Are there legal issues for pension funds making charitable donations right now?

This isn’t the first time the Caisse has supported philanthropic endeavours. In fact, it supports a variety of these causes annually, said Yann Langlais-Plante, a media, communications and public relations advisor at the Caisse, in a statement emailed to Benefits Canada. “In our view, our philanthropic action is part of being an active member of the community.”

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The BCI, on the other hand, has an ongoing program that encourages employees to work with causes of their choice one business day per year without using personal days or vacation time. “BCI puts clients at the forefront of all decisions and this is no different,” said Ben O’Hara-Byrne, a BCI spokesperson, in an emailed statement. “We encourage employees to spend one business day each year working with a worthy cause and, since they can’t use the program right now, BCI opted to make this donation in lieu as a recognition of our ongoing commitment to the community during this crisis.” 

Not so simple

When it comes to financial donations to charities, one item for pension funds to consider is tax compliance, notes Randy Bauslaugh, head of the national pensions, benefits and executive compensation practice at McCarthy Tétrault LLP.  Since registered pension plans’ primary purpose is providing lifetime income to its members, using the plan for other purposes may affect their compliance with the tax rules.

Further, plan sponsors should consider their fiduciary duties, he says. “The focus of fiduciary responsibility in a registered pension plan is to comply with the terms of the plan and deliver the benefits that are promised under the plan, not other things.”

Indeed, a plan sponsor’s fiduciary duty involves carrying out the purpose of trust, which is delivering lifetime pension income. “Without more evidence that this is somehow carrying out that fundamental purpose of delivering retirement benefits, I fail to see how a charitable donation to provide economic relief from the effects of COVID-19 is consistent with that trust purpose,” says Bauslaugh. “Now, maybe they can come up with a rationale that would be acceptable by a court or the majority of their beneficiaries, but I’d need to see it.”

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Whether a pension plan can donate to a charitable cause may depend on the cause, says Mitch Frazer, partner and chair of the pensions and employment practice at Torys LLP. “Is it doing something that supports someone’s school or educational initiative? Maybe that doesn’t fall in that category. If it’s a COVID-19 relief fund, which helps save lives of potential members or the beneficiaries, or makes society better, or helps cure this and then helps the market, I think you have a much better argument.”

The current context isn’t like a traditional recession such as the global financial crisis, he adds. In that case, when financial markets started to collapse, pension funds would give back by trying to prop up companies and create general economic value. “They were helping the economy because they had money to do so. But now an elephant — a.k.a., the government — has sat on the economy. And so, in order to get the elephant off the economy, you have to fix health. I would argue that a pension fund doing it within reason here is helping to fix a symptom of what is suspending our economy.”

Another consideration for plan sponsors is the size of the contribution compared to the size of the plan, says Frazer.

Simon Archer, partner at Goldblatt Partners LLP, highlights the distinction between a pension fund acting as an operations manager and employer compared to one that acts as a pension fund investor. For instance, a pension fund as an employer would have a budget for operational activities, which could include charitable giving as part of its communications and marketing budget. But it would be a separate question for a board of trustees to donate money to charities as an investment activity rather than as an act of operations management.

For example, if an organization’s management has an annual operations budget and has given employees days off for charitable activities in the past, says Archer, choosing this year to donate a similar amount to charity instead is a different decision than asking about fiduciary issues. Rather, it’s a decision about how management allocates its annual budget and would likely be permitted.

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He also notes that pension funds may also consider whether their operational budgets are consistent with regulatory requirements for expenses from pension funds.

Different shapes and sizes

For registered pension plans in general, Bauslaugh has concerns about charitable donations, but he acknowledges some pension plans are established by statute. “They’re not necessarily subject to all of the same requirements as, say, the run-of-the-mill registered pension plans. So you’d have to examine the terms and conditions under which they’ve been established versus the terms and conditions under which most registered pension plans are established.”

Some large pension funds, like the Caisse, for example, have broader economic mandates, highlights Frazer.

Susan Seller, partner at Bennett Jones LLP, notes a distinction exists between private plans and the larger public pension funds. “If you’re a large pension fund, like a public sector pension fund entity, that’s an institutional investor in its own right. They typically have policies around their charitable activities and any donations that they may make, and very specific objectives and policies that they follow including procedures for board approval, etc.”

But the concept of fiduciary duty does apply across the board, she adds.

Other ways to help

In the past, Archer has been asked about whether pension funds can donate to charity and he’s always said no. “These were smaller funds without the same kind of, what I’ll call, operating budget that others have, and you’re conservative advice is, if it’s not authorized under your trust agreement or as a legitimate expense of the pension fund in the administration of the fund, then you better not do it, or you better find another way to provide the community service.”

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Another option is for a pension fund to introduce a staff-led initiative, which it then supports as an employer and not a pension fund trustee. “That’s not going to be second-guessed by a beneficiary who says, ‘Why are you giving money away when my pension is underfunded,’ or something like that,” says Archer.

Further, pension plan sponsors can provide employees with paid-time-off to do good deeds like delivering meals, suggests Frazer. “There are a lot of ways you can actually help people creatively.”

Dot the i’s and cross the t’s

Overall, the topic of pension plans donating to charity is a tricky legal issue, says Bauslaugh. “Unfortunately, it’s one of those things where you might say, ‘It sounds like a good idea, let’s check it out with legal counsel.’ And I’m not saying that as a make-work project for lawyers. I just think you’re in a fiduciary position to manage a plan to provide retirement benefits, so you really need to think twice about using those plan assets to do something other than that.”

In addition to consulting with legal counsel, pension plan sponsors should also look at their mandate, ensure it fits with their bylaws, make sure their boards are OK with this shift in policy and ensure the contribution is reasonable, notes Frazer.

And plan sponsors or pension funds that go down this route should have a policy to address the objectives and parameters of this type of donation, as well as the procedure for approving it, says Seller. 

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