© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the June 2005 edition of BENEFITS CANADA magazine.
La Belle Province has always dealt with benefits and pension legislation differently than the rest of Canada. But a new set of court decisions in Quebec could set precedents for other provinces.

Quebec has always done things its own way. And it is its unique approach to pensions and benefits that has recently made it a hub of legislative activity. Those decisions—pertaining to the liability of pension committees and the rise of pensioner activism in the province—that emerge in the coming months will be a catalyst for change in these areas and will likely reverberate across Canada.

Quebec was the first province to introduce pension committees and locked-in retirement accounts(both in 1990), to enact comprehensive privacy legislation(1994), and to create a phased retirement option to allow individuals to collect a pension and work at the same time(1997). It remains the only province in Canada with measures to control who may and may not call themselves financial planners(1998).

The pace of innovation has continued into this millennium. Besides new design ideas, several recent Quebec court cases are helping to set the tone for pension governance in the rest of Canada. Someone who wonders what’s in store for the benefits programs across the country can start by taking a look at what’s happened—and what may happen— inside Quebec. You’re bound to pick up an idea or two.

Quebec legislation requires that most pension plans(those with 26 members or more)be administered not directly by the employer, but rather by a “pension committee” where active, non-active and independent members are all represented.

At the moment, Quebec is the only province in which pension committees are mandatory, although Manitoba is considering making a similar change in its Pension Benefits Amendment Act, and the Canadian Association of Pension Supervisory Authorities has also recommended the use of pension committees in the Model Law released in January 2004. The Model Law says that in situations where “the employer wears both hats, acting as both employer and pension plan administrator, confusion may result that can undermine the credibility of the plan in the minds of members.”

“We’ve been living with it for 15 years now and I believe there are advantages to the pension committee model,” says Serge Charbonneau, an actuary with Morneau Sobeco in Montreal. “There’s improved transparency, for one thing. There’s more communication.”

Charbonneau, who is also chair of the Committee on Pension Plan Financial Reporting at the Canadian Institute of Actuaries, points out that under Quebec law, a pension committee is required to hold an annual general meeting for plan members. “From a pension governance standpoint, it’s a perfect opportunity to discuss responsibilities,” he says. “It’s another way for employers to reach out to their stakeholders, explain their position, and discuss the health of the pension plan.”

That doesn’t mean everyone shows up, however, and it can be frustrating when only a handful of employees bother to take an interest. “Sometimes employers may ask themselves why they bother holding the annual meeting when attendance is low, but it’s not about the quantity of people who attend the meeting,” says Charbonneau. “It’s the principal itself that’s important.”

While several union groups, including the Canadian Labour Congress, have indicated their support for this sort of structure, the praise is not universal. Michel St-Germain, a principal with Mercer Human Resource Consulting in Toronto, points out that pension committees “can create huge personal liabilities for members and for pension advisors.” It may be theoretically possible for a committee member to limit their responsibility by submitting a written statement each time they do not agree with a decision, but “that’s just not practical,” says St-Germain.

Liability insurance is available for pension committee members in theory, but St-Germain warns that coverage may be difficult to obtain. “It’s hard to value that kind of risk,” he says. He also points out that several insurers have decided to remove themselves from the liability insurance market altogether. Rather than wrestle with these kinds of problems, he says there’s a danger members may simply decide to resign from committees or refuse to serve.

More than anything else, it’s the recent Jeffrey Mines dispute that has pension committee members in Quebec scurrying for cover. The class action lawsuit centres on the mine’s pension committee’s decision to invest nearly three quarters of the plan’s assets in the stock market. When equities failed to perform as hoped, the company was unable to fund the shortfall and eventually ended up in bankruptcy.

The plaintiffs are suing both the committee and the investment manager, alleging they did not act in the best interest of the members. Instead of aiming for higher returns, they claim the defendants should have invested more cautiously—even if it meant the employer would have been required to make additional contributions.

The case is still in its early stages but if it is not settled out of court, it should help to clarify committee members’ legal responsibilities. If you’re an employer based in Manitoba, this is one you definitely want to watch.

Besides the issue of pension committees, Quebec has also been grappling with the rights and responsibilities of retirees. The Québec Court of Appeal case, Association provinciale des retraités d’Hydro-Québec v. Hydro-Québec of March 2005, has raised some important questions about when an employer needs to seek the consent of its nonactive members when making changes to a pension plan.

Hydro-Quebec and its union had agreed on changes to the pension plan that would reduce the surplus. The association of Hydro-Quebec retirees, however, cried foul and claimed the alterations could not proceed unless they were granted what they believed to be their fair share—namely a top-up of over $350 million to the benefits they were already receiving. The Court examined both the Civil Code and the provincial pension legislation and ruled the employer was not bound by a fiduciary duty to treat all beneficiaries exactly the same way. Since the retirees were unionized, the court held that it was ultimately the union’s responsibility to negotiate any improvements.

That decision may have put the minds of Quebec employers at ease for the moment, but they shouldn’t breathe a sigh of relief. On April 26, 2005, the National Assembly passed Bill 195, giving retirees the right to have a say before a plan can go on contribution holiday. Under the new regime, employers, unions and pensioners will all have to vote on the matter. The move was opposed by business lobbyists like the Conseil du patronat du Québec, but in the end, the retirees had the greater political clout.

It was a relatively small victory, but according to Charbonneau it’s a sign of what’s to come. “The fact that retiree groups have become sensitized and organized is a significant development,” he says. “Just the fact that they’ve become involved will change the nature of future discussions.” He suggests that as demographics continue to change and the number of seniors increases, it seems likely that we will hear more—not less—about retirees’ right to a say in pension plan changes.

According to a Decima Research survey released in March 2004, one in three Canadians are opposed to the idea of mandatory retirement, and one in four expects to keep working past the normal retirement age of 65. With such a large portion of society planning to stay on the job, you’d think that politicians in Ottawa would be further along in their efforts to reshape public pension legislation. But they’re not. There is no phased retirement option for the Canada Pension Plan.

In Quebec, however, people between 55 years and 70 years can phase in their retirement—they can work fewer hours without lowering the pension they’ll receive under the Québec Pension Plan. The employee and the employer simply agree to keep making contributions based on an amount that’s greater than the employee’s actual salary.

Employers in Quebec stand to benefit from the increased flexibility this measure allows; rather than face long-term labour market shortages, they will be able to better manage succession planning. “There’s a great need for people to retire gradually,” says St-Germain. “Pension legislation is beginning to reflect that reality. It’s the tax legislation that is a problem. And that can be awfully difficult to amend.”

The problematic legislation to which St-Germain refers is Regulation 8503(3)(b)of the federal Income Tax Act, which prevents employees from accruing a pension in a defined benefit(DB) plan from which they are also receiving income.

In an attempt to work around the rules, Quebec has altered its Supplemental Pensions Plan Act and allowed working pensioners to keep contributing while they receive an annual lump sum. That lump sum must be the lesser of 70% of their reduced salary, 40% of the QPP earnings limit($16,200 in 2004), or their commuted value. When the pensioner finally stops working, their pension will be reduced by the actuarial equivalent of the payments already received.

St-Germain says that the number of employees opting for phased retirement under their employers’ pension plans has been fairly low. “It’s more complicated,” he says. The requirement to receive income as a lump sum(a measure that is also necessary for income tax reasons)is an option that may not appeal to those who would prefer regular monthly payments. “It also forces the employer to establish a formal phased retirement policy—something they’re reluctant to do because, once it’s done, they’re stuck with it.”

Following the Monsanto decision, employers in and outside Quebec who are without a pension plan may be wondering if it’s even worth the bother of establishing one. Late last year, the Régie des rentes du Québec proposed a new type of pension plan that may remove some of the disincentive— specifically, member funded pension plans(MFPPs)(in French, Régimes de Retraite à Financement Salarial).

This type of plan provides the comforts of a DB plan, but removes the employer’s risk by shifting the funding responsibility to the members. The employer is only required to contribute a fixed portion of employee’s salaries, and any funding over and above this set amount must come from the active members. If the plan should be in a deficit position, the members must either increase their contributions or accept a reduction in their pension.

Compared to the rest of North America, organized labour is remarkably strong inside Quebec. While only about a quarter of all workers in Alberta or Ontario are represented by a union, that number increases to 40% inside the province. “Unions have a preference for DB plans,” says St- Germain. “So [the MFPP proposal] is a compromise. If the employer can’t afford the risk, maybe the employees can.”

The plan can be set up as a DB package, or as a combination of DB and defined contribution, although MFPPs can only be established as new plans; old DB plans may not be switched over. Both St-Germain and Charbonneau believe that removing this restriction and allowing for the conversion of existing plans would make the idea more attractive.

There are also concerns regarding plan changes; the Régie’s draft proposes that no employer be allowed to unilaterally terminate or amend an MFPP. When the Quebec government released the draft for comment in November 2004, Watson Wyatt Worldwide made a submission pointing out that “in the interests of maintaining their flexibility to respond to changing financial circumstances and business needs, many employers will be reluctant to commit themselves permanently and irrevocably to a pension arrangement.”

It will take some time for Régie staff to take suggestions like these into consideration and draw up a revised version. But by early 2006, yet another new financial structure may emerge from Quebec. And if the rest of Canada is true to form, it will just be a matter of time before other provinces introduce their own version of the MFPP.

Andrew Rickard is a Certified Financial Planner and freelance writer in Toronto. andrew@andrewrickard.ca

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