, public policy, for the Conference Board of Canada in Toronto. "There are still some issues that need to be resolved."

The greatest threat to private sector defined benefit plans is the cost of maintaining and funding such plans, seen as a major threat by 70% of respondents. The volatility of future funding contributions is seen as a major threat to defined benefit plans by 63% of respondents.

The inability of members to get investment returns that provide adequate benefits was cited as the top threat, by 61%, to the sustainability of private sector defined contribution plans, followed by possible employer liability for poor investment performance, at 49%.

Sponsors in Canada are changing their defined benefit plan designs to address concerns about volatility and costs. About 16% of DB plan sponsors said they have made design changes in the past two years and 25% said they plan to do so in the next year.

A "surprising" fact discovered by the survey is that the majority of DB plan changes would apply to both new hires and future service for current employees rather than only new hires, said Ian Markham, director, pension innovation for Watson Wyatt in Toronto.

"It's a lot easier to do it for the people who aren't with you yet," Mr. Markham said.

The most common design change planned for private sector plans is the conversion of future service benefits for some members to defined contribution arrangements, while the most common planned change for public sector plans is an increase in the employee contribution rate.

About 18% of publicly traded companies converted future benefits for all members to defined contribution plans in the past two years, while another 15% said they plan to do so in the next year. Only 5% of respondents, though, indicated that they have or plan to fully wind up their defined benefit plans.

Back to Top

Bucking a trend, pharmaceutical firm keeps DB pension plan


Published May 21, 2007

TORONTO—When Merck Frosst Canada Ltd. was looking at ways to reduce the cost and volatility associated with its defined benefit pension plan, the pharmaceutical maker considered following other employers footsteps by converting to a defined contribution plan.

“Frankly, we looked very hard at converting from a defined benefit to a defined contribution plan because, ultimately from an employer’s perspective, that’s a very easy way to immunize your risks going forward,” said Danny Greene, director, HR shared services for the Kirkland, Quebec-based company

Merck Frosst, though, decided to buck the trend and chose to implement changes that the company believes will help stabilize its pension contributions, Mr. Greene said at the “2007 Pensions Summit: Striking the Right Balance,” presented by the Conference Board of Canada May 10-11 in Toronto.

The impetus for the redesign of the Merck Frosst pension plan was the realization that benefits costs were increasing at significant rates, he said.

“It became an expense that needed attention,” Mr. Greene said.

The drug maker also wanted to develop a pension plan to attract and retain skilled employees, particularly those in research, he said. The Canadian subsidiary of Whitehouse Station, N.J.-based pharmaceutical company Merck & Co. Inc. has 1,544 employees in Canada, about 25% in the research area.

“We were really interested in employees who want to stick around for the long-term, given the nature of our research and our product,” Mr. Greene said.

The company considered a range of options: a traditional final pay defined benefit plan, a reduced defined benefit plan, a career pay plan, hybrid plans and defined contribution plans, he said. Ultimately, company officials rejected the idea of converting to a defined contribution arrangement, believing that a defined benefit plan would be more of an inducement for long-term service with the company, Mr. Greene said.

“There are no perfect solutions,” he said. “In all fairness, defined contribution plans may be very appropriate to your business.”

The company also felt that the value created by a sophisticated defined benefit plan was an important advantage, Mr. Greene said, pointing to Watson Wyatt Worldwide data that has shown defined benefit plans in the United States provide higher average investment returns than defined contribution plans.

“It wouldn’t be an easy thing to do to keep our DB plan, but we knew it would be the right thing to do,” he said.

Current employees’ pension benefit is calculated by a formula that takes 2% of their final average earnings and multiples it by their years of service. Effective Jan. 1, 2008, the contribution rate will decrease from 2% to 1.8% for current employees for their future years of service as well as new hires.

The company will also eliminate early retirement subsidies for new hires after Jan. 1, 2008, while current employees will be grandfathered for the early retirement incentives for both past and future service, he said.

In addition, Merck Frosst’s enhanced termination benefit will decrease for new hires to the minimum required by Quebec law, which tends to be the most progressive from a Canadian employee’s perspective, Mr. Greene said. The company chose to abide by the Quebec statute to avoid dealing with the vast differences in provincial laws relating to pension benefits, he said. ‘It ends up being a very favorable outcome for our employees,” Mr. Greene said.

The company retained a feature of its pension plan known as the “Savings Plus” account, in which employees can make voluntary contributions to the pension plan. “This is their own money that would be invested by the money managers to purchase additional enhancements,” he said.

After the redesign, the core costs of the pension benefit will decline for the company, Mr. Greene said. The need to control the company’s pension costs was communicated to the employees, he said.

“We were very transparent,” Mr. Greene said. “We needed to reduce the volatility and the costs of our pension plan.”

Back to Top

Toronto hosts pensions event


Published May 21, 2007

TORONTO—About 150 people attended the “2007 Pensions Summit: Striking the Right Balance,” presented by the Conference Board of Canada May 10-11 in Toronto.

The event featured sessions on the future of defined benefit plans in Canada, pension governance and investment, and legal developments affecting plan sponsors in Canada.

Plans for next year’s conference have not been finalized.

Back to Top