East Side Story

While a general sense of economic optimism still prevails, Atlantic Canada has experienced the same problems stemming from recent financial market events as other regions. Defined contribution (DC) pension plan sponsors are worried about how to support plan members in these uncertain times. And those same plan members—especially those at or approaching retirement age—are questioning the viability of their individual retirement plans. Defined benefit (DB) plan sponsors have seen a rapid deterioration in the financial position of their pension plans in 2008, particularly in the last four months. There are significant deficits in many DB pension funds, including the large provincial public sector plans.

Pension Developments

The past year has seen considerable activity in the pension environment in Atlantic Canada. From court cases to legislative change and review, it’s been a busy year for employers and others connected to the pension industry.

Plan Terminations – The primary focus of much of the legislative change in the Atlantic region over the year has been the protection of members, particularly upon termination of the plan. Several relatively recent business closures have helped sharpen this focus for legislators.

Starting in 2004—and with litigation that continues through the court system to the present day—the bankruptcy of the St. Anne-Nackawic Pulp Mill in New Brunswick alerted people on the east coast to the significance of the personal toll that pension plan terminations can take. As a sponsor of two underfunded pension plans in New Brunswick, St. Anne-Nackawic did not have the assets to satisfy plan deficiencies when it went bankrupt in 2004. Even if the assets had been there, New Brunswick law in force at that time did not require the company to take financial responsibility for plan deficits to ensure that full benefits would be paid.

Observers and affected individuals alike were surprised and disturbed to see the priority of payment rules under New Brunswick pension law in action in these events. Those rules established classes of payments to be made in a specified order, with nothing payable to a subsequent class until the full entitlement of the preceding class was satisfied.

Placing those entitled to an immediate pension in a class preceding others with accrued benefits but not yet eligible to retire effectively secured full (or virtually full) payment for pensioners and active members who had reached their early retirement dates, but left little or nothing for the others. In some cases, this resulted in members with long service losing their accrued benefits because they were just shy of age 55, when they would have been eligible for early retirement. Controversially, these rules were retroactively modified for the St. Anne-Nackawic situation. The general rules on benefit priority were also revised to avoid such drastic distinctions in future cases.

While pension plans in a deficit position had certainly terminated in New Brunswick before, plan sponsors had either voluntarily made good on the promised benefits or, if benefits had been reduced, the scale of the plan’s collapse and reductions in benefits were not comparable to the St. Anne-Nackawic case. St. Anne-Nackawic resulted in neighbour pitted against neighbour, as pensioners and other plan beneficiaries struggled to ensure a measure of personal financial security out of a sadly deficient fund.

Communities in Nova Scotia have also experienced the devastating impact of industrial closures, including the implications for pension plan rights. Since the Cape Breton Development Corporation ceased operations in 2001, the jobs and economic spinoffs have been deeply missed, but at least the affected workers had the security of fully funded pensions and the additional financial support that came from the determination of employee ownership of plan surplus. However, the closure of the TrentonWorks railcar plant in Trenton, N.S.—which employed 330 people in a small town and had operated there since 1872—has been a different story.

When TrentonWorks announced that it was ceasing operations in the province in early 2007, workers faced not only job losses but also the partial loss of pension benefits, as the company’s pension plan was not fully funded. Like New Brunswick at the time of St. Anne-Nackawic’s bankruptcy, Nova Scotia did not require an employer to fund pension plan terminal deficits. There was a well-organized outcry following the TrentonWorks closure announcement, based on the realization that pension plan members would not receive the full value of benefits they thought they had accrued.

In large part because of these very public events, legislators in the region have been moved to action. In each of the Atlantic provinces with a pension regulatory scheme (New Brunswick, Nova Scotia and Newfoundland & Labrador), provincial governments have enacted changes to the applicable Pension Benefits Act to require employers to satisfy deficits on full or partial plan windups. Accompanying regulations to each of these changes spell out the details of these new funding requirements, but generally, employers have up to five years to satisfy a windup deficit.

When the Nova Scotia government reacted to the TrentonWorks situation, it took the unusual step of adopting legislation to require terminal funding with retroactive effect to capture the TrentonWorks windup already in process. However, the very organization that spurred the Nova Scotia change ultimately was not burdened with its effects, as the company ceased operations without sufficient assets to satisfy the new legislative requirement.

Paradoxically, these legislated solutions appear to be least effective in the situations of the greatest risk that they are meant to address. There is, as yet, no solution to the problem of windup situations involving insolvent employers.

Mandatory Retirement – The issue of mandatory retirement is obviously closely linked to pension arrangements. The decision to retire—and to be able to afford to do so—is often directly connected to an individual’s pension benefit entitlements. As Canadians, our basic protections against a variety of forms of discrimination are based on human rights laws. While these laws have not actively required employers to terminate employees at a particular age, they have historically permitted mandatory retirement practices by limiting age protections or exempting mandatory retirement from the normal protections.

Whether as a reflection of changing societal norms or in recognition of the economic realities of a shrinking labour force and longer lifespans, the state of human rights legislation on the issue of mandatory retirement has changed dramatically over the past several years. Nearly every Canadian jurisdiction now either prohibits the practice or will implement a prohibition in the near future.

In Newfoundland & Labrador, amendments to the human rights legislation prohibiting mandatory retirement policies took effect on May 26, 2007. Pension benefits legislation was amended at the same time to ensure a basic right to continuing pension benefit accrual for those staying in employment past the normal retirement age. The legislation also introduced a number of optional plan design choices for members working past that age.

Nova Scotia also introduced changes to its human rights rules on mandatory retirement in the same time frame as Newfoundland & Labrador. However, the proposals for an immediate prohibition were met with significant resistance from some quarters—most vocally, from the university sector. As a result, the changes to legislation were approved in 2007, but their implementation has been deferred to July 1, 2009. Even though the Nova Scotia human rights legislation currently still permits bona fide mandatory retirement policies, recent human rights commission jurisprudence in the province indicates that permission to impose mandatory retirement will be granted in relatively limited circumstances.

New Brunswick has perhaps had the most interesting year when it comes to the issue of mandatory retirement. In New Brunswick (Human Rights Commission) v. Potash Corporation of Saskatchewan Inc., the Supreme Court of Canada considered the language of the New Brunswick human rights legislation and, to the surprise of many observers, upheld the employer’s right to force an employee out at age 65. The New Brunswick human rights legislation allows mandatory retirement when required in the context of a bona fide pension plan. In the Potash case, a majority of the Supreme Court of Canada held that a bona fide pension plan is simply one that is not a sham intended to defeat human rights protections and that is otherwise legitimate (evidenced by factors such as registration under the Income Tax Act and pension standards legislation).

The future direction of mandatory retirement in New Brunswick is unknown, but New Brunswick legislators and employers are facing the same social and economic pressures that have led to mandatory retirement changes elsewhere. It may be reasonable to expect changes to these policies in New Brunswick in the near future, despite the Potash decision.

Pension Litigation

2008 has also been a year for some noteworthy pension litigation in Atlantic Canada. In addition to the New Brunswick Potash case, there have been two notable pension cases in Nova Scotia.

In Smith v. Michelin North America (Canada) Ltd., Everett Smith led a group of Michelin pensioners in an attempt to require Michelin to repay approximately $268 million to the pension fund, representing the value of contribution holidays that the company had taken over an extended period. Smith was unsuccessful in his application to the Nova Scotia Supreme Court, which held that the contribution holidays were validly taken. The court ordered costs of approximately $300,000 to be personally paid to Michelin by Smith, a retired forklift technician. The Nova Scotia Court of Appeal heard an appeal on the contribution holiday issue and costs in early October 2008. It upheld the trial decision on both the validity of the employer’s contribution holidays and the costs awarded against Mr. Smith—which were actually increased by $40,000 to include the costs of the unsuccessful appeal.

Another piece of interesting litigation took place in 2008 between the trustees of the Police Association of Nova Scotia (PANS) Pension Plan and a number of towns with police force employees participating in the PANS plan. The PANS plan was administered by trustees without representation from the towns where employees were plan members. The plan experienced a solvency deficiency and the Superintendent of Pensions ordered the towns to make payments to satisfy the deficiency, holding that they were “employers” with the responsibility to do so under the Nova Scotia Pension Benefits Act. The towns argued that they were not parties to the actual plan terms and that their obligation to contribute to the plan was limited by the terms of the collective agreements that allowed their employees to participate. The towns were successful in that argument at trial but unsuccessful when the matter was heard by the Nova Scotia Court of Appeal. The Court of Appeal reinstated the Superintendent’s order for the towns to make the solvency payments, holding that the overall scheme of pension standards legislation required that result. At least one of the towns involved has indicated its intention to appeal this ruling to the Supreme Court of Canada. The outcome will be interesting to many stakeholders—including the taxpayers of the small municipalities involved, who will ultimately pick up part of the tab if the Court of Appeal ruling stands.

Future Legislation

While recent pension legislation changes in the Atlantic region have been ad hoc and largely focused on solvency or other financial risk issues, there is a significant process underway that could lead to more wholesale change of the pension system.

Similar to the actions taken in Ontario, Alberta and British Columbia, the Nova Scotia government appointed a Pension Review Panel in early 2008. The panel issued a comprehensive discussion paper in the spring, soliciting input from pension stakeholders on issues ranging from funding requirements for DB plans and safe harbours for DC, to the institution of a province-wide pension plan for employees currently without private pension coverage.

The panel recently released an interim position paper, seeking input on its preliminary proposals. Perhaps the most notable element of these proposals is a fundamental restructuring of funding requirements for DB plans, which would see a significantly divergent funding standard applied to N.S. pension plans. It appears that the overall goal of harmonizing pension standards is taking a back seat to addressing the perceived weaknesses in the current regime. Regional differences appear likely. Assuming that support can be consolidated for pension change within Nova Scotia’s minority government, we expect to report some interesting legislative developments at this time next year.

The pace of pension activity has picked up considerably, and plan sponsors and members alike will be anxiously watching the outcomes of important court cases as well as legislative changes. But most of all, people will be watching the impact of the financial crisis on pension plans and on their personal plans for retirement. After a year of turmoil, many are hoping for fair winds and calm seas in 2009.

Lori Park and Doug Brake are principals with Mercer’s retirement, risk and finance business in Halifax.

lori.park@mercer.com; doug.brake@mercer.com

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the December 2008 edition of BENEFITS CANADA magazine.