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How To Minimize The Risk

By: Jean-Pierre Laporte & Sheldon Wayne

While surplus sharing issues capture most of the attention of pension plan members and sponsors these days, the next big issue could be the question who pays for plan expenses. Jean- Pierre Laporte and Sheldon Wayne, of Hicks Morley Hamilton Stewart Storie LLP, look at some of the legal aspects of pension expense.

With the erosion of the large actuarial surpluses that accumulated in the 1980s and 1990s, surplus ownership battles are expected to be less of an issue in the foreseeable future. Even the current flurry generated by the Supreme Court of Canada’s 2004 decision in Monsanto Canada Inc. may ultimately turn out to be a temporary blip affecting mostly partial windups which occurred in the 1980s and 1990s. Perhaps, in an effort to replenish today’s sagging pension funds or create new surplus, a new battleground between plan sponsors and members may be emerging: payment of expenses from a pension plan’s assets. This article examines the various risks that a plan sponsor may face and the strategies that can be adopted to deal with these risks and minimize the plan sponsor’s legal exposure in this area. The strategies discussed in this article are highly dependent on the specific facts and plan documentation related to each case. Legal advice specific to the plan and the circumstances should always be sought in determining the strategy that is appropriate for a particular case.

The Context
Recent developments in pension case law highlight the importance of referring to the plan documentation (including, in some cases, historical plan documentation) in relation to the payment of expenses out of pension funds. This area of the law is unsettled, but raises certain warning signals for employers.

In the Kerry (Canada) Inc. v. DCA Employees Pension Committee case, the Financial Services Tribunal of Ontario required the plan sponsor to repay to the pension fund, with interest, expenses relating to consulting advice for a proposed plan conversion from a pure Defined Benefit (DB) arrangement to a hybrid plan with a Defined Contribution (DC) component. The tribunal distinguished between pre-conversion expenses (advice on how to effect the conversion) for which the employer was to be responsible and post-conversion expenses (implementation of the conversion) which were eligible for payment from the pension fund. The decision was based in part on the wording of the trust agreement which said that assets could only be used for the exclusive benefit of the beneficiaries of the fund and no amendment could provide otherwise. The tribunal interpreted this to mean that expenses must be primarily for the benefit of members, which the pre-conversion expenses were not.

In Markle v. The City of Toronto, the trustees of a pre-OMERS pension plan established through a bylaw sought the direction of the court as to whether a proposed bylaw (designed to permit city plan administration expenses incurred in a number of previous years to be refunded from the pension fund to the city without trustee approval) amounted to a partial revocation of the trust and was, therefore, invalid. The original bylaw stated that the city was to bear the operational and administrative expenses of the plan and fund. This was later relaxed somewhat to permit some expenses to be paid from the fund, subject to trustee approval. The city continued to be obligated to provide its own staff as needed for the operation of the plan. The bylaw did not reserve to the city a power to revoke the trust. The trial judge and Court of Appeal found that the assets in the pension plan were impressed with a trust in favour of the beneficiaries of the fund and that the proposed bylaw to fetter the discretion of the trustees and pay a retroactive reimbursement to the city could not stand.

In the end, both cases focused on the original purposes of the trust. Amendments to these purposes were found to partially revoke the trust. An appeal of the Kerry case by the DCA Committee has been heard by the Divisional Court which has reserved judgment. Despite the fact that Markle is arguably at odds with the leading Supreme Court of Canada case on treatment of surplus in a trust prior to plan windup, leave to appeal the Markle decision was refused by the Supreme Court of Canada. It will be important to monitor the development of case law dealing with plan expenses until such time as these issues are clarified.

The payment of expenses must also comply with applicable pension laws.

In Ontario, for example, only those reasonable expenses which are related to the administration of the pension plan and permitted by the common law or provided for in the pension plan can be paid out of a pension fund. This is the result of subsection 22(9) of the Pension Benefits Act (PBA). Subsection 22(11) of the PBA further specifies that an agent of the administrator of the pension plan is not entitled to payment from the pension fund other than the usual and reasonable fees and expenses for services provided by the agent in respect of the pension plan.

In short, the legal principles governing expenses paid from a fund are that they must be reasonable and related to the administration of the pension plan, and they must comply with the plan documents.

The Risks
With the rise in class actions in various provinces, there is even greater potential for employees and former employees to band together and challenge employer practices, particularly where the financial benefits of doing so are potentially significant. In the case of a pension plan from which expenses have been paid, this could involve a claim for return of many years’ worth of payments, plus the investment income that these monies would have generated.

In the unionized setting, improper expense payments could be grounds for a grievance if the issue falls within the scope of the collective agreement in any particular instance. While disputes as to the right of the employer to use plan assets for expenses may put a strain on the relationship between the parties to a collective agreement, in most situations, plan expenses cannot be arbitrated. If a breach of the PBA has occurred, then, subject to a five-year limitation period, the employer (or a director or officer who authorized or acquiesced in the breach) could be charged with an offence under the PBA. It is expected that this avenue of recourse would rarely be used for expense payment situations, but it is available. A fine could be levied of not more than $100,000 for the first conviction and not more than $200,000 for each subsequent conviction.

Where the costs of preparing legal opinions on pension plan administration matters are charged to the fund, and while the cost of the opinion may be a proper expense, there is also a risk that the advice contained in the lawyers’ product could lose any privileged status it may have had. In Camosun College Faculty Association v. College Pension Board of Trustees, the trustees of the pension plan had sought a legal opinion on whether an employee could remain employed by the college and still receive a pension under a phased retirement provision. The costs of the opinion were charged to the pension fund. The petitioners sought a copy of the opinion, but the respondent trustees refused. The court decided that legal opinions for the proper administration of a trust, being a joint interest of the trustees and beneficiaries of the trust, are not protected by solicitor- client privilege as against such beneficiaries when the costs of those opinions are paid out of trust funds, except in limited circumstances. As a result, the trustees were not able to claim the privilege to avoid disclosing the opinion to the members.

The Strategies
In light of these risks, plan sponsors may want to consider the following guidelines to minimize legal challenges:

The wording in current plan documents should be reviewed to determine the scope of fees that may be payable from the plan. If the plan sponsor, administrator, or trustees, as the case may be, wish to go further, particularly in the case of a plan funded by a trust, they can seek a legal opinion as to the ability to pay expenses from plan assets. Agents and advisors hired to assist the administrator in the administration of the plan should be required to provide a reasonable breakdown as to the nature of their fees to allow a more appropriate determination of which fees may be payable from the fund.

Plan design changes
If an actuary or consultant is retained to advise on proposed plan design changes which are not required by law, it is necessary to consider whether pre-implementation expenses should be separated from implementation expenses. Implementation expenses cover those related to the administration of the plan (including disclosure to plan members and compliance with regulatory requirements) and which are consistent with the plan documents.

Plan merger
Plan sponsors may wish to consider and seek legal advice as to whether the actuarial and legal fees to effect a merger should be separated into those that are related to the planning of the merger and those that are related to the carrying out of the merger and meeting the regulators’ requirements. As well, the documentation of the merging plans should be reviewed and legal advice sought to determine what they say about plan expenses and about the use of assets in general, especially in light of the 2003 ING v. Transamerica decision of the Ontario Court of Appeal.

Plan windup
Where the regulatory authority has ordered a full or partial windup, or the employer has reasonably determined that the circumstances would justify an order by the regulatory authority, the resulting fees to accomplish the windup would normally be eligible for payment from the plan’s assets, again subject to the terms of the plan documentation. In the case of a partial windup, during the period that assets and liabilities for the partial windup group reside in the plan, including surplus for distribution pursuant to the Monsanto case, it would be appropriate as well to take into consideration any general administration expenses of the plan to the extent that the windup group’s continued existence can be said to contribute to these fees. A reasonable method should be used to allocate these fees between the partial windup and remaining groups.

Given that the regulator in Ontario – the Financial Services Commission of Ontario (FSCO) – is required to approve all payments made from the pension fund of a fully or partially wound up plan, a high degree of scrutiny may be applied to expenses arising in these situations under Ontario-registered plans. Therefore, as can be said of all expenses, it is prudent to retain proper documentary support.

Surplus reversion application
In Ontario, FSCO considers the payment of expenses associated with a surplus application to be a payment to the employer and requires full disclosure in any surplus agreement if these expenses are to be paid from the surplus. It is, therefore, common for surplus sharing agreements between the employer and plan members to provide for specified expenses to be deducted from the surplus before distribution to the parties. An employer wishing to take advantage of this will want to ensure that there is clear language in the surplus sharing agreement.

Collective bargaining
FSCO policy A200-100 provides that neither employer nor union consulting or actuarial fees associated with analyzing and preparing costings of bargaining proposals are properly chargeable to a pension fund. Fees incurred to prepare and file amendments to a pension plan resulting from negotiations could, subject to the terms of the plan documentation, be charged to the fund.

Non-pension expenses
Fees charged for non-pension plan matters (such as supplemental top-up retirement arrangements) should not be paid from the assets of a pension plan. If consultants are providing advice on a number of pension and non-pension matters, the expenses should always be broken down on the invoice into their separate components.

Legal expenses
As we have seen, paying legal expenses related to an opinion from a plan fund may result in the loss of its privileged nature and be subject to disclosure in some circumstances. Therefore, it may be worthwhile to consider paying the cost of a legally sensitive opinion from non-pension fund sources.

Plan Amendments
Whether an amendment to allow additional expenses to be paid from a pension fund is valid will depend on a number of factors:

Depending on the circumstances, an employer may want to consider a court application to either confirm or vary the current expenses language. The consent of the plan members may be required. A class action proceeding could also be used by the employer to achieve a result that binds the members and beneficiaries.

Employers will also want to consider whether such an amendment could be considered by the Superintendent of Financial Services to be adverse. In that case, the special notification procedure set out in section 26 of the PBA would be triggered: notice to members which invites comments to be made to the Superintendent of Financial Services.

In unionized environments, the terms of the collective agreement may prohibit any plan amendments of this sort without the union’s agreement.

Members and unions are increasingly raising questions about the expenses that are paid from pension funds. Because of the heightened risk of litigation and the highly charged nature of plan expenses, employers will want to:

Markle and Kerry will not likely be the last word on expenses, so now is a good time to act.

Jean-Pierre Laporte and Sheldon Wayne are with Hicks Morley Hamilton Stewart Storie LLP.

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