Funding

• Author: Ari N. Kaplan
• Profession: Partner, Koskie Minsky LLP. Faculty of Law, University of Western Ontario
• Pages: 384-436

CHAP TER 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 Benef‌i ts Act (t he PBA) and is what qualitatively

distingui shes pension plans from other form s of retirement compen-

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

funding is to ensure that contributions as sociated with pen sion bene-

f‌i ts are paid regularly and throughout the working life of the employee,

and invested prudently, so that the neces sary fund s will exi st upon

retirement to pay the pension and other benef‌i ts t hat were promised in

the plan text. The purpos e of adequate fu nding standards is to enhance

the security of pen sion benef‌i ts by ma ndating minimum funding level s

and regulating the timing of payments to p ension funds.

The PBA’s fundi ng 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 pay able. As one court

asked, rhetorically:

Who is more interested in t he solvency of a pension pl an than its

members, who are either depe nding upon it as a source of income in

1Pension Benef‌i ts Act, R.S.O. 1990, c. P.8, ss. 55–62 [PBA]. Pension plans must

also be fund ed in accordance with the req uirements of the Income Tax Act,

R.S.C. 1985, c. 1 (5th Supp.), as amended [ITA].

2St. Marys Paper Inc. (Re) (1994), 116 D.L.R. (4th) 448 at 460 –61 (Ont. C.A.), ap-

peal dis missed at (1996), 26 O.R. (3d) 416 (S.C.C.) [St. Mar ys Pape r].

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Funding 385

their retirement ye ars, or looking forward to the day when they w ill,

or must?3

Statutory solvency funding requirements apply almost exclusively

to def‌i ne d benef‌i t pension plans, since a def‌i ned contribution pension

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

tions to the pension fund are rem itted. In a def‌i ned benef‌i t 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 pla n and eco-

nomic and personnel factors, such as incre ases in sal aries and the ex-

pected investment experience.

Over time, the cost of a def‌i ned benef‌i t plan is determined by the

benef‌i ts and ex penses paid, less investment earnings. In order to fund

a def‌i ne d benef‌i t plan in an orderly and systematic manner, the cost of

the pension plan must, therefore, be allocated to time periods u sing

actuarial cost methods and assumptions to deter mine a current service

cost, or “normal cost,” for each year and an “actuar ial liabil ity” as of

the valuation date.

This chapter describe s the rules concerni ng contributions to an

ongoing pension plan, the investment of the pension fund, and the ac-

tuarial valuations and reports t hat must be prepared and f‌i led at peri-

odic and other prescribed intervals and which give a snapshot of the

health of the pension fund. Sp ecial funding rules and exceptions exist

for multi-employer pension plans (MEPPs) and jointly sponsored pen-

sion plans (JSPPs), which are also discusse d in this chapter.

B. CONTRIBUTIONS

1) Introduction

The PBA identif‌i es certain terms relating to pension contributions t hat

must be i ncluded in the pl an text and pre scribes r ules applicable t o em-

ployees and employers who make those contributions. The most sign if‌i -

cant responsibility in relation to pension contributions, however, falls

upon the plan admini strator. 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 t hem.

3Collins v. Pension Commission of On tario (1986), 31 D.L.R. (4th) 86 at 98 (Div. Ct.).

PENSION LAW386

2) P l a n De sig n Re qu i rem e nt s

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 suff‌i cient to provide the benef‌i ts promised

and payable under the pension plan.6 Signif‌i cantly, 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 liabi lity” and

“solven cy de f‌i ciency” under the plan.7

b) MEPP and JSPP rules

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

cerning an employer’s contribution obligation with respect to MEPPs

and JSPPs. These are jointly-trusteed and sponsored def‌i ned-benef‌i t

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

pension plan is usua lly limited to a f‌i xed amount set out in a collective

agreement. In MEPPs and JSPPs, there must still be a provision for the

funding of benef‌i ts that sets out the employer’s contribution obligations

in respect of the plan.8 However, the pension plan must also descr ibe

the employees’ obligation to make contributions under the plan, “in-

cluding contributions in res pect of any going concern unfunded liability

and solvency def‌i ciency.”9 Further, the plan terms may limit the employ-

er’s contribution obligation to “such amounts set out in the applicable

collective agreement as are required to be paid by the employer.”10 In

other words, a MEPP or JSPP need not require that the employer pay any

unfunded liabilities or solvency def‌i ciencies, if that is the nature of the

pension bargain. As a m atter of public policy, this increased f‌i nancial

risk to the security of employee pension benef‌i ts is the trade-off of joint-

employer-employee sponsorship of a pension plan.11

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

5 Ibid., s. 11(2).

6 Ibid., s. 55(1).

7 PBA Reg., s. 4(1). These terms are def‌i ned in Chapt er 7, section C(2).

8 Ibid., s. 6(1) and PBA, s. 10(3)2.

9 PBA, s. 10(3)1.

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

11 S ee Chapter 6, section A(1)(d).