Funding

• Author: Ari Kaplan, Mitch Frazer
• Pages: 377-432

377

CHAPTER 7

FUNDING

A. INTRODUCTION

A pension plan must be pre-“funded.”1 It cannot be a pay-as-you-go

arrangement. This feature is “central to the regulatory scheme”2 estab-

lished by the Pension Benef‌its Act (t he PBA) and is what qualitatively

distinguishes pension plans from other forms of retirement compen-

sation arrangements. The objective of “going-concern” and “solvency”

funding is to ensure that contributions associated with pension bene-

f‌its are paid regularly throughout the working life of the employee, and

invested prudently, so that the necessary funds will exist upon retire-

ment to pay the pension and other benef‌its that were promised in the

plan text. The purpose of adequate funding standards is to enhance

the security of pen sion benef‌its by mandating m inimum funding levels

and regulating the timing of payments to pension funds.

The PBA’s funding rules exist to protect employees; without these

rules, the receipt of an employee’s pension is contingent on the liquid-

ity of the employer at the time the pension is payable. As one court

asked, rhetorically:

1 Pension Benef‌it s Act, RSO 1990, c P.8, ss 55–62 [PBA]; Pension plans must a lso

be funded in accord ance with the requirem ents of the Income Tax Act, RSC 1985,

(5th Supp), c 1, as amended [ITA].

2 St Marys Paper Inc (Re) (1994), 116 DLR (4th) 448 at 460–61 (Ont CA), appeal

dismis sed at (1996), 26 OR (3d) 416 (SCC) [St Marys Paper].

PENSION LAW

378

Who is more interested in t he solvency of a pension plan than its mem-

bers, who are either depend ing upon it as a source of income in their re-

tirement years, or look ing forward to the day when they wil l, or must?3

Statutory solvency funding requirements apply almost exclusively

to def‌ined benef‌it pension plans, since a def‌ined contribution pension

plan is, in essence, fully funded once the employer’s normal contribu-

tions to the pension fund are remitted. In a def‌ined benef‌it pension

plan, the amount of an employer’s required contribution is largely de-

termined according to assumptions made by the plan actuary. These

assumptions take into account the demographics of the plan and eco-

nomic and personnel factors, such as increases in salaries and the ex-

pected investment experience.

Over time, the cost of a def‌ined benef‌it plan is determined by the

benef‌its and expenses paid less investment earnings. In order to fund

a def‌ined benef‌it plan in an orderly and systematic manner, the cost of

the pension plan must, therefore, be allocated to time periods using

actuarial cost methods and assumptions to determi ne a current service

cost, or “normal cost,” for each year and an “actuarial liability” as of

the valuation date.

This chapter describe s the rules concerning contributions to an on-

going pension plan and the actuarial valuations and reports that must

be prepared and f‌iled at periodic and other prescribed intervals and

which give a snapshot of the health of the pension fund and the invest-

ment of the pension fund. Special funding rules and exceptions exist

for multi-employer pension plans (MEPPs), jointly sponsored pension

plans (JSPPs), and target benef‌it plans (TBPs).

B. CONTRIBUTIONS

1) Introduction

The PBA identif‌ies certain terms relating to pension contributions that

must be included in the plan text and prescribes rules applicable to em-

ployees and employers who make those contributions. The most signif‌i-

cant responsibility in relation to pension contributions, however, falls

upon the plan administrator. While the administrator does not make

contributions, it must nevertheless ensure that all contributions that

are required to be made are properly remitted to the pension fund in a

timely manner by those persons who are responsible for making them.

3 Collins v Ontario (Pension Commission) (1986), 31 DLR (4th) 86 at 98 (Div Ct).

Funding 379

2) Plan Design Requirements

a) Introduction

A pension plan must set out the method of calculating the contribu-

tions required by the pension plan.4 A pension plan is not eligible for

registration if the formula for calculating the employer’s contributions

to the pension fund is variable at the discretion of the employer5 or

does not provide for funding suff‌icient to provide the benef‌its promi sed

and payable under the pension plan.6 Signif‌icantly, every pension plan

must set out the obligation of the employer to pay the “normal cost” of

funding the plan, a s well as any “going concern unfunded liabil ity” and

“solvency def‌iciency” under the plan.7

b) MEPP, JSPP, and TBP rules

There is an important exception to the plan design requirements con-

cerning an employer’s contribution obligation with respect to MEPPs8

and JSPPs.9 These are jointly-trusteed and sponsored def‌ined-benef‌it

pension plans where the obligation of the employer to contribute to the

pension plan is usually limited to a f‌ixed amount set out in a collective

agreement. In TBPs10 the employer’s contribution obligations are also

f‌ixed, and these plans need not be jointly sponsored and are usually

not. In MEPPs, JSPPs, and TBPs, there must be a provision for the fund-

ing of benef‌its that sets out the employer’s contribution obligations in

respect of the plan.11 However, the pension plan must also descr ibe the

employees’ obligation to make contributions under the plan, including

contributions in respect of any going concern unfunded liability and,

except in the case of MEPPs, any solvency def‌iciency.12 Further, the

plan terms may limit the employer’s contribution obligation to “such

amounts set out in the applicable collective agreement as are required

to be paid by the employer.”13 In other words, a MEPP, JSPP, or TBP

does not require that the employer pay any unfunded liabilities or sol-

vency def‌iciencies, if that is the nature of the pension bargain.

4 PBA, s 10(1)(6).

5 PBA, s 14.1(2).

6 PBA, s 55(1).

7 PBA, Reg, s 4(1). These terms are def‌ined S ection C(2), below in this chapte r.

8 PBA, ss 1(3) & (4).

9 PBA, s 1(2).

10PBA, s 39.2(1). As of the date of public ation, section 39.2 had not been pro-

claimed and r egulations had not yet been rele ased.

11 PBA, Reg, s 6(1), and PBA, s 10(3)2.

12 PBA, s 10(3)1.

13 PBA, Reg, s 6(2)(b).