In our previous two articles in this series (Part I and Part II), we considered issues related to setting up an Alberta (and eventually BC) defined benefit plan solvency reserve account (SRA) and sponsor verses administrator roles in establishing, and making withdrawals from, an SRA. In this post, we examine the issue of benefit and plan administration expense payments from an SRA.
You will recall that to eliminate any possibility of existing plan trust wording restricting the intended operation of the SRA, the recommended approach is to establish the SRA through a separate plan trust agreement supported by appropriate plan amendments. This would result in the pension plan being funded through two or more trusts. So far so good, as there is no legislative restrictions on plans having multiple trust funds.
Creating this structure, however, raises questions as to which trust will be used to pay benefits and when. In plans that are currently funded under multiple trusts this would rarely be an issue to the extent that all such trusts are generally governed by the same legislated rules. SRA trusts, however, are subject to limitations which restrict contributions to solvency deficit payments and to more relaxed statutory excess/surplus withdrawal regimes. As such, even though securing plan benefits is still the prime objective of the SRA trust, it stands to reason that different considerations may apply when such trusts are being looked at by a plan administrator as a source of actual benefit payments. We think this likely applies to both ongoing plan and plan wind up situations, and that similar considerations could also apply to plan administration expense payments.
Neither the Alberta nor BC legislation, nor their respective regulatory policies issued to date, deal specifically with benefit/expense payments out of an SRA. The issue is complicated by the fact that, to the extent a plan administrator is making any decision relating to benefit/expense payments, fiduciary duties come into play. This can be an especially thorny question where the administrator is exercising a discretion, as opposed to administering a set plan provision.
As highlighted in our previous posts, the legislation is not clear in many respects as to what activities relating to an SRA are “sponsor” functions and what activities are “administrator” functions (i.e., fiduciary in nature, or one that requires acting in members’ best interests). In most situations, particularly in the context of an ongoing plan, the sponsor will likely prefer that the SRA be used exclusively to meet its primary objective; that is, to secure payment of plan solvency obligations in the event of plan wind up, following which any surplus can be returned to the plan sponsor with regulatory approval. In other words, the preference would be for the SRA account not to be used for the payment of benefits or plan administration expenses while the plan is ongoing, unless or until the regular plan trust assets are exhausted. This makes sense since the whole purpose of SRAs is to provide benefit security if needed and permit excess/surplus asset withdrawal where not needed. In fact, benefit payments/administration expenses are tailored to be funded by going concern valuation contributions made into the regular plan trust, from which they would be paid.
We raise this question because for those plan sponsors considering the establishment of an SRA, it is important for the plan terms to specifically set out how the SRA will be administered by giving the administrator clear direction regarding benefit and expense (non-investment) payments out of the non-SRA trust while the plan is ongoing. For example, the plan could provide that benefit/plan administration expense payments be made out of the SRA only to the extent such payments cannot be fully paid from other plan assets outside of the SRA trust and require that similar language be included in the SRA trust agreement. This should avoid any potential conflicts and frustration of the SRA’s intended operation that could otherwise arise if the plan were to require the administrator to make such decisions on a discretionary basis.
Of course it will also be important for the plan investment policies to be revised to properly reflect the terms of the SRA trust so that its assets are managed in a way which is integrated with the management of all other plan assets having regard to plan liabilities.
Our comments reflect our initial view that benefit/administration expense payments would only be made out of the SRA if absolutely necessary to meet plan obligations. We suspect this is not an issue the legislature or pension regulator has turned its mind to and, is something that we intend to flag for the regulators to consider in providing further policy guidance.
[Note: Many thanks to Ian Edelist at Eckler Ltd. for his valuable assistance and review.]