Legal Nature of the Pension

• Author: Ari N. Kaplan
• Profession: Partner, Koskie Minsky LLP. Faculty of Law, University of Western Ontario
• Pages: 1-34

CHAP TER 1

LEGAL NATURE

OF THE PENSION

A. INTRODUCTION

It is diff‌i cult 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 the predominate

purpose of which is to deliver a soci al program by either conferr ing

a social benef‌i t or regulating social behaviour, or two, schemes that

regulate economic behav iour with the objective of providing stabilit y

and fairnes s in capital markets or correcting a perceived imbal ance in

those markets. These conventional assumptions are simply inadequate

or inapplic able in the c ase of pen sions.

On one hand, the establishment of an employer-sponsored pen-

sion plan is a voluntary exercise and, therefore, a pension plan wil l

often exist purely as a funct ion of a contract. On the other hand, pro-

vincial pension legislation original ly required employers to establish

a pension plan for their employees. This was a policy initiative that

intended — and to an extent still intends, notwithstanding its volun-

tarines s — to download onto the private sector the delivery of a social

program, albeit regulated by government.

Pension law exploits the dichotomy between the se two rationales: one

rationale being th at the law should aim to defer as much as pos sible to the

common law bargain and property r ights of employers and employees, and

the other being th at the law should reinforce the public policy objective s

relating to pensions by ensuring a mini mum level of sustenance follow-

1

PENSION LAW2

ing an employee’s working life. This dichotomy has produced a noticeable

tension in pension law as it ha s evolved since its genesis over forty years

ago and since it became a serious f‌i eld of legal pract ice in half that t ime.

B. OVERVIEW

1) S t at i s t ic a l Over vie w

It is often helpful in the disciplines of social science and humanities

(which include law) to begin a textbook with a brief stati stical overview

of its subject matter. In the f‌i eld of pensions and pension law, this is no

exception. The statistics concerning p ension plan membership, cover-

age, plan type, and reg istration put the law in motion and contextuali ze

various aspect s of the applicable legal and regulatory principles.

a) Introduction

On 1 January 2004, almost 5.6 million Canadian workers participated

in 14,777 registered employment-based pension plans.1

b) Pl an desig n t ype

There are two basic types of pension plan design: def‌i ned benef‌i t and

def‌i ned contribution.2 A typical def‌i ned-benef‌i t pension plan promises

a pension benef‌i t at retirement determined by a formula t aking into ac-

count a f‌i xed or tiered percentage multiplied by the employee’s length

of service in the pla n and his or her f‌i nal or career average salary at

retirement. Employer contributions to a def‌i ned benef‌i t plan are usu-

ally based on actua rial recommendations in which the actuar y makes

a number of assumptions about the plan’s future exper ience, demo-

graphics, and salaries, among other things. In a def‌i ned-benef‌i t pla n

the benef‌i t, not the contribution, is def‌i ned.

In a def‌i ned contr ibution pension plan (also known a s a money

purchase plan), contribution rates are f‌i xed in the plan text and are

1 Statistic s Canada, Cana da’s Retirement Income Programs, 2006 Ed ., Cat. No.

74-507-XCB (Otta wa: Ministry of Indust ry: Income Statistics D ivision, 2006)

[Canada’s Retiremen t Income Programs, 2006]. On 1 January 2000 t here were

15,557 pension plans covering 5.3 million workers. See Statistics Canada, Pen-

sion Plans in Canad a January 1, 2000, Cat. No. 74-401-XPB (O ttawa: Ministry of

Industry: I ncome Statistics Divi sion, Pensions and Wealth Progra m, 2001) at 16

[Pension Plans in Canad a January 1, 2000].

2 There are numerous va riations on these t wo types, including s o-called “hybrid”

plans. See Ch apter 3, section B(2) for a more thorough discussion on pl an design.

Legal Nature of t he Pension 3

usually based on a percentage of the member’s earni ngs, a specif‌i c dol-

lar amount or a specif‌i ed number of cents per hour worked. Such a

plan produces a pension benef‌i t at retirement that is dependant upon

the funds allocated to each employee’s individual account or upon the

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

tribution, not the benef‌i t, is def‌i ned.

On 1 January 2004, there were 7,507 def‌i ned contribution plan s and

7,014 def‌i ned benef‌i t plans registered i n Canada. Despite the fact that

there are more def‌i ned contribution plans than any other plan ty pe, an

overwhelming 82 percent of all pension plan members part icipated in

def‌i ned benef‌i t plans as of that d ate. These statistics tell us that most

employees who are covered by def‌i ned benef‌i t plans participate i n large

pension plans.3 More t han h alf of all e mploye es in d ef‌i ned benef‌i t plans

work in the public sector.4

Because of the signi f‌i cant membership levels in def‌i ned benef‌i t

plans, many of the legal principles affecti ng pension plans, whi le ap-

plicable to all plans, h ave a part icular relevance to def‌i ned benef‌i t

plans. The prevalence of def‌i ned benef‌i t coverage is illustrated by, for

example, the abundance of case law that addresses issues affecting the

use of and entitlement to pension plan surplus, which, by def‌i nition,

can only arise in a def‌i ned benef‌i t plans. Moreover, provincial pen sion-

standards legislation only has scant reference to def‌i ned contribution

plans and contains almost no pension standards pertaining exclusively

to that plan ty pe.

c) Recent changes in pen sion coverage

Between 1990 and 2004, pension plan membersh ip in Canada, in ab-

solute numbers, was relatively stable.5 However, when expressed as a

percentage of the paid workforce,6 pension coverage during t he 1990s

3 Over 95 percent of all p ersons participati ng in def‌i ned benef‌i t plans be longed to

plans conta ining at least 100 employees.

4Canada’s Retirem ent Income Programs, 2006, above note 1. See also Pen sion Plans

in Canada Jan uary 1, 2000, above note 1 at 31 and 38.

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

1 percent (from 5,318,090 in 1991 to 5,267,894 as at 1 January 200 0). Between

1998 and 2000, tota l plan membership actually i ncreased by 3.5 percent, which

has been la rgely attributed to growth i n sustained employment in 1998 an d

1999 following the r ecession and period of ma ss layoffs of the early 1990 s:

Pension Plans in Cana da January 1, 2000,ibid. at 19 and Table 3. Between 1

January 20 00 and 1 January 2004, pla n membership increase d by 6 percent to

5,589,876: Ca nada’s Retirement Income Programs , 2006,ibid.

6 Since pension plan s form part of the employment rel ationship, paid workforce

coverage excludes pe rsons not entitled to part icipate in pension plans s uch as