In the wake of the Indalex case, it might behoove plan sponsors to draft a funding policy.

This policy, according to the Canadian Association of Pension Supervisory Authorities (CAPSA), is a framework for funding a DB pension plan, taking into account factors that are relevant to the plan and the sponsor (e.g., benefit security, minimum funding requirement under the applicable pension legislation).

The legislation in Ontario is not clear if funding is actually a fiduciary duty, said Kathryn Bush, a partner with Blake, Cassels & Graydon LLP, speaking at the firm’s breakfast seminar earlier this week in Toronto. “Under Ontario pension legislation, it may well be a plan sponsor choice, but there isn’t a court case that says that yet.”

While there may be no direct court case, Bush said that, on balance, the Indalex case shows that plan sponsors should move from being reluctant to creating a funding policy to actually creating one.

Creating a policy
While developing a funding policy is not required under any current pension legislation, CAPSA states that it is good practice and good governance to do so.

According to the CAPSA Guidelines, there are a number of advantages in developing a funding policy. For example, a policy improves the identification, understanding and management of the risk factors, and it can help to improve the transparency of funding decisions.

Under the CAPSA Guideline No. 7—Pension Plan Funding Policy Guideline—the following points should be included in the creation of the policy:

1. plan overview (e.g., what kind of plan is it—is it part DC? is the employer an LLP?);
2. funding objectives;
3. key risks that the plan faces (e.g., plan beneficiary demographics);
4. funding volatility factors and management of risk (what is the plan’s tolerance for volatility);
5. funding target ranges (e.g., description of any contribution target levels or cost-sharing arrangements);
6. cost-sharing mechanisms (between the beneficiaries and the employer);
7. utilization of funding excess (is there a surplus?);
8. actuarial methods, assumptions and reporting;
9. frequency of valuations;
10. monitoring (how often the policy is reviewed); and
11. communication (what funding information will be available to whom and when).

But will creating a funding policy change anything, as long as the plan is being funded according to the law?

Bush said that by drafting a funding policy that is provided to plan members, administrators are letting members know the basis on which decisions are being made to fund their plan.

While many claims made against employers deal with claims relating to surplus, the payment of expenses and improper plan amendments, they also include breach of fiduciary duty in their claim. But Bush said she has been starting to see allegations made based on breach of fiduciary duty only.

“And you want defence for those,” said Bush, adding that a carefully worded funding policy can be relatively innocuous, expressing the factors that may be considered in making funding decisions.

“That, to me, seems [to be] decent protection at a reasonable cost.”

Copyright © 2020 Transcontinental Media G.P. Originally published on

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