Legal Nature of the Pension

AuthorAri Kaplan, Mitch Frazer
It is diff‌icult to pigeonhole pension law and regulation. Lega l regimes
that import a regulator y 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 behav iour with the
objective of providing stability and fai rness 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 pr ivate 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 est ablish 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 initia l 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 pen sion
law should ref‌lect its deliberate occupation within the third pillar of
Canada’s state-supported retirement delivery s ystem. These legal prin-
ciples ask us to acknowledge the public policy role of pension plans
providing a minimum level of susten ance following an employee’s
working life. This dichotomy has produced a fertile breeding ground
for pension law jurisprudence and legi slation as it has evolved since its
genesis a half-centur y ago.
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 thi s is no exception. The changing
statistics over the years concerning pension plan membership, cover-
age, plan type, and regi stration mobilize the law and contextualize the
applicable legal and regulatory principle s.
a) Introduction
On 1 January 2011, over six million Canadian workers part icipated in
19,463 registered employment-based pension plan s.1
b) Plan design type
There are two basic type s of pension plan design: def‌ined benef‌it and de-
f‌ined contribution.2 A ty pical 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 280-00016 Registered 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 nsim/
&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 Canada January 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 Canada Janu 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 actuar ial recommendations in which the actu ary makes a
number of assumptions about the plan’s future exper ience, 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, contr ibution rates are f‌ixed in the plan text and are
usually based on a percentage of the member’s earnings, a speci f‌ic 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 plan s. Most
employees covered by def‌ined benef‌it plans part icipate in large pension
plans.3 More th an half of all employees in def‌ined benef‌it plan s work
in the public sector.4
Because of the historic ally-high membership levels in def‌ined bene-
f‌it plans, many of the legal principles a ffecting 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 add ressing pension surplus or pen sion
def‌icits. These legal issues only ar ise in def‌ined benef‌it plans. More-
over, provincial pension standards legislation only has limited refer-
ence to def‌ined contribution plans and contain s almost no legislative
standards dedicated exclusively to that plan type.
c) Recent cha nges in pension coverage
Between 1990 and 2011, pension plan membership in Ca nada 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, above not 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

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