Recent changes to Canadian pension legislation could change the employee/employer relationship regarding DC pensions, according to a panel of pension law experts speaking at a Blakes seminar earlier this week.
In Ontario, options for payment out of DC plans has thus far been limited to annuity purchases and transfers to accounts such as life income funds and registered retirement income funds. However, recent amendments to the Pension Benefits Act of Ontario will permit DC plans to pay variable benefits in a manner authorized by the federal Income Tax Act (ITA).
According to Jessica A. Bullock, an associate in the firm’s pension and employee benefits group, these amendments—which are not yet in force—will turn DC plans in Ontario into “true pension plans,” instead of simply an arrangement that is in force only during a member’s employment with a plan sponsor.
Bullock said that plan sponsors that choose to pay benefits out of a DC plan would have to amend their plan documents to outline the following:
- reference to how minimum payment amounts will be determined and paid, according to ITA regulations;
- reference to “specified beneficiary” as defined by ITA regulations; and
- statement that lump-sum payments will be paid as soon as practicable after a plan member’s death. According to Bullock, anything within one year will be deemed “practicable.”
In addition, plan termination forms will need to be updated to reflect the option for payment of benefits from the plan.
Bullock also spoke of changes made to the federal Pension Benefits Standards Act—also not yet in force—which will create a so-called “safe harbour” for plan sponsors with respect to member investment choices.
Section 8(4.3) of the act has been amended to state that a plan administrator must offer investment options of varying degrees of risk and expected return that would allow “a reasonable and prudent person” to create an investment portfolio adapted to their retirement needs.
In addition, section 8(4.4) indicates that if an administrator offers investment choices outlined under section 8(4.3), the administrator will be deemed to be in compliance with their obligations. Bullock commented that it would be interesting to see how these sections are applied in practice by the courts.
Policy A300-200, released on June 30, 2010 by the Financial Services Commission of Ontario, sets out long-term commitments and responsibilities of plan administrators regarding management and retention of plan records, and provides guidance on this issue. Bullock said that effective retention of records by administrators would be increasingly important as DC plans gain traction in Canada, to help plan sponsors in potential litigation. The policy indicates that records that pertain to legislative requirements and individual beneficiaries must be kept indefinitely. While a defined retention period is not stated for other records, Bullock suggested that it is wise for plan administrators to keep these indefinitely as well.
She also mentioned that many administrators have chosen to contract with outside service providers to handle records retention and deal with member inquiries or complaints. While this is acceptable practice, the offloading of these duties to an external provider doesn’t dismiss plan administrators from ultimate responsibility for their own plans. For this reason, Bullock said, it is important that plan administrators carefully scrutinize the record-keeping and complaints-handling processes of any service providers they seek to work with.
Kathryn M. Bush, a partner at Blakes focused on pension and benefits and tax law, outlined several U.S. and Canadian cases related to DC pensions that she said could be indicative of the kinds of litigation DC pension administrators should work to protect themselves against.
She said a big reason many plan sponsors are moving from DB to DC plans is that the latter offloads much of the related plan risk from the administrator to the member. But, she said, the reality is not that simple. Courts are increasingly weighing in on the fiduciary duty of plan administrators.
In one Canadian case, Dyer v. Cunningham (Cunningham & Associates Financial Services), 2007, the 59-year-old plan member plantiff lost 15% of his pension value and sued the plan’s investment advisors as a result.
The court ruled in favour of the defendant, saying that that the member ignored the advisor’s advice. Bush indicated this is a good example of why plan administrators should keep thorough records of what advice plan members are given.