To:Corporate Services Committee

From:Chief Financial Officer & Treasurer

Subject:METROPOLITAN TORONTO POLICE BENEFIT FUND RESPECTING BY-LAW NO. 181-81 (METROPOLITAN CORPORATION), SECTION 24 REFUND, PROPOSED WIDENING OF ENTITLEMENT.

Purpose:

To comment on the recommendations of the Board of Trustees of the Metropolitan Toronto Police Benefit Fund in regards to the proposed widening of the entitlement to a refund of contributions to members who retire with more than 30 years of service.

Funding Sources, Financial Implications and Impact Statement:

Not applicable.

Recommendation:

It is recommended that the Corporate Services Committee refer these recommendations to the Toronto Police Services Board for their concurrence.

Background:

The Corporate Services Committee had before it a communication from the Secretary, Metropolitan Toronto Police Benefit Fund advising that the Board recommended to the Corporate Services Committee:

(1)to amend Section 24 of By-law No. 181-81 (Metropolitan Corporation) to allow the payment as described in subclause (b)(i) thereof to all currently retired members who at the time of retirement had 30 years of service and were at least 50 years of age, without the requirement to receive an actuarial reduced pension under section 19; and,

(2)the authority be granted for the introduction in Council of the necessary Bills to give effect to Recommendation No. (1)

The Board of Trustees had a request from Mr. Paul Walter, Trustee to amend Section 24 of By-law No. 181-81 to make the refund provided for applicable to all members who at retirement are at least 50 years of age and have 30 years of service, or who receive a pension pursuant to the permanent partial disability provisions. The Board requested a report from the City Solicitor, which was attached to their communication to the Corporate Services Committee, on the historical origin of the refund, the legality of the proposed amendment and the impact on the Fund. This report was forwarded to the Board for their information at their meeting of February 26,1999.

Discussion:

The report of the City Solicitor (Appendix 1) outlines the history and legal issues involved in the granting of the refund of contributions requested by the Board of Trustees. The City Solicitor concludes that "in placing the restrictions it does on entitlement of a refund, section 24 has never been defective, or at odds with the original intent either of the 1979 settlement or the 1981 correspondence between Messrs. Walter and Horsley".

The Solicitor also addresses the legality of refunds. He concludes that the "section 24 refunds are of doubtful validity as currently worded". He suggests that the extension of the "refund" to all members could possibly be accomplished as a distribution of surplus. Thirdly, he advises that the actuary has reserved for the cost of this improvement.

A draft by-law prepared by City Legal Services to implement the changes recommended is appended to this report.

Conclusion:

This issue has been part of labor negotiations between the Police Services Board and the Toronto Police Association. In light of this concurrence from both parties should be sought before the recommendation of the Board of Trustees is implemented.

Contact Name:

Ivana Zanardo

Director

Pension, Payroll & Employee Benefits

397-4143

Chief Financial Officer & Treasurer

Appendix 1

February 13, 1999

TO:BOARD OF TRUSTEES OF

THE METROPOLITAN TORONTO POLICE BENEFIT FUND

FROM:City Solicitor

SUBJECT:By-law No. 181-81 (Metropolitan Corporation)

Section 24 Refund

Proposed Widening of Entitlement

Recommendation:

IT IS RECOMMENDED THAT this report be received for information.

Background:

At its meeting of November 20, 1998, the Board of Trustees had before it

(i)a communication dated November 18, 1998, from Mr. Paul Walter, Trustee, setting forth, inter alia, the text of a motion recommending that the City Solicitor be requested to draft an amendment to section 24 of By-law No. 181-81 to make the refund therein provided for applicable to all members who at retirement are at least 50 years of age and have 30 years of service, or who receive a pension pursuant to the permanent partial disability provisions; and

(ii)a draft amending by-law that would accomplish the desired modification of section 24, prepared by Mr. Derek Brown, City Legal Services, at the request of Mr. Art Lymer, Trustee.

At that time, the Board requested the City Solicitor to submit a report as to historical origin of the refund, the legality of the proposed amendment and the impact on the Fund.

Discussion:

Current section 24

A copy of the office consolidation of section 24 of By-law No. 181-81 as amended to date is attached to this report as Appendix I. The section requires that to obtain the refund or equivalent supplementary pension, a member must be entitled to a pension under section 14 (permanent partial disability) or section 22 (early retirement once at least 50 with 30 years' service) AND have elected to receive a pension under section 19 (actuarial equivalence to full accrued pension credit; i.e., reduced to reflect the commencement of the benefits before the normal retirement age (NRA) of 60) or, if the member is already 60, to receive a normal pension under section 11.

History

In his 1978 interest award, arbitrator Joseph Samuels refused to implement the Associations request for a switch from career average earnings to final average earnings (FAE) as the basis for pension calculation, but did recommend that the parties commence discussions concerning the possible harmonization of the Benefit Fund plan and OMERS"In their 1979 settlement relating to pensions, the Association and the Metropolitan Board of Commissioners of Police agreed that, commencing January 1, 1980, Fund benefits shall be identical to, but no greater or less than and on the same basis as the FAE formula benefits under OMERS, being 2% times average annual contributory earnings for best consecutive 60 months times years of service to a maximum of 35, subject to CPP reduction, plus Type 3 Supplemental (full pension if retiring at age 50 or older with 30 or more years service or with permanent partial disability).

The additional cost to the Fund was to be borne partly by an increase in employee/employer matching contributions -- the existing contributory rate of 7% would become 7½% in 1979, and from 1980 would rise to 9% for earnings in excess of the YMPE (Years Maximum Pensionable Earnings) under the Canada Pension Plan -- and the balance, including any experience deficiency, by the Police Board, to whose benefit any surpluses would accrue. The settlement made no reference to refunds or supplementary pension in lieu thereof.

It was made clear that the long-standing right of a member who was at least 50 years of age and had 30 years of service to retire on a full pension (30-and-out) or on a reduced pension with fewer years of service (at least 25) would continue. The reductions agreed to in 1979 were somewhat larger than they had been, although they were subsequently improved and eventually eliminated.

At that time, the basic OMERS early-retirement benefit, set forth in section 16 of the Regulation, was to elect, within the ten years preceding NRA, an immediate pension actuarially equivalent (i.e., with smaller monthly payments) to a normal pension commencing at NRA. However, if the employer entered into a Type III (or ) Supplementary Agreement with OMERS, a member with 30 years service or a permanent partial disability who exercised the basic early-retirement option for a reduced pension would receive a supplementary pension to bring the total benefits up to those of an unreduced pension. There was such a Type 3 Agreement in place for officers belonging to OMERS, who contributed an additional 1% of their earnings beyond the basic OMERS rate of 6½% plus 8% beyond YMPE (matched by the employer); sections 6 and 7 of that Agreement dealing with the calculation of the supplementary pension and benefits in lieu of thereof, are reproduced as Appendix II to this report.

Although not provided for in the Type 3 Agreement or in the OMERS Regulation, in 1979 the OMERS Board established a policy that any member of a class paying Type III contributions who does not become eligible for the Type 3 additional benefit was to be provided with an "additional pension from his own contributions plus interest" (see Appendix III to this report).

Mr. Jack Horsley of the Metropolitan Legal Department had responsibility for preparation of the new by-law implementing the changes called for by the 1979 pension settlement. In connection with a redraft which had been sent to Mr. Walter in his then capacity as President of the Association, but which did not yet contain what is now section 24, Mr. Walter sent to Mr. Horsley a letter dated August 11, 1981 arising from actuarial advice. Item 8 of that letter (reproduced as Appendix IV to this report) pointed out the additional pension provided by OMERS from a member's Type 3 contributions plus interest if the member does not retire early, and requested that a section be added to provide that 1% of contributory earnings from January 1, 1980, be treated as voluntary additional contributions (presumably referring to what is now clause 31(2)(c) of By-law No. 181-81 stating that a member of the Fund who retires without electing to transfer such contributions to a registered retirement savings plan be paid a pension on the basis of such contributions).

Mr. Horsley responded to this request in Item 8 of his letter to Mr. Walter of September 15, 1981 (reproduced as Appendix V to this report) by advising that he understood that reference had been made to "clause 7 of the supplementary [Type 3] agreement" and suggesting the original wording of section 24.

By-law No. 181-81 was enacted to include that wording and subsequently amended to read as shown in Appendix I to this report.

Commentary

Mr. Horsley accepted the Association's position that for the benefits from the Fund to be "identical to, but no greater or less than and on the same basis as" those under OMERS, including the Type 3 Agreement, they had to include an equivalent to the benefit received by OMERS members in lieu of the early retirement supplementary pension. From this standpoint, it was irrelevant that the employer-matched 1% increase in the contribution rate for Fund members beginning in 1979 in no way corresponded to the additional 1% charged to OMERS members in connection with the Type 3 benefits (Fund members had had a 30-and-out privilege for many years without any "extra" contribution; the increase in contribution rate did not arise because of, nor was it earmarked to provide a source of special funding for, that privilege), or that Fund members who received a benefit under section 24 would in effect get the improved FAE-based benefits without full payment of their share of the negotiated increase from the old CAE contribution rates.

Section 24 was in step with the Type 3 Agreement in requiring in clause 24(a) that a pension under section 19 of the by-law (i.e., actuarially reduced) be elected as a precondition of entitlement to the refund, since section 6 of that Agreement (see Appendix II) stated that the supplementary pension was a top-up payment for any member who had elected an early retirement pension under section 16 of the Regulation (i.e., actuarially reduced). It was also in step with the 1979 OMERS policy of granting a supplementary pension for a member who "doesn't become eligible" for the Type 3 benefit, in that it specified election of a section 11 pension (normal pension) as an alternative to section 19 for a member who has reached NRA.

In fact, section 24 went beyond OMERS since it provided for a refund as an option at retirement -- at the time, section 18 of the OMERS Regulation in 1979 (referred to in clause 7(a) of the Type 3 Agreement; see Appendix II) contemplated refunds to a member only on cessation of membership for reasons other than death or retirement, or to a widow(er), a designated beneficiary or the member's estate. As it happens, the "pension adjustment" requirements that were put into the Income Tax Regulations about a decade ago now preclude the possibility of supplementary pensions for post-1989 service.

Nowhere did the OMERS scheme of benefits in existence in 1979 permit a member to double-dip by retiring below NRA and receiving a supplementary pension based on "unused" Type 3 contributions, which is what has been suggested for Fund members (substituting a refund for a supplementary pension). Accordingly, in placing the restrictions it does on entitlement to a refund, section 24 has never been defective, or at odds with the original intent either of the 1979 settlement or the 1981 correspondence between Messrs. Walter and Horsley.

It is true that OMERS eventually dispensed with the collection of extra contributions for the 30-and-out privilege, and made blanket refunds to all active Type 3 contributors. If this circumstance is put forth as the justification for an amendment to section 24 permitting a refund to all members, the matter is in the realm not of legal interpretation but of policy toward post-1979 OMERS improvements, keeping in mind that under the 1979 settlement, the Police Board did not oblige itself to make the benefits under the Fund identical to those under OMERS as same might evolve over the years, but rather only as at the time of that settlement. Furthermore, the Fund has never had a two-tier system under which supplementary benefits could be purchased by paying additional contributions and has never been in a financial position so favourable that it could afford to reduce future contributions.

If the issue is characterized as granting to members a refund of the part of their contributions attributable to the 30-and-out privilege, questions will arise as to the magnitude of that part (presumably significantly less than the ½% stipulated in item 24(b)(i)(B) of By-law No. 181-81) and the appropriateness of making a refund of a portion of contributions that were never separately collected or regarded as the source of separate funding for that privilege (as they were in OMERS) and for which no across-the-board reduction in the contributions of active members (and the employer) has been or is intended to be implemented.

Legality of Refunds

Section 8502 of the Income Tax Regulations sets out the conditions to which a pension plan must adhere to avoid revocation of its registration. Clause (d) thereof is headed "permissible distributions", and the only return of contributions provided for (and hence permitted) are those described in subclause (iii) "to avoid the revocation of the registration of the plan" or under subclause (iv) with respect to a defined benefit provision, "pursuant to an amendment to the plan that also reduces the future contributions that would otherwise be required to be made under the provision by members". Subclause (v) permits interest to be paid in connection with subclause (iv) returns.

Section 63 of the Pension Benefits Act prohibits entitlements to refunds with the exception of additional voluntary contribution and interest, payments under the 50% rule and refunds on termination of employment where there is no deferred pension.

In light of the foregoing, it seems that even the existing provisions in section 24 for refunds are of doubtful validity as currently worded, although insofar as they can be characterized as predetermined conditional benefits they may be valid. Since the specified percentages were never identifiable parts of the contribution formula, they could not very well be deemed (retroactively) to be voluntary additional contributions.

Extension of the "refund" to all members could possibly be accomplished as a distribution of surplus -- subclause 8502(d)(vi) of the Income Tax Regulations includes "a payment in full or partial satisfaction of the interests of a person in an actuarial surplus that relates to a defined benefit". Such an approach would probably be acceptable under the Pension Benefits Act as well, since the restrictions on distribution of surplus to employers do not apply to such distributions to employees.

Insofar as an amendment affected active members, it would be a collective-bargaining issue and would require the concurrence of both the Police Association and the Police Services Board before submission to Council.

Cost

The actuary has advised that if the by-law is lawfully amended, the cost to the Fund of providing benefits in accordance with the draft by-law referred to above (i.e., making a payment to all pensioners who did not qualify for benefits under clause 24(b) when they retired and to all currently active members as they retire in the future) would be about $4,000,000.00. After the possibility of making entitlement to such benefits universal was raised with the actuary some time ago, the reserve already established with respect to clause 24(b) was gradually increased until it is now at that amount, but the actuary points out that this increase took place not in acknowledgment that the existing liability of the Fund under that clause was of that magnitude, but rather out of a desire to be conservative (i.e., in case the clause were to be amended to implement the possibility).

Contact Name and Telephone Number:

Derek Brown at 392-8055

H.W.O. Doyle,

City Solicitor