Level Chan and Dante Manna

In this update we provide what we see on the employee benefits and pension plans legal horizon in 2020 and beyond, along with a review of some highlights from 2019. Some themes include balancing costs for the aging workforce and addressing income inequity.

Employee benefits and compensation

Age discrimination in benefits plans

As employees continue to work past the historical retirement age of 65, age discrimination-related claims for employee benefits will continue. Our last year-end update noted the significance of the Ontario Human Rights Tribunal decision Talos v Grand Erie District School Board, where the Tribunal concluded that an age-related cut-off for health, dental and life insurance benefits could not be excused by a statutory exemption for 65-year-old employees, as that exemption was contrary to the Canadian Charter of Rights and Freedoms (“Charter”).

The Talos decision, however, did not purport to address all benefits plans, particularly not where an offsetting benefit kicks in at age 65. This distinction was reinforced by the Canadian Human Rights Tribunal (“CHRT”) in 2019, in Bentley v Air Canada and Air Canada Pilots Association. There, the CHRT upheld a benefits scheme that allowed termination of long-term disability benefits for pilots who become eligible for an unreduced pension. In so doing, it distinguished Talos on the basis that Air Canada’s termination of the benefit “is generously set off with retirement benefits, a full unreduced pension.” In addition, the Tribunal considered that the benefits scheme in question was considered reasonable and was accepted by the complainant’s union. This qualification of Talos will be relevant to future cases as well.

Tax treatment of employee stock options

Changes to employee stock options have been delayed until further details are announced. The federal government delayed its Ways and Means Motion (tabled June 17, 2019) to change the tax treatment of stock options. In response to evidence of disproportionate usage by high-income earners, the motion would impose a $200,000 annual limit on employee stock option grants (based on fair market value at the time the options were granted), subject to carve-outs for certain companies. These changes were originally proposed to come into effect January 1, 2020.

After a consultation period concluding September 16, 2019, the government announced that it would delay changes to stock options in order to provide individuals and businesses time to review and adjust to the new rules. The government will announce its plans in Budget 2020.

National pharmacare

We anticipate more movement towards national pharmacare in 2020. The Advisory Council on the Implementation of National Pharmacare delivered its Final Report (“Report”) to the federal government in June 2019. The Report recommended legislation separate from the Canada Health Act to set out the principles and national standards of pharmacare and to outline how governments will share costs and opt in to pharmacare.

Following the Report and the federal election, pharmacare was included in several mandate letters to ministers released December 13, 2019, so we can expect further progress during the current mandate.

Employee life and health trusts

Since our 2018 year-end update, where we advised Health and Welfare Trusts (“HWT”) were to be replaced by similarly-structured Employee Life Health Trusts (“ELHT”), draft amendments to the Income Tax Act were published, along with explanatory notes, showing proposed changes to ELHT rules to accommodate former HWTs. The proposed changes include:

• a trust created prior to 2010 may qualify as an ELHT;
• existing HWTs can merge and/or transfer property to ELHTs without adverse tax consequences;
• a special tax for “prohibited investments”, including investments in, or loans to, a participating employer (or affiliate). Rather than rendering the entire trust offside, the tax applies only to the prohibited investments.

The deadline for converting to an ELHT continues to be January 1, 2021; however, collectively bargained HWTs that meet certain conditions will continue to be deemed to be ELHTs as late as December 31, 2022 in order to provide time for negotiation.

Additional issues remaining open for consideration are listed in the backgrounder, including potential expansion of the type of benefits qualifying as “designated employee benefits”.  Comments on the draft amendments and remaining issues were open through the end of July, 2019 and we anticipate further follow-up in 2020.

Disclosure of compensation by CBCA corporations

As part of the 2019 Federal Budget, several new amendments to the Canada Business Corporations Act (“CBCA”) were made requiring enhanced disclosure of remuneration at annual shareholder meetings, including:

• Say-on-pay votes – Prescribed CBCA corporations will be required to develop an approach with respect to the remuneration of “members of senior management”. Results of the vote must be disclosed, however those results will not be binding on the corporation.
• Recovery of benefits – Information on “recovery of incentive benefits or other benefits” included in the remuneration of directors, officers and employees of the corporation who are “members of senior management”.
• Well-being – Information on “well-being of employees, retirees, and pensioners”.

These provisions have yet to be proclaimed into force and the government has yet to pass regulations prescribing which corporations will be required to comply, the content of disclosure, and who will be considered “members of senior management”. It seems unlikely this will occur until after the 2020 proxy season.

Pension

Retirement income security

Also under the 2019 Federal Budget, the Pension Benefits Standards Act, 1985 (“PBSA”), Companies’ Creditors Arrangement Act (“CCAA”), and Bankruptcy and Insolvency Act (“BIA”) were amended in June to strengthen pension protection in the wake of the Nortel and Sears insolvencies. The PBSA amendments clarify that a pension plan must not provide that a pension benefit entitlement is affected upon termination of the plan. The CCAA and BIA amendments will give courts broader disclosure and remedial powers regarding termination pay, severance pay or incentive benefits made to directors and officers of a corporation within the year preceding the insolvency, or if there are breaches of good faith by any interested parties in the proceedings.

Further changes may be expected as, according to the 2019 Budget, the federal government will continue to engage Canadians on further support for defined benefit plans’ sustainability.

Nova Scotia defined benefit funding rules

Changes to the Nova Scotia defined benefit (“DB”) pension plan funding regulations are expected to be announced in 2020, in conjunction with amendments to the Pension Benefits Act (“PBA”), following a consultation paper in 2019.

The PBA amendments introduce new provisions allowing for the establishment of “reserve accounts”, removing the limits on the use of letters of credit, and allowing the discharge of liability for annuity buyouts for a DB plan that is not wound up. The “reserve account” provision is unique to Nova Scotia and is potentially an expansion of the “solvency reserve account” provisions, currently in place in British Columbia and Alberta, and proposed in Manitoba.

The paper outlined proposed changes to the Pension Benefits Regulations (“PBR”) with respect to DB plan funding. These include elimination of solvency funding for certain DB plans, enhanced going concern funding with provisions for adverse deviation (“PfAD”), contribution holiday restrictions, and reduced frequency of valuations for solvency-exempt DB plans. The paper proposed two options to calculate PfAD.

The province requested feedback by June 21, 2019. We anticipate the PBR amendments will be announced some time in 2020.

Challenges to changes to public service benefits

Courts continued to consider challenges to changes to public service benefits in 2019. In June, the Federal Court of Appeal in Bemister v. Canada (Attorney General) upheld the federal government’s decision to increase retirees’ proportionate share of Public Service Health Care Plan premiums. This change was ultimately recommended by a representative committee including retirees (“Partners Committee”), but a group of retirees later commenced the application.

The appeal court agreed with the trial judge that the changes to retiree benefits was not a breach of contract or the Charter. Regarding the alleged contractual breach, the court noted that the retirees, through the Partners Committee, consented to the changes, and a further indication of consent was that they did not invoke a dispute resolution mechanism which was available to them.  The court also held that the process provided by the Partners Committee, and the government’s consideration of retirees’ submissions, did not undermine the freedom of association under the Charter.

The Bemister case (and a 2019 Quebec Court of Appeal case on a related issue, Procureur général du Canada c. Union of Canadian Correctional Officers — Syndicat des agents correctionnels du Canada) support the viability of government changes to public service benefits that are made after good faith consultations and input from stakeholders.

Newfoundland and Labrador public sector pension plans

Continuing the move of public sector plans to joint sponsorship, replacement legislation for the Newfoundland and Labrador Public Service Pensions Act received royal assent on April 2, 2019, but has yet to be proclaimed in force. Similarly, the replacement Newfoundland and Labrador Teachers’ Pensions Act came into force effective April 18, 2019.  The changes move plan terms out of legislation to allow the plan sponsors to adopt and amend the plans.

New kinds of annuities

The federal government has yet to legislate proposed amendments to the Income Tax Act which would permit two new kinds of annuities. The proposed amendments were published in draft form on July 30, 2019 along with explanatory notes; at that time it was proposed they would to come into force on January 1, 2020.

The two new kinds of annuities proposed are:

• Advanced Life Deferred Annuities – Annuities for which payments may be delayed until age 85. They may provide single-life or joint-life benefits.
• Variable Payment Life Annuities – Benefits that will be subject to adjustments if the fund rate of return or mortality experience differ materially from actuarial assumptions.

There is no timeline for these amendments to be put into law.

Sustainable investments

Although a growing practice, there is still no legislative requirement in Atlantic Canada to incorporate environmental, social and governance (“ESG”) factors into a plan’s investment policy. However, global trends in regulation, and generally heightened awareness and urgency regarding climate-change mitigation, suggest that some level of ESG-related pension regulation could soon be on the horizon.

In November 2019, Council of the EU passed new legislative reforms to the Low Carbon Benchmark Regulation and Disclosure Regulation; these began to come into effect in December, 2019. These followed the final report of the EU Technical Expert Group, which noted the need for a new harmonized methodology for benchmarking, and a new level of transparency and comparability of information across benchmarks. While not directly applicable to Canadian pension plans, the regulations will apply to investors and managers in Europe and may provide guidance in other jurisdictions.

Looking ahead to 2020

As was the case in 2019, changes do not always happen as expected, and we will continue to keep you apprised as they unfold. We can expect further developments in 2020 as governments continue to tackle benefits and retirement income security for the aging workforce.

This update is intended for general information only. If you have questions about the above, please contact a member of our Pensions & Benefits group.

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