Legal Nature of the Pension

• Author: Ari Kaplan, Mitch Frazer
• Pages: 1-35

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CHAPTER 1

LEGAL NATURE

OF THE PENSION

A. INTRODUCTION

It is diff‌icult to pigeonhole pension law and regulation. Legal regimes

that import a regulatory component are often described by reference

to one of two broad purposes: one, statutory schemes that deliver a

social program by either confer ring a social benef‌it or regulating social

behaviour, or two, schemes that regulate economic behaviour with the

objective of providing stability and fairness in capital markets or cor-

recting a perceived imbalance in those markets. These conventional

and sometimes competing assumptions collide in the case of pensions.

On one hand, the establishment and maintenance of an employ-

er-sponsored pension plan is a voluntary or negotiated decision and,

therefore, a pension plan is part of the private law system derived from

contracts. On the other hand, provincial and federal pension legisla-

tion are products of social policy build ing. The original Pension Be nef‌its

Act required employers to establish workplace pension plans for their

employees. These were policy initiatives that downloaded onto the pri-

vate sector the delivery of a social program, regulated by government.

Pension law has evolved from that initial premise.

Pension law is framed by the dichotomy between two rationales:

one, that the law should defer as much as possible to private law con-

siderations underlying the common law, contractual, and property

rights of employers and employees. The other rationale is that pension

law should ref‌lect its deliberate occupation within the third pillar of

PENSION LAW

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Canada’s state-supported retirement delivery system. These legal prin-

ciples ask us to acknowledge the public policy role of pension plans

providing a minimum level of sustenance following an employee’s

working life. This dichotomy has produced a fertile breeding ground

for pension law jurisprudence and legislation as it has evolved since its

genesis a half-century ago.

B. OVERVIEW

1) Statistical Overview

It is often helpful in social sciences and humanities (and law) to begin

a textbook with a brief statistical overview of its subject matter. In the

f‌ield of pensions and pension law this is no exception. The changing

statistics over the years concerning pension plan membership, cover-

age, plan type, and registration mobilize the law and contextualize the

applicable legal and regulatory principles.

a) Introduction

On 1 January 2011, over six million Canadian workers participated in

19,463 registered employment-based pension plans.1

b) Plan design type

There are two basic type s of pension plan design: def‌ined benef‌it and de-

f‌ined contribution.2 A typical def‌ined benef‌it pension plan (DB) prom-

ises a pension benef‌it at retirement determ ined by a formula tak ing into

account a f‌ixed or tiered percentage multiplied by the employee’s length

1 Statistics Canada, Table 280-00016Registered pen sion plans (RPPs), members and

market value of asset s, by funding instrume nt, sector, type of plan and contributor y

status, Annua l [Statistics Canad a], CANSIM, online: w ww5.statcan.gc.ca/ca nsim/

a26?lang=eng&retrLang=eng&id=2800016&pattern=Registered+pension+plans

&tabMode=d ataTable&srchLan=-1&p1=1&p2=-1. On 1 January 2000 t here were

15,557 pension plans coveri ng 5.3 million workers and by 2004, the re were 14,777

pension plan s covering 5.6 million workers. See St atistics Canada, Pen sion Plans

in CanadaJanuary 1, 2000, Cat No 74-401-XPB (Ottawa: Minist ry of Industry:

Income Statist ics Division, Pensions and Wea lth Program, 2001) at 16 [Pension

Plans in CanadaJanu ary 1, 2000] and Statistics Ca nada, Canada’s Retirement

Income Programs, 2006 Ed, Cat No 74-507-XCB (Ottawa: Mini stry of Industry:

Income Statist ics Division, 2006) [Canada’s Retirement Income Programs, 2006].

2 There are numerous v ariations on these t wo types, including Target Be nef‌it Plans

and other “hybrid” plan s. See Chapter 3, Section B(2) for a more thorough discu s-

sion on plan desig n.

Legal Nature of t he Pension 3

of service in the plan and his or her f‌inal or career average salary at

retirement. Employer contributions to a def‌ined benef‌it plan are usu-

ally based on actuarial recommendations in which the actuary makes a

number of assumptions about the plan’s future experience, demograph-

ics, and salarie s, among other things. In a def‌ined b enef‌it plan, the bene-

f‌it, not the contribution, is def‌ined.

In a def‌ined contribution pension plan (DC), also called money

purchase plans, contribution rates are f‌ixed in the plan text and are

usually based on a percentage of the member’s earnings, a specif‌ic dol-

lar amount, or a specif‌ied number of cents per hour worked. DC plans

produce a pension benef‌it at retirement based on the funds available in

each employee’s account. Sometimes employee DC accounts are based

on the aggregate fund rate of return. In a def‌i ned contribution plan, the

contribution, not the benef‌it, is def‌ined.

On 1 January 2011, there were 6,826 def‌ined contribution plans

and 11,975 def‌ined benef‌it plans registered in Canada, and 74 percent

of all pension plan members in Canada participate in DB plans. Most

employees covered by def‌ined benef‌it plans part icipate in large pension

plans.3 More than half of all employees in def‌ined benef‌it plans work

in the public sector.4

Because of the historically-high membership levels in def‌ined bene-

f‌it plans, many of the legal principles affecting pension plans, while ap-

plicable to all plans, have a par ticular relevance to def‌ined benef‌it plans.

The prevalence of def‌ined benef‌it coverage is illustrated, for example,

by the abundance of caselaw addressing pension surplus or pension

def‌icits. These legal issues only arise in def‌ined benef‌it plans. More-

over, provincial pension standards legislation only has limited refer-

ence to def‌ined contribution plans and contains almost no legislative

standards dedicated exclusively to that plan type.

c) Recent changes in pension coverage

Between 1990 and 2011, pension plan membership in Canada — in ab-

solute numbers — increased by almost 19 percent.5 However, when ex-

3 Over 95 percent of all DB pl an employees belong to plans cont aining at least

100 employees. Since 200 0, increases in the numb er of def‌ined benef‌it plans

have almost exclu sively been with respec t of plans with fewer than te n mem-

bers. Many new DB pl ans are Individual Pens ion Plans (IPPs). Between 200 0

and 2010, the number of IPPs nearly quad rupled. In the same period , the num-

ber of DB plans w ith 100–499 employees de creased by 45 percent.

4 Statistic s Canada, abovenot e 1.

5 During the 1990 s, there was a slight decreas e in plan membership of less t han

1 percent (from 5,318,090 as of 1 January 1992 to 5,267,894 as of 1 Januar y