Funding

• Author: Ari Kaplan/Mitch Frazer
• Pages: 385-444

385

CHA PTER 7

FUNDING

A. INTRODUC TION

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 h e PBA) and is what qualitatively

distingui shes pension plans from other forms of retirement compen-

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

funding is to ens ure that contributions associated wit h pension benef‌its

are made into the pension fund reg ularly throughout the working life

of the employee, and invested prudently, so that the necessar y funds

will exist upon retirement to pay the pension and other benef‌its that

were contained in the plan text or other wise were part of the “pension

promise.” The purpose of adequate funding standards i s to enhance

the security of pen sion benef‌its for employees by mandating minimum

funding levels, regulat ing the timing of payments to pension fu nds, and

ensuring th at pension funds are invested prudently.

Without these rules, the receipt of an employee’s pension would be

contingent on the liquidity 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 requireme nts 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].

PENSIO N LAW386

Who is more interested in t he solvency of a pension plan tha n its

members, who are either depen ding upon it as a source of income in

their retirement ye ars, or looking forward to the d ay when they will,

or must? 3

Statutory solvency funding requirements apply almost exclusively

to def‌ined benef‌it (DB) pension plans, since a def‌ined contribution (DC)

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

contributions to the pension fund are remitted. In a DB pension plan,

the amount of an employer’s required contribution is largely determined

according to assumptions made by t he plan actuary. These assumptions

take into account the demographics of the plan a s well as economic and

personnel factors, such as future in f‌lation, salary incre ases, expected

investment return, retirement ages, li fe expectancy, and other variables.

Over time, the cost of a DB plan is determ ined by the benef‌its and

expenses paid less investment earnings. In order to fund a DB plan in

an orderly and systematic manner, the cost of the pension plan must,

therefore, be allocated to time per iods using actuarial cost method s and

assumptions to determi ne a current service cost, or “normal cost,” for

each year and an “actuar ial liability” as of the valuation date.

This chapter describes the rules concerning contributions to an

ongoing DB pension plan and the actuarial valuations and reports that

must be prepared and f‌iled at periodic and other pre scribed intervals and

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

ment of the pension fund. Special fu nding rules and exceptions exist for

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

(JSPPs), and target benef‌it plans (TBPs). In addition, in 2020, some of the

solvency rules across the countr y were temporarily revised or, in some

cases, frozen in re sponse to the COVID-19 pandemic.

B. CONT RIBUTIONS

1) Introduction

The PBA identif‌ies cer tain terms rel ating to pension contributions that

must be included in the plan text and pre scribes rules applicable to

employees and employers who make those contributions. The most sig-

nif‌icant responsibility in relation to pension contributions, however,

falls upon the plan admi nistrator. While the administ rator does not

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

Funding 387

make contributions, it must nevertheless ensure that all contributions

that are required to be m ade are properly remitted to the pension fund in

a timely manner by tho se persons who are responsible for making them.

2) Plan Design Requirements

a) Introduction

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

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

registration if the formula for calculating the employer’s contributions

to the pension fund is var iable at the discretion of the employer5 or

does not provide for funding sucient 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 liabi lity” and

applicable “solvency def‌iciency” under the plan.7

b) Multi-employer pension plans, jointly sponsored pension plan,

and target benef‌it plan 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 sometimes jointly sponsored)

DB 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 col-

lective agreement. In TBPs,10 the employer’s contribution obligations are

also f‌ixed, and the se 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 un funded liability and,

except in the case of MEPPs, any reduced solvency def‌iciency.12 Furt her,

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

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

5 Ibid, s 14.1(2).

6 Ibid, s 55(1).

7 Ibid, Reg, s 4(1). These terms ar e def‌ined Section C(2), below in thi s chapter.

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

9 Ibid, s 1(2).

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

claimed and re gulations had not yet been rele ased.

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

12 Ibid, s 10(3)1.