Key Takeaways from the 2024 Pension & Benefits Seminar

November 29, 2024

On November 13, 2024, lawyers from McCarthy Tétrault’s Pension, Benefits & Executive Compensation Group and other experts at the firm came together to host the firm’s 14th Annual Pension & Benefits Seminar. This annual client-focused event canvasses legal and governance insights into key trends in the pensions and benefits space, as well as new legal developments and risks they present.

This article will highlight the key takeaways from the seminar.

Key Takeaway #1: Legislative and Regulatory Updates

Several legislative and regulatory updates impacting Canadian retirement plans have occurred over the course of this year. Three key updates are included below.

Governance

CAPSA Guideline No. 3: CAPSA has released an updated capital accumulation plan (“CAP”) guideline effective September 9, 2024. The following is summary of the key changes:

The updated CAP guideline sets out an expanded list of responsibilities for the plan sponsor. Importantly, the updated guidelines also recognizes that many plan sponsors will rely on service providers and that the plan sponsor’s primary activities will likely involve communication with its plan members and supervision of the service providers.
While the guideline also sets out responsibilities for service providers, it does note that the Plan Sponsor and Service Provider should have an agreement clearly defining the tasks and functions that the service provider is agreeing to perform.
The updated CAP guideline emphasizes the importance of adopting an ongoing member education strategy that is geared towards the purpose and intended outcome of the CAP and that is defined to improve member decisions and outcomes. The CAP guidelines set out a number of categories that the plan sponsor should consider when establishing their member education strategy, including information on the nature and features of the cap, outlining responsibilities of plan members, investment options, and fees/expenses.
The updated CAP guideline includes a section on automatic features. These may include automatic enrollment, default communication, or other automatic features. The guideline notes that where an automatic feature is used, it should be disclosed to plan members with the ability for members to opt-out, if applicable.
The CAP guideline states that on-going communication to members should be geared towards the outcome intended by the plan and include regular reporting on the member’s accounts and performance of investment. Additionally, the content required under the member statements has been broadened to include the allocation of contributions invested in the chosen investment option, notice any upcoming retirement or ability to start retirement income, and the member’s personal rate of return
Further, the CAP guideline sets out a number of considerations for plan sponsors to use when selecting investment options as well as requirements for where the plan sponsor has entered into an agreement with a service provider to provide investment advice or financial planning.
Lastly, a detailed governance framework is another requirement that has been introduced, and it must be tailored to the size and complexity of a plan sponsor’s CAP.

Risk

CAPSA Guideline No. 10: CAPSA has released a new risk guideline effective September 9, 2024. This guideline sets out best practices for pension risk management were implemented, covering areas such as investment risk governance, third-party risk, cybersecurity, and environmental, social, and governance (ESG) factors. Establishing a robust risk policy can assist pension plan administrators in meeting their fiduciary obligations. A suggested risk management framework is outlined to assist pension plan administrators in identifying, assessing, and mitigating risks. A written risk management policy or framework is recommended to document the plan's risk management approach. The risk management approach should be proportionate to the particular nature and circumstances of the plan. The guideline further provides detailed guidance on managing specific risks, such as third-party risk, cybersecurity risk, investment governance, ESG risk, and the use of leverage.

Other Considerations

Changes to Secured RCA Regime: The Canadian government announced changes to the Income Tax Act in the 2023 federal budget, specifically, targeting qualifying Secured Retirement Compensation Arrangements (RCAs). These changes, which were formally adopted in June 2024, aim to unlock billions of dollars in refundable tax (RT) that were previously trapped within these arrangements. By eliminating the requirement to remit RT on post-March 28, 2023 fees associated with RCAs and allowing employers to claim refunds equal to 50% of accumulated RT, the government seeks to provide businesses with additional financial flexibility and stimulate economic activity. In order to ensure that an employer is able to take full advantage of these changes, employers should (a) assess their arrangement to ensure it is eligible, (b) if yes, review current documents to assess the ability to amend them to fit within the new rules and to determine appropriate amendments (if any), (c) ensure that refundable tax equal to fees for the security are no longer remitted, and (d) prepare for next tax filing season for RCAs in order to make application for the partial refund of benefits paid by the employer.

Key Takeaway #2: A Plan Administrator’s Toolkit for Addressing Administration Errors and Drafting Mistakes

Rules for Fixing DC Contribution Errors

Under-Contributions

Permitted Corrective Contributions (PCCs) enable employers and plan members to rectify past under-contributions to a DC pension plan. These under-contributions can arise for various reasons, such as failures to enroll, contribute, or misidentify pensionable payroll codes. PCCs can be made to correct under contributions that occurred over the past 10 years, but they are subject to a limit of 150% of the annual money purchase limit, minus any previous PCCs the member contributed. If a PCC is made in installments, it is considered fully made on the date of the written commitment to make the correction.

PCCs can reduce an individual's RRSP contribution room for the following taxation year. If this reduction leads to a negative RRSP contribution room, the individual may not be able to make deductible RRSP contributions in future years until the negative balance is rectified. PCCs must be reported to the CRA using a T215 form within 120 days of the contribution. Importantly, there is no need to amend prior year T4 slips.

Over-Contributions

Plan administrators can correct past over-contributions to a DC pension plan by reporting a pension adjustment correction (PAC) on a prescribed information return (T10). This process restores the member's RRSP contribution room in the year the over-contribution is refunded. PACs are used to correct reasonable errors or avoid the revocation of a DC plan's registered status.

Similar to correcting under-contributions, PACs can only be used for over-contributions made within the past 10 years. Plan administrators may add a reasonable interest rate to over-contributions refunded to avoid plan registration revocation. Both the interest and the refunded over-contribution are generally taxable.

Plan administrators must report PACs within specific deadlines.

For over-contributions paid in the first three quarters of a year, the report is due 60 days after the quarter's end; and
For fourth-quarter payments, the deadline is before February of the following year.

Additionally, administrators must comply with relevant pension legislation when withdrawing amounts from a pension plan to correct these over-contributions.

Amending A Pension Plan to Clarify Plan Provisions

Pension legislation recognizes three types of amendments: regular, adverse, and void. In Ontario, the PBA mandates that plans be administered according to filed documents. Amendments must be filed and registered and the application meets the requirements of section 12 (i.e., file within 60 days after date the plan is amended). An amendment “may be made effective as of a date before the date on which the amendment is registered.”

New Ontario Regulatory Guidance on Pension Plan Amendments

FSRA's guidance focuses on "Retroactive Adverse Amendments," which, FSRA has determined are generally deemed impermissible under the PBA. If an amendment takes effect before it is filed, it must be shown that it does not have an adverse impact. Specifically, the negative effects on rights and benefits must be non-material, and any impacts should be mitigated through transparency, reasonableness, and equity.

The guidance indicates that FSRA has discretion to still register amendments with retroactive effect and potentially negative impacts based on several factors, such as : whether the amendment has been communicated, the extent of its impact, the reason for retroactive filing, and whether it treats members fairly and equitably. FSRA will also assess whether the amendment aligns with the administrator's fiduciary duty. FSRA’s guidance also notes that failure to comply with the PBA's amendment requirements could result in monetary penalties being imposed on the plan administrator.

Plan Rectification Court Applications

What if Registration of Amendment is Refused?

Guidance confirms that FSRA has the authority to issue a Notice of Intended Decision (NOID) to refuse registration of a plan amendment. If a NOID is issued, the plan sponsor has two options:

Appeal the NOID to the Financial Services Tribunal, challenging FSRA's interpretation of "Retroactive Adverse Amendments" as set out in the new Guidance and its authority to refuse registration under the PBA; or
Make a court application to rectify the plan text.

What Happens if the Retroactive Amendment of a Drafting Error is not an Option?

FSRA has stated that it does not have the authority under the PBA to correct drafting errors through the registration of a Retroactive Adverse Amendment. Instead, employers must seek court intervention by filing a rectification application with the Ontario Superior Court of Justice under Section 96 of the Courts of Justice Act (CJA). FSRA may, at its discretion, choose to support the employer's or plan administrator's application for rectification, but will evaluate whether to do so based on the "basis for the relief sought."

What are Rectification Applications and When are These Applications Available?

Rectification is an equitable remedy that allows a court to correct mistaken wording in a pension plan to reflect the true intentions of the parties. It is used to fix errors where the plan document fails to accurately record a clear and unequivocal agreement. The purpose of rectification is to give effect to the true intent of the parties, not to correct errors of judgment. When granted, rectification applies retroactively to the plan's original enactment date, ensuring the plan operates as if it had always contained the correct terms. The party seeking rectification must prove, with evidence, that the true substance of the parties’ intentions was, because of a mistake, not accurately recorded in the Plan. This is a subjective test, and the requirements for rectification were set out by the Supreme Court of Canada in Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56. The four requirements that must be satisfied are:

The parties had reached a prior agreement whose terms are definite and ascertainable;
The agreement was still effective when the instrument was executed;
The instrument failed to record accurately that prior agreement; and
If rectified as proposed, the instrument would carry out the agreement.

Where Rectification is Required

When preparing a rectification application, consider the following:

Evidence: Determine what evidence will be required, including whether witness testimony should be used
Timing: Plan the timing of your application carefully, ensuring it is brought at the right stage
Minimizing Objections: To make the process smoother, provide appropriate notice to plan members and engage in dialogue with FSRA to address any potential objections before filing the application

Case Law

Citibank Canada, 2024 ONSC 544

Citibank Canada sought rectification of a drafting error in its pension plan introduced during the 2002 Restatement. The error involved the calculation of adjusted pension benefits for Early Retirement and Deferred Vested Members. Prior to the 2002 Restatement, both groups were treated equally, but the 2002 Restatement mistakenly provided more generous benefits to Deferred Vested Members, which was not intended, approved, or reflected in actuarial valuations or plan communications.

The court found that the test for rectification was met because:

The parties had a prior, definite agreement to treat both groups equally, as evidenced by consistent treatment in earlier versions of the plan;
This agreement remained effective at the time of the 2002 Restatement;
The drafting error was a mistake, not a deliberate choice; and
Rectification would align the plan with the original agreement, restoring its intended terms.

IBM Canada Limited v. Dario Ceci and Jacinthe Ratelle, 2024 ONSC 1771

In November 2016, IBM's senior legal counsel identified a drafting error in the 2014 Restatement of the IBM Retirement Plan. The error mistakenly allowed credited service for members on long-term disability leave to accrue up to age 65, instead of the intended age 55, which was consistent with previous plan provisions. This issue was similar to mistakes found in another IBM pension plan, prompting IBM to take corrective action.

IBM sought regulatory guidance from FSCO, which advised amending the plan prospectively and seeking a rectification order from the court for retroactive correction. The Ontario Superior Court granted the application, confirming that the test for rectification was met. The court emphasized that allowing the error to persist would unfairly benefit members who could not have reasonably expected to receive the incorrect benefits.

Trends and Strategies for Managing Disputes Relating to Errors

Plan Administrator and Trustee Duties

Plan administrators and trustees are fiduciaries, meaning they owe plan members the following:

loyalty;
good faith;
acting in the best interests of the members; and
meeting the terms of the plan, and the provisions in the PBA (or other statutes).

Small Disputes

For small disputes, the first step to consider is whether the dispute can be resolved privately. This involves attempting to resolve the matter between the plan administrator and complainant. It can be beneficial to hire an actuary or another consultant to assist with the situation. However, it is important to note that communications with the actuary may not be privileged.

Large Disputes

However, a dispute can be escalated if:

the complaint or lawsuit draws the attention of other members;
the regulator determines that other members have been impacted by a similar issue; or
the plan administrator identifies that the issue affects additional members.

One common mechanism for escalating disputes is through a cooperative process that addresses and resolves the dispute, such as a class action proceeding.

A class action can lead to a binding outcome for the entire group, whether initiated by members and litigated, settled with the administrator, or pursued jointly by both parties. The result—either through a trial judgment or court-approved settlement—prevents individual members from filing separate lawsuits during and after the action, providing a single solution binding on all members (unless someone opts out). It is important to keep the regulator informed and potentially involved throughout the process.

Practical Tips – What Should You Do?

Plan administrators or trustees should ensure they have appropriate liability insurance; are knowledgeable about their plan and the PBA requirements; investment decisions are sound; and potential errors are identified. If a dispute arises, determine whether an error exists and, if so, assess its scope; identify the most effective, cost-efficient, and fair approach to engage with the affected parties and the regulator; and explore creative solutions for resolving the issue.

Key Takeaway #3: The Evolving Privacy Law and Technology Landscape – Impacts for Plan Administrators

Importance of Defining Plan Administration Roles, Responsibilities and Obligations in the Digital Ecosystem

The transition to digital technologies offers several advantages, including cost savings, time efficiencies, and enhanced member engagement. However, it also introduces new complexities and risks that need to be considered. The adoption of digital technologies in plan administration creates a new digital ecosystem, which brings unique responsibilities for those parties involved.

Not only are the interactions and relationships between parties involved in administering a pension plan complex, but data flows between various parties add another layer of intricacy, especially from a data and privacy management perspective. These data flows can differ in type, each carrying its own set of roles and responsibilities. Identifying whether parties occupy “controller”, “processor” or “sub-processor” roles for privacy law purpose is important because data flows can occur between various entities in different ways.[1]

The legal obligations and responsibilities for each party are very different. In a controller-to-processor transfer, the controller is responsible for ensuring that the processing complies with privacy laws, so the contract must specify the processor's limitations, security controls, data breach protocols, etc. In contrast, with a controller-to-controller transfer, each party is independently responsible for its own compliance with privacy laws once the data is disclosed. This means the focus shifts from restricting the other party's use of the data to ensuring adequate consent from the individual for the data disclosure, clearly defining the point of transfer of accountability, and having appropriate indemnities in place. Complicating matters is the fact that, between the same two parties, there can be multiple data flows of different types.

In addition to the complexities of personal data exchanges, there is another key issue related to data flows, whether personal or not. The core issue is that, legally, no one "owns" data. While discussions about data often involve the question of ownership, it's important to recognize that, under the law, data does not have an owner in the same way that other forms of property or intellectual property (IP) do. Since there is no specific owner with a defined set of rights, it is essential to clearly outline the rights and interests each party has in the data. This includes addressing possession, contracts, confidentiality terms, privacy rights, and IP.

Cyber Risk, Governance and Mitigation

The adoption of digital technologies has also led to increased scrutiny of cyber risk in pension plan administration. Cyber risk is a significant concern in pensions plan administration for several reasons, including the large volume of personal information, potentially substantial plan assets, and the likelihood of limited staffing resources dedicated to IT and cyber security. These factors make pension plans attractive targets to cyber criminals, highlighting the critical importance of robust cyber security governance, control and response processes.

These principles have recently been endorsed in regulatory guidelines released in either draft or final form by pension regulators across the country.^[2] The guidelines share several common themes. All plans are expected to have documented governance procedures in place to identify and mitigate cyber security threats, monitor activity, and respond to and report material incidents.

When considering cyber risk, it is also important to consider how liability for data breaches, cyber incidents, and similar issues are allocated or limited between a supplier and a customer contractually.

Key Takeaway #4: Recent Cases and Key Takeaways

Gorecki v. Byelyeychuk, 2024 BCSC 1589: This case concerns entitlement to survivor benefits from a BC-registered pension plan following the death of Bohdan Gorecki, who was married to Ellen Gorecki but had a common-law partner, Olha Byelyeychuk, in Poland. The key facts are:

Bohdan was married to Ellen when his pension was accrued solely in BC;
he separated from Ellen in 1998, moved to Poland, and allegedly married Olha in 2004 while still legally married to Ellen;
Bohdan began collecting his pension in 2012 and died in 2015;
the plan administrator determined that Olha, as Bohdan's common-law partner at the time of his pension receipt and death, was entitled to the survivor benefit, arguing that Bohdan and Ellen had been separated when he married Olha.

The case went before the BC Supreme Court (BCSC), which recognized Olha as Bohdan’s common-law partner under the PBSA but also acknowledged Ellen's rights under provincial family law. The court ordered an equal division of the survivor benefit between the two women. The decision highlights the importance of updating beneficiary designations and information.

Wong v. NYCERS, TRS and BERS, NY SC, Index No. 652297/2023, 7//2/2024: Here, the plaintiffs sued the trustees of key New York City public sector pension plans, alleging that the trustees divested approximately $4 billion in fossil fuel investments under political pressure from then Mayor Bill de Blasio. They claimed the divestments violated the fiduciary duties of loyalty and prudence, as the energy investments had outperformed the S&P 500 by 58%. However, the New York court dismissed the case, citing a lack of standing. The court relied on the U.S. Supreme Court's ruling in Thole v. U.S. Bank (2020), which held that participants in a DB plan with fixed payments cannot sue for fiduciary breaches if their benefits are unaffected by the investment decisions. The court emphasized that plaintiffs must demonstrate that he or she suffered an injury in fact that is concrete, particularized, and actual or imminent, which they failed to do since the divestment did not impact their benefits.

UK: The UK Pensions Regulator (TPR) took legal action against Stephen Smith, a former pension plan trustee, accusing him of making five prohibited loans and one prohibited investment from the pension plan. Smith was charged with failing to act in the best interests of the plan’s beneficiaries, lacking impartiality, and being negligent in his trustee duties. As a result, all scheme funds were lost when the loans were converted into a failed employer-related investment. Smith pleaded guilty to making five prohibited loans totaling around £700,000. He received a suspended jail sentence, 150 hours of community service, and was ordered to pay £1,000 in prosecution costs. The judge emphasized the serious harm pension mismanagement can cause, noting that it undermines public trust in the pension system.

Ontario: FSRA ordered the plan sponsor/administrator of Xylem Canada Company Pension Plan to submit outstanding regulatory filings for its pension plans for 2021 and 2022 within 10 days of July 31, 2024. FSRA had previously imposed $175,000 in administrative penalties on Xylem for failing to file required documents.

United Brotherhood of Carpenters and Joiners of America, Local Union 2103 v. Provencher, 2024 ABKB 291: A judge prevented trustees of a pension and health plan from taking control of their own appointment process. The case was brought by two union locals and a plan member, who filed a summary judgment application against several current and former trustees. The issue arose after amendments were made to the trust agreements, which excluded both the union and their members’ employers from any role in appointing or removing trustees. The changes removed definitions for union and employer trustees, eliminated the requirement that union trustees be members in good standing, and introduced a provision requiring board approval for all trustee appointments. One amendment also asserted the fund’s goal of complete independence from the union.

British Broadcasting Corporation v BBC Pension Trust Ltd [2024] EWCA Civ 767: The High Court and Court of Appeal reviewed the scope of a fetter on the scheme amendment power in the BBC pension scheme, specifically regarding the ability to change future service benefits and member contributions for Active Members. The BBC sought to alter these terms but faced a restriction in Rule 19, which prevented changes unless certain conditions were met.

The High Court upheld the view that the BBC could only modify future service benefits or member contributions where both the trustee and the BBC agree with the change and one of three conditions set out in Rule 19 has been satisfied. These conditions are:

the Scheme Actuary confirms that Active Members will not be substantially worse off as a result of the proposed changes; or
if they will be worse off, the Scheme Actuary confirms that Active Members will be provided with suitable alternative benefits (which must be substantially equivalent to the benefits being replaced); or
the Active Members as a group have agreed to the proposed changes at a duly convened meeting of Active Members.

The BBC's appeal was ultimately dismissed by the Court of Appeal, which interpreted the term "interests" in a simple, broad, and open-textured manner. The court emphasized that it is not tied to specific "rights," nor limited to "accrued" or "secured" rights. It also noted that "interests" is not constrained by any cut-off date or by reference to "past contributions" or “contributions already made.” The Court of Appeal highlighted that one of the most valuable interests for an Active Member is the ability to continue accruing pension benefits on specific terms as their service length increases, even if they have no legal right to remain employed with the BBC. As a result, the court found that the fetter in the pension scheme places a significant limit on the BBC's ability to close the scheme to future accrual or alter how benefits continue to accrue for Active Members.