Surplus rights and deficit obligations are probably the biggest issues challenging the private pension regime, according to Aon’s submission to the Ontario Expert Commission on Pensions.

“We submit that, unless there are specific negotiated terms between sponsor and members defining the use of surplus, then the rights to surplus should be given in proportion to the parties’ responsibilities to fund deficits,” says the submission. “The asymmetry in the system has been a major catalyst toward plan termination and underfunding. We have seen instances where funding policies specifically target minimum levels because of such asymmetries.”

The historical language in arrangements with the “for the exclusive benefit of the participants” reference had been a requirement in order to receive tax-preferred status with the Canada Revenue Agency, says Aon. To now use this to deny employers the ability to change this, owing to trust law principles, is absurd. Moreover, the courts that are hearing cases continue to want to get the law right without consideration of the real operational mechanics of the system.

“The legal community and the FSCO must develop an approach to effect a resolution to this asymmetry as a first priority. It is understood that this could involve some grandfathering arrangements,” the submission says. “It is also understood that there is a potential for some groups to have been deemed as ‘losers’ in such resolution. However, the greater good has to be served in this instance.”

“Continued litigation on this front doesn’t seem to help, including the costs of litigation. We fear that the very nature of the adversarial system would tend to preclude an easy and straightforward solution to this dilemma.”

Therefore, Aon recommends that legislation must be put into place as soon as possible which:

(i)overrides the conundrum of historical language;
(ii)has contract law principles take priority; and
(iii)very clearly articulates the risk/reward concepts leading to surplus rights.

To read Aon’s submission along with many of the other submissions, click here to visit our page devoted to the Ontario Expert Commission on Pensions.

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