Bill S-3: An Act to amend the Pension Benefits Standards Act, 1985 and the Office of the Superintendent of Financial Institutions Act (LS295e)

HOUSE OF COMMONS		SENATE
Bill Stage	Date	Bill Stage	Date
First Reading:	26 November 1997	First Reading:	30 September 1997
Second Reading:	22 April 1998	Second Reading:	21 October 1997
Committee Report:	14 May 1998	Committee Report:	5 November 1997
Report Stage:	5 June 1998	Report Stage:	18 November 1997
Third Reading:	8 June 1998	Third Reading:	20 November 1997

Royal Assent: 11 June 1998 Statutes of Canada 1998, c.12 N.B. Any substantive changes in this Legislative Summary which have been made since the preceding issue are indicated in bold print.

BILL S-3: AN ACT TO AMEND THE PENSION BENEFITS
STANDARDS ACT, 1985 AND THE OFFICE OF THE
SUPERINTENDENT OF FINANCIAL INSTITUTIONS ACT

In July 1996, OSFI released a discussion paper, Enhancing the Supervision of Pension Plans under the Pension Benefits Standards Act, 1985, which dealt with changes to the prudential and supervisory framework for federally regulated private pension plans. Bill C-85 was introduced in the House of Commons on 6 March 1997, but died on the Order Paper when the election was called. Bill S-3 is almost identical to Bill C-85.

Bill S-3 would introduce to the PBSA the basic thrust of changes already introduced to the legislation governing federally chartered financial institutions in Canada. Among the key changes in this regard are those in proposed section 11 of the bill (clause 10). The Superintendent would be empowered to take a variety of actions (such as issuing directives to plan administrators that certain actions cease or that certain others be undertaken) when he/she was of the opinion that a situation had arisen that threatened the safety and soundness of a plan.

In addition, as in the legislation governing federally chartered financial institutions, clause 6(2) would amend section 8 of the PBSA to charge the administrator with investing the assets of the fund in "a manner that a reasonable and prudent person would apply in respect of a portfolio of investments of a pension fund." Current regulations take a more mechanical approach. Additional safety and flexibility would be provided by the addition of this new measure. It means that the administrator would be expected to use techniques such as diversification and the appropriate matching of assets to liabilities so that the pension fund could avoid undue risks while obtaining a reasonable rate of return.

There are also aspects of the bill that are designed to enhance plan governance. For example, proposed section 7.5 of the PBSA would empower the Superintendent of Financial Institutions to require the administrator of a pension plan to hold a meeting to discuss issues specified by the Superintendent (clause 5). Further, the Superintendent would be able to participate in the meeting and require the administrator to invite specified persons to it.

The proposed changes would also deal with the controversial issue of surplus assets in a pension plan, where such surplus assets existed. In general, the treatment of surplus assets in a pension plan is determined by the pension plan itself, the trust document related to the plan, any collective agreement(s), communications to employees, legislation and court interpretations of all of these. Much of the current controversy about surplus is related to ambiguity and/or silence in these documents about how any surplus should be handled. Operationally, much of the controversy could be avoided through clear communication, in plan documents and collective agreements and to employees, about how any surplus should be treated.

In addressing any surplus in a pension plan, two issues often arise: the withdrawal of surplus, and the use of surplus in an ongoing plan. Pension standards legislation generally places controls on the withdrawal of any surplus by the employer; these controls exist to protect the solvency of the plan and the potential or actual rights of employees and former employees to any surplus. Most generally, legislation requires the employer to demonstrate its entitlement to withdraw surplus. However, even where the plan text provides for the withdrawal of surplus, the courts may be called upon to interpret plan documents and the relationships created by them in order to determine ownership; in this case, the documents and communications noted above are relevant.

Proposed section 9.2 of the PBSA would address how any plan surplus might be refunded to the employer. If the employer could demonstrate that it was entitled to the surplus, regulatory requirements would have to be met and the Superintendent would have to give consent before the employer would be able to withdraw the surplus.

An employer that was unable to demonstrate such entitlement would be able to gain access to the surplus by gaining support for a proposal for it to do so from (1) at least two thirds of the members of the plan and (2) at least two thirds of former members of the plan and others entitled to a benefit under the plan. In addition, regulatory requirements would have to be met and the Superintendent would have to give his/her consent.

If, however, the employer proposal, while not receiving the two-thirds necessary support, did receive support from more than half of each of the two groups, the employer could submit the proposal to arbitration. If the pension plan was terminated, arbitration would be mandated. If the employer and the two groups voting could not agree on an acceptable arbitrator, he or she would be chosen by the Superintendent. The arbitrator’s decision would be final.

Clearly then, where entitlement to the surplus has not been spelled out, this bill would implicitly assign property rights to the surplus to those who were entitled to benefits from the plan and to the employer, provided that the employer gained the support of the other beneficiaries. To win such support, the employer would in all likelihood have to pay a price - sharing the surplus with those whose support it needed.

To avoid problems of entitlement to the surplus in the future, proposed section 10(6) of the PBSA would require every pension plan filed for registration to provide for the use of surplus during the continuation of the plan and on its termination.

Finally, clause 4 of the bill would also make provision for federal-provincial co-operation in the regulation of pension funds. The Minister would be empowered to enter into agreements with a province to administer, apply and enforce that province’s pension legislation. Existing legislation limits such agreements to administration of the province’s pension legislation.

Clause by clause discussion of Bill S-3
Source: The Office of the Superintendent of Financial Institutions Canada

Source: OSFI, Enhancing the Supervision of Pension Plans under the Pension Benefits Standards Act, 1985, July 1996, Office of the Supperintendent of Financial Institutions Canada.