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Interesting times for employers with Ontario pension plans

Yesterday the Ontario Deputy Superintendent of Pensions released a formal statement that included the comment:  “these are interesting times in the pension sector.”  How true.

Many long-anticipated improvements to Ontario pension legislation, regulation and policies are finally coming into force.  The pension regulator will have more specific, helpful powers to target non-compliance issues.  Plan sponsors will have more choices in the design of pension plans, especially in the defined contribution sphere.  And many employers who sponsor defined benefit pension plans will be pleased by this morning’s Ontario government announcement about an entirely new framework for funding defined benefit pension plans, which will come into effect “in the coming weeks”.

We have written about some of these promised changes in prior posts (here and here).  We will be providing more details and strategic suggestions about these interesting developments, in future articles.  In the meantime, you can find information about this this morning’s announcement by the Ontario government here.

Please contact a member of Dentons’ Pensions and Benefits group for information and advice about how these significant changes will affect your business.

 

 

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Interesting times for employers with Ontario pension plans

Changes to the Canada Pension Plan: a field guide for Ontario employers

Are you an employer who is uncertain about what you should be doing to prepare for the changes to the Canada Pension Plan (CPP)?  This guide will help you.

The changes were announced by the federal government a year ago, and formal rules became law at the end of 2016.  Unlike the infamous Ontario Retirement Pension Plan, these government-run pension changes are here to stay.

Here is a summary of the changes.

 Mandatory contributions to the CPP by employers and employees will increase, starting January 2019.  The increases will be phased in gradually over several years.  By 2023 employers and employees will each be paying 5.95% of their eligible income to the CPP.  Right now they are each contributing 4.95% of eligible income.

It’s a significant increase in contributions.  The combined employer and employee mandatory contributions to the CPP will go from 9.9% of employees’ eligible income to 11.9% of their eligible income.  That’s a 21% increase.

And it’s an even bigger hit for higher-income employees and their employers.  Anyone with an annual salary of more than $70k (approximately), and their employers, will have to make additional contributions commencing 2024.

The upside is that the amount of the CPP benefit paid to Canadians will increase.  It is expected that the annual benefit paid by the CPP will increase by as much as 50%.  In today’s dollars, the maximum CPP annual payout would go from $13,370 to $20,000.  This full enhancement to the CPP benefit probably won’t be seen for approximately 40 years.

If you have Quebec employees, beware:  the CPP does not apply.  Changes to the Quebec Pension Plan are being considered, but it’s not known whether or when any changes will be made.

January 2019 is not far away.  If you will be making changes to retirement and savings plans as a result of the CPP changes, you may want to communicate those changes to employees in the next year or so.

As a starting point, here are some high-level strategic suggestions:

 If you have a Group RRSP or defined contribution pension plan:

  • Consider whether to reduce the amount of required employee contributions to your plan, so that there will be little or no impact on your employees’ take-home pay.
  • Consider reducing employer contributions to your Group RRSP or defined contribution pension plan, so that the overall employer costs of contributing to the CPP and your employer-sponsored plan remain level.  If you decide to do so, communicate the changes to employees now, so they are well aware in advance of any changes.

If you have a defined benefit pension plan:

  • Find out if there is anything in your pension plan that relates to the CPP.  Are employee contributions computed based on how much they contribute to the CPP?  Is there a “bridge benefit” that relates to the CPP?
  • Ask your actuary whether the liabilities of your pension plan will increase as a result of any provisions that relate to the CPP.
  • Consider amending your pension plan to lessen the impact of the CPP changes, if any, on the design of your plan.

If you have a union:

  • Find out if there are sections of the collective agreement that will restrict you from making changes to your retirement savings plans.  Consider letting the union know, in collective bargaining, that changes may be made due to CPP changes.
  • If the term of the collective agreement goes beyond 2018, formulate a plan to communicate to the union the fact that employee take-home pay will go down as a result of higher CPP contributions.

Please contact a member of the Dentons Canada pension and benefits group for assistance in understanding how the CPP changes will impact your organization.  Be prepared.

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Changes to the Canada Pension Plan: a field guide for Ontario employers

Who is a “parent” in the Ontario pension world? And why does it matter?

Any person who is the “spouse” of a member of a registered pension plan in Canada has rights regarding the pension entitlement of his or her partner. That important policy has been entrenched in pension legislation for decades.  Exactly who is a “spouse”?  The answer to that question has recently become a bit more complicated.

The Ontario government changed the Ontario Pension Benefits Act effective January 1, 2017 to recognize the evolving definition of a family, for legal purposes.  Administrators of registered pension plans should take steps now to ensure that their pension plan documentation and administration is keeping up with these changes.  Reputational and financial costs could be imposed on pension plan administrators who fail to recognize spouses’ rights to pensions, in this modern world where there has been an evolution of what constitutes a spouse.

The basic rules in Ontario are that two people are spouses for pension purposes if they are married to each other, or they fall within one of the following two categories:

  • they have been living in a conjugal relationship continuously for at least three years, or
  • they have been living in a conjugal relationship of some permanence for less than three years and are the parents of a child.

Effective January 1, 2017 a change was made to Ontario pension benefits legislation that is relevant to the phrase, “parents of a child”.

Prior to 2017, the Ontario legislation said that spousal pension rights under the parent category were triggered if the plan member and his or her partner were “the natural or adoptive parents of a child”.  That wording was simple.  Arguably, it did not capture circumstances where a child was conceived with assisted reproduction.  And it certainly did not address the complex issues of surrogacy or sperm donors.

The Ontario government has stepped in to address these complex issues. The definition of “parents of a child” in the Ontario pension benefits legislation now refers to provisions of the Ontario Children’s Law Reform Act.  That legislation has detailed provisions that address the complicated question of “who is a parent?”.  These are not simple provisions.  For example, they address circumstances of surrogacy where entitlement to parentage has been waived.  They also address circumstances of sperm donors where there is a written agreement, prior to conception, confirming that the donor does not intend to be a parent.

Pension plan administrators should consult their advisors to understand how to navigate these new requirements. Pension plan texts, member booklets, forms, and all other communications and administration must align with these changes.  Administrators will have to rely on experts to determine whether an individual is a spouse of a pension plan member, if the two individuals have been living together for less than three years, but may qualify as “spouses” because there is a child.

Administrators have a legal obligation to ensure that the correct individuals receive their pension entitlements. That means that these new Ontario requirements should be considered and implemented in all aspects of documentation and administration.

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Who is a “parent” in the Ontario pension world? And why does it matter?

Ontario regulatory form regarding pension plan contributions: comply!

Trustees and administrators of Ontario registered pension plans: beware of Form 7.

That’s the form that administrators of registered pension plans must complete, and send to their pension fund trustees, that summarizes the estimated employer and employee contributions that will be due to be made to the pension plans in future. The form must be provided by the registered administrator of every Ontario registered pension plan to the trustee, at least annually.  If there’s a change to the estimated future pension contribution requirements, the administrator must send a revised Form 7 to the pension fund trustee within 60 days of becoming aware of the change.

Trustees of pension plans (which for this purpose include insurance companies) are not required to complete Form 7’s. But trustees have an important, independent legal obligation to notify the Ontario Superintendent of Financial Services if they do not receive the required Form 7.  Further, if contributions to the pension plan are not received by the trustee in accordance with the estimates in the Form 7 received by the trustee, the trustee must notify the Superintendent.  There are prescribed time limits for all of these requirements.

In essence, the Form 7 rules require pension fund trustees to police timely plan contributions. The law requires trustees to blow the whistle if a plan administrator is not making contributions on time.

In 2013 a trustee was prosecuted in Ontario for failing to report the non-filing of a Form 7 with respect to a plan administrator who eventually filed for bankruptcy protection from its creditors. The trustee plead guilty and was fined $50,000.

The gravity of compliance with Form 7 rules was recently emphasized by the Ontario pension regulator in an announcement that can be found here.  A few days ago, the regulator released a revised Form 7 that can be found here, as well as a comprehensive User Guide that can be found here, to assist plan administrators in completing Form 7.  It also released two new standardized templates, to be used by pension fund trustees to report to the Superintendent when a plan administrator fails to submit a Form 7, or fails to make the contributions as summarized in a Form 7.  The templates can be found here.

Although Form 7 is a prescribed form, it does not have to be filed with the Ontario pension regulator. It is simply a required communication from plan administrators to pension fund trustees.  Do not take this as an indication that the Ontario pension regulator is indifferent about compliance with the Form 7 rules.  It has clearly demonstrated that it requires compliance, and it has provided a guide and templates to assist the pension industry with the rules.

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Ontario regulatory form regarding pension plan contributions: comply!

Ontario Pension Advisory Committees

If you are involved with the administration of an Ontario registered pension plan, you should familiarize yourself with new Ontario rules regarding pension advisory committees. The new rules will be effective January 1, 2017.  They give significant additional rights to plan members, and could impose extra costs and administrative burdens on plan administrators.  You can find the new rules here: Ontario Pension Advisory Committee Rules

I wrote about these new rules a few weeks ago, when draft regulations were released by the Ontario government. The regulations are now final and are described in my article here: Pension Article

It is possible that these new rules will have no impact on your plan. If unions and plan members take no action, plan administrators are under no obligation to take any action.  There will be no pension advisory committee in that case.  But if a request is made by a union, or by at least ten members of a plan (including retirees), the new rules will be triggered.  The rules set out a clear and detailed process to communicate the request with all plan members, distribute materials and conduct a vote.

If a vote to establish an advisory committee is successful, the plan administrator is then required to do several things, including:

  • hold the initial meeting,
  • give the committee or its representative “such information as is under the administrator’s control and is required by the committee or its representative for the purposes of the committee”,
  • make the plan actuary available to meet with the committee at least annually if the plan provides defined benefits,
  • ensure that the committee has access to an individual who can report on the investments of the pension fund at least annually, and
  • provide administrative assistance to the committee.

The pension advisory committee will not have any legal authority to dictate how the plan should be administered. The new legislation says simply that “[T]he purposes of an advisory committee are (a) to monitor the administration of the pension plan; (b) to make recommendations to the administrator respecting the administration of the pension plan; and (c) to promote awareness and understanding of the pension plan.”

Reasonable costs related to the establishment and operation of the committee are payable out of the pension fund.

Please contact a member of the Pension, Benefits and Executive Compensation group at Dentons Canada LLP for more information about this potentially significant change to the governance of Ontario registered pension plans.

Ontario Pension Advisory Committees

Canada Pension Plan enhancements: it’s happening

Yesterday the federal government tabled Bill C-26, which will implement changes to the Canada Pension Plan that were announced in June, 2016.  All provinces other than Quebec are now on board, in support of increased employer and employee contributions, and higher benefits.  The higher contribution rates will not apply until January 1, 2019.  They will be phased in gradually over seven years (from 2019 to 2025).

Commentators refer to these changes as “historic”.  It has been decades since significant changes were made to the CPP.  The reality is that the Canadians who should be happiest about these changes are teenagers, since it will be many years until significantly higher benefits are paid from the CPP.

We will be providing more details about the CPP changes in the coming weeks.

 

Canada Pension Plan enhancements: it’s happening

Ontario Pension Plan Members Will Soon Have Significant New Rights

Ontario is on the verge of implementing new rights for members of registered pension plans. Members will have the right to form committees that will have broad rights to review information about all aspects of plan administration including investments.  Employers who sponsor or administer a registered pension plan should familiarize themselves with these new Ontario legal requirements.  They are not yet law, but likely will be in a matter of months.

Last week the Ontario government released revised draft regulations about these new legal requirements, seeking comments by September 12th, 2016.  The new requirements have been kicking around in draft for the past six years and will replace current Ontario legislation regarding member advisory committees.  Most employers probably haven’t heard of the current requirements regarding such committees, because the current rules have no teeth.  The new ones will.  You can find the new requirements here.

The new requirements will apply to pension plans that have at least 50 members (including retirees). For those plans, if 10 members (or their union) notify their plan administrator of their desire to form a member advisory committee, a process must be launched to inform all plan members and conduct a vote.  If a majority of members vote in favour of establishing an advisory committee, it should be established in a matter of months.  The plan administrator will have no right to representation on the committee.  Reasonable expenses of the committee are payable from the pension fund.

Once a new committee is formed, the plan administrator must:

  • arrange for the plan actuary (for defined benefit plans) to meet with the committee at least annually;
  • give the committee access, at least annually, to an individual who can report on the plan’s investments; and
  • give information to the committee, and allow it to examine the plan records.

These new legal requirements will not give plan members a say on how their plan should be administered, but they certainly will change the landscape of members’ access to information about their pension plan. The new requirements will come into play only where there is sufficient interest among members, or unions, in forming a member advisory committee.

These new Ontario rules will create an entirely new type of scrutiny of pension plan administration. Prepare now.

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Ontario Pension Plan Members Will Soon Have Significant New Rights

U.S. employers targeted by lawsuits claiming excessive fees in employee retirement and savings plans: Could it happen in Canada?

I recently wrote about the legal risks regarding plan fees that should be considered by Canadian employers who sponsor group registered retirement savings plans and defined contribution pension plans (that article can be found here).  These risks have been emphasized by several lawsuits filed against U.S. employers in the last few months.  The following is a brief update on litigation activity in the U.S. which should give pause to Canadian employers who sponsor capital accumulation plans for their employees.

This week, no fewer than seven high-profile U.S. universities were sued regarding fees charged in their defined contribution retirement plans.  Plaintiffs are seeking class-action status against these U.S. educational institutions alleging, among other things, that their employers acted imprudently by selecting high-cost funds for the plans when lower-cost alternatives were available.  These lawsuits are part of a trend that has emerged in the last decade: claims against large and small U.S. employers which allege that fees haven’t been adequately disclosed, service providers are being paid unreasonable fees for the services they provide, and insufficient diligence has been carried out to properly select reasonably-priced funds and monitor whether fees remain competitive for years after funds are selected.

Some commentators have referred to this trend as a gold rush for lawyers. Several very large, respected U.S. companies have settled claims for tens of millions of dollars, while at the same time asserting that they have acted prudently in charging plan fees for administration, record-keeping and investment services.

The spate of U.S. litigation should prompt Canadian employers to mull over the following obvious questions: Do plan fees hold up against a benchmark of fees charged by other plans?  Could the same services be provided at a lower price?  Has the employer conducted, and kept records of, regular reviews of fee options?  Was expert advice obtained in selecting funds and negotiating with service providers and investment managers?  Consider this wording in a very recent claim against a small U.S. employer:

“Defendants had a flawed process – or no process at all – for soliciting competitive bids, evaluating proposals with respect to services offered and reasonableness of fees for those services, actively monitoring the reasonableness of fees assessed to Plan participants, and choosing a service provider on a periodic, competitive basis.”

Could all Canadian employers defend such allegations – especially those who have not paid attention to the fees charged in their plans for a few years? They may mistakenly think that their trusted service provider will inform them if fees could be reduced.  That may not be the legal obligation of a service provider.  And it may not be in the financial best interests of service providers to do so.

The Ontario pension regulator has formally encouraged pension plan administrators to shine a light on fees. It stated in a 2016 guideline that it expects employers who sponsor defined contribution pension plans to give “due consideration” to including wording in statements of investment policies and procedures that sets out “expectations, ranges, or limits on total plan expenses and fees; and guidelines for monitoring expenses and fees”. Good advice, especially in light of the litigation on this topic in the U.S.

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U.S. employers targeted by lawsuits claiming excessive fees in employee retirement and savings plans: Could it happen in Canada?

How should employers deal with pensions in a severance package?

HR professionals often ask us how to deal with pension issues when they structure severance packages for non-union employees. Should employees continue to earn pension benefits after termination of employment?  If so, for how long?

Here are some legal principles that will help the puzzled professional approach these questions. See the article by Taylor Buckley here [http://www.employmentandlabour.com/limiting-liability-incentives-and-benefits-on-termination-of-employment] that describes in a general way the treatment of a variety of employee benefits on termination of employment.  This article will focus on the treatment of pensions.

Is there anything in writing?  Is there a written employment contract, collective agreement, plant closure agreement or other document that clearly describes what will happen to pension benefits when the employee is dismissed?  If the answer is yes, follow the written document.  If the answer is no, read on.

The statutory notice period?  Easy. In Ontario, employment standards legislation requires pension accruals to continue during the period of statutory notice.  For both defined benefit and defined contribution pension plans, the employee should be given credit and contributions in the pension plan for that period.  The challenge is what pension treatment should apply at the end of the statutory notice period.  Read on.

What about pension benefits during the period of common law notice?  A period of common law notice could extend for several months after a statutory notice period ends.  Courts have said that long-service, highly-paid employees who are terminated without legal “just cause”, could be entitled to a period of common law notice as long as two years.  The general rule is that an employee who is dismissed without cause is entitled to the value of the pension benefit that he/she would have received if he/she had worked for the entire period of common law notice.  The general rule won’t apply if there’s something in writing that provides for some different treatment – an employment contract, collective agreement, binding policy, etc.

If the general rule applies, the dismissed employee’s entitlement is to the value of the pension that he or she would have earned in the pension plan during the period of common-law notice. When dealing with a defined benefit pension plan, the amount of contributions is not the same as the value.  Advice of an actuary may be required to determine the value of a defined benefit pension accrual during a common law notice period.  It could be easier and less expensive for an employer to set up severance arrangements so that pension accruals continue in the pension plan, rather than pay a separate cash amount equal to the value of the pension accrual.

Are employers required by law to continue pension benefits through the entire period of common law notice?  If the general rule applies, that doesn’t mean that the dismissed employee must receive the value of pension benefits for the entire period of common law notice.  Employees can agree to some other deal.  A dismissed employee could sign a release and accept a severance arrangement that doesn’t include the accrual of pension benefits through the period of common law notice (as long as all statutory obligations are met).  That is legally acceptable, as long as the treatment of pension benefits is clear in the documentation, and the employer has acted appropriately in disclosing the pension issues to the employee.

How should an employer disclose pension issues when negotiating a severance deal?  Carefully.  Pension legislation requires an administrator of a pension plan to act as a fiduciary when explaining pension entitlements under the plan.  That includes a situation where a dismissed employee is considering pension issues in the context of a severance package.  Severance letters often say something like, “you will receive pension information under separate cover”.  If the employer is seeking a release at that point, the release may be challenged in future if the dismissed employee later says that he or she didn’t understand how his pension was being handled under the severance arrangement.  The better approach is to deal with the treatment of pensions up front, in the initial severance letter that sets out all payment terms.

Exactly what are the options in dealing with pensions during a severance period?  The easy point is that in Ontario accruals continue, without exception, during the statutory notice period.  The more difficult point is what should happen with pensions after the end of the statutory notice period.  There are two basic choices.  Pension accruals could cease at the end of the statutory notice period, in which case the dismissed employee simply receives his or her pension termination option statement.  Alternatively, pension accruals could continue for the period of time when the dismissed employee is still considered to be an employee for tax purposes.  The key here is that the status of being employed for pension accrual purposes can continue even if the individual does not report to work.  A severance deal can be structured so that for tax purposes, the individual’s employment has not terminated at the end of the statutory notice period.  Such arrangements are commonly referred to as “salary continuance arrangements”.  The individual’s salary and some benefits continue during the salary continuance period, without interruption, even though the employee no longer comes to work.  The employer doesn’t provide a Record of Employment until the end of the salary continuance period.  Documentation must be clear in confirming with the dismissed employee exactly what is happening with his/her benefits.  And the employer should be aware of what is permitted regarding benefit accruals/continuation in the relevant benefit plan text.

It is often simpler, and less expensive, to provide for continuing pension plan accrual within the pension plan during a period of salary continuance, rather than wrestle with the issue of a cash payment to compensate the dismissed employee for loss of pension accruals during a severance period.

The bottom line for employers with pension plans is that a proper structuring of a severance package requires thought beyond the question of “how many months is this employee entitled to?” There could be an expensive pension issue that employers should address at the outset.  Should the pension accruals continue throughout the salary continuance period?  Would it be easier and less expensive to simply provide a cash payment in lieu of pension accruals?  Has the dismissed employee been given clear and complete information about what his/her pension rights are in connection with his/her severance deal?  Employers should have solid answers to these pension questions before terminating employees.

Get legal advice.  We strongly recommend that employers get legal advice when dismissing employees.  Circumstances can vary, and there may be important exceptions and unique approaches to the principles described in this article.

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How should employers deal with pensions in a severance package?

Ontario Retirement Pension Plan: a guide

Media coverage about the Ontario Retirement Pension Plan (ORPP) has been unrelenting for the past two years. The Ontario government has made many announcements setting out its vision for its new, government-run defined benefit pension plan for Ontario employees which will be similar to the Canada Pension Plan (CPP).

Are you finding it hard to keep track? Here is an up-to-date guide. More details are in the articles listed at the end of this guide.

When is the ORPP coming into effect?

The Ontario government recently changed the effective dates. It’s likely that the following schedule is final.

Employers who had an active registered pension plan on August 11, 2015, are exempt until January 1, 2020. It doesn’t matter if their existing plan does not currently qualify as “comparable” under the ORPP rules. It doesn’t matter if their existing pension plan doesn’t apply to all of their employees. All of those lucky employers have until January 1, 2020 to decide how to react to the ORPP.

All other employers of Ontario workers will be required to start making contributions to the ORPP on the following dates, unless they adopt a “comparable” registered pension plan:

  • January 1, 2018 if more than 50 employees; and
  • January 1, 2019 if 50 or fewer employees.

What types of pension plans will qualify as “comparable”? 

The Ontario government has not budged from its position that group registered retirement savings plans do not qualify as “comparable”. It is now certain that Ontario employers who offer only a Group RRSP, deferred profit sharing plan or other type of non-pension savings plan, will have to either change their plans, or join the ORPP.

See the links at the end of this guide for details of what registered pension plans do qualify as “comparable.” Beware: this is not a simple, blanket exemption. Every registered pension plan will have to be closely examined to ensure that it perfectly complies with the details of what the Ontario government deems to be “comparable”. Does your registered pension plan have a waiting period for plan entry or service caps? Are there classes of employees who are not required to join your plan (e.g. certain fixed-term, contract, call-in or other classes of permitted excluded employees)? If the answer is yes, not all of your employees will be members of a “comparable” plan for ORPP purposes. Those employees will need to join the ORPP, while your other employees will not.

The ORPP Administration Corporation will soon start communicating with employers to confirm their enrolment date in the ORPP, and to verify which employers have “comparable” plans and are therefore exempt.

Is the ORPP now law?                        

Yes. In 2015 a very brief piece of legislation was adopted without many specifics. On April 14, 2016 the Ontario government released Bill 186, the Ontario Retirement Pension Plan Act (Strengthening Retirement Security for Ontarians), 2016. It is 50 pages of legislative details about the new regime. More details have been promised in regulations that will be released in the summer of 2016.

Will it go away if the Canada Pension Plan is enhanced?

Don’t count on it. Federal, provincial and territorial finance ministers will be meeting in June of 2016 to discuss possible changes to the CPP. It’s a long and uncertain political road to get to an enhanced CPP. It may never happen. Meanwhile, the Premier of Ontario has repeatedly said that the Ontario government is pressing ahead with the ORPP.

What’s new?                                    

The recent introduction of Bill 186 in the Ontario Legislature (on April 14, 2016), with all of its detailed rules about the ORPP, is exciting for lawyers. Details in the Bill include a regime for enforcement, guidelines for the collection of personal information, unsurprising points about the treatment of pensions earned under the ORPP on marriage breakdown, death, and so on. Many of these details are not new, so the Bill is less exciting for employers.

One interesting new detail in the Bill applies to directors of corporations. If they receive a “stipend or remuneration” for their service as a director, they will be subject to the ORPP unless an exemption applies.

Want more information?

Contact any member of the Dentons Canada pension group, or click on the following links:

 

 

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Ontario Retirement Pension Plan: a guide