October 31, 2018
The application of commercial law concepts to pension and benefit plans often creates confusion for stakeholders in the pension and benefits industry. This article seeks to shed light on two basic but fundamental issues trustees and their advisors should keep in mind when acting for a pension or benefit fund and entering into legal relationships.
As a preliminary note, it is important to understand the distinction between the pension plan and the pension fund. The pension plan will create the pension fund which will hold the assets of the pension plan. It is integral to keep the trust relationship between the trustees and beneficiaries of a pension fund in mind when decision making occurs on behalf of the pension fund. In the context of a pension fund, a trust can be conceptualized as a legal relationship whereby the trustees of the pension fund have legal ownership and control over the assets of the pension fund. Consequently, the trustees will receive, hold, administer and make investment decisions in respect of the assets of the pension fund for the benefit of the beneficiaries (who in most cases are the employees who are members of the pension plan and beneficiaries of the pension fund).
A useful starting point in understanding how such funds enter into legal relationships is to examine where the decision-making power of the trustee derives from. When forming a pension fund, an important step is to determine how the trustees are selected. Typically, this will be mandated in the trust agreement itself which will state who may become trustees. In most cases, the trust document will give the union (or unions) and/or employer (or employers) the power to appoint representatives to the board. The duties of the trustees will flow from the trust agreement itself as well as other trust documents such as the pension plan rules and statement of investment policies and procedures, legislation such as the Pension Benefits Act (Ontario) and/or the Pension Benefits Standards Act, the Income Tax Act and the common law. The trustees are empowered to make decisions on behalf of the pension fund such as entering into various contracts and agreements and to provide for the payments of pension and benefits to employees and their beneficiaries.
From a corporate commercial perspective there are two simple but crucial matters that trustees should be aware of:
1: Ensuring that the correct parties are named.
It is vital to determine who the trustees, on behalf of the pension fund, will be contracting with. For example, if the pension fund is entering into a services contract with a company, the trustees should be sure to determine whether they are intending to contract with the company itself, or a parent company or perhaps the individual owner of the company. If the proper parties are not named, the trustees may lose any recourse against that party should it not meet its obligations under the contract.
2: Ensuring that the parties are named correctly.
A second consideration to take into account is to ensure that the parties themselves are named in accordance with the legal name under which they are registered. Businesses will often conduct business or use short forms that are different from their legal name. Similarly, pension and benefit funds will often adopt shortened versions of their names on documents that are different from the legal name of the relevant fund. The fund itself has a distinct legal name mandated by the trust agreement that should be used by the trustees when entering into agreements. If the proper name is not listed, a pension or benefit fund may not be able to enforce its contract and in certain cases this might lead to trustee liability.
While these two points may seem straightforward, these are in fact common mistakes that occur and can result in significant repercussions and added cost for union-sponsored pension and benefit plans.
Pension and Benefits