Verdict Hurts Plan Members
By: Randy Bauslaugh
While the lawyers and actuaries may realize a windfall as a result of an Ontario court decision in the Monsanto case and the decision by the province not to proceed with the new surplus-sharing rules in Bill 198, it may be difficult to find an actuary prepared to sign a partial wind-up report that allocates or attributes surplus, says Randy Bauslaugh, a partner at Blake, Cassels & Graydon.
Based on newspaper reports and views expressed by certain members of Ontario’s provincial parliament, you might have thought the decision of the Ontario Court of Appeal in the Monsanto case was a great victory for employees and pensioners. Rubbish. It simply served to show how little most of the press and all of the political critics know about pension plans.
In fact, the decision in the Monsanto case will increase the costs of administering and funding pension plans and could significantly reduce the security of pension benefits for all pensioners and active employees who are in registered pension plans.
What was the case about?
Monsanto wanted to leave surplus funds in its pension plan. Employees who were laid-off wanted part of it paid out. The court agreed with the laid-off employees. As a result, funding cushions that remain in pension plans to provide protection in hard times or to provide increases to pensioners, will have to be paid out to employers or to laidoff employees or both whenever there is a mass lay-off or business closure.
The pension provisions of Ontario’s Bill 198 would have provided protection to continuing employees and pensioners by not requiring the funding cushion to be paid out. Critics of Bill 198 got this wrong. They said Bill 198 would overturn Monsanto and harm pensioners and employees. In fact, pensioners and active employees will be losers as a result of the Monsanto case, unless pension standards in Ontario and other jurisdictions with similar problematic language can be amended to reverse its effect.
Under Ontario law, employees who are laid-off receive extra pension benefits if their age and service equals 55 years. Ontario and Nova Scotia are the only jurisdictions in North America to provide these extra benefits to laid-off employees. Bill 198 did not affect these rights.
Pensioners and continuing employees are not affected by lay-offs, so they do not get the extra benefits, nor do they get the surplus. Under the Monsanto ruling, continuing employees and pensioners remain in a plan that must have part of its funding stripped out, even if that puts the plan in a deficit at the time the money is actually paid. The critics of the pension provisions of Bill 198 apparently believe this is fair.
Who Gets It?
Who gets the funding surplus that is stripped out? That’s not clear. It partly depends on who owns it. If the plan members own it, the estimated surplus will be paid to the laid-off employees. It is paid only to the laid-off employees – not to the other plan members. If the employer can prove it owns plan surplus, a 1991 NDP regulation requires the employer to then get the consent of the laid-off employees before any part can be paid to the employer. An Ontario employer will have to pay a ransom to the laid-off employees to receive its own property.
Moreover, the continuing employees and pensioners do not even have to be consulted or notified of this. The critics of Bill 198 apparently believe that this too is fair.
And just how do you force an employer to make a deal when the employer wants to leave the money in its pension plan? In such a situation, it could be a long time before any funding surplus is paid out of a partially terminated pension plan, if ever.
But these too were concerns that apparently did not bother the critics of Bill 198.
Neither the Monsanto case nor any other law says anything concrete about how to divide a plan surplus between laidoff employees and other plan members or how to allocate the stripped out surplus among the laid-off members. Do you do it on the basis of contributions to the plan? Do you prorate the surplus to the service of the members? Do you prorate to their existing benefits? Do you take into account prior plan mergers? What if the laid-off plan members came into the plan after the surplus was created? Can you take into account benefit improvements granted to the laid-off employees out of surplus? No one knows.
Other jurisdictions either don’t interpret their legislation this way or they do not require funding surplus to be stripped out when there is a lay-off. So if the plan has members in jurisdictions outside of Ontario, there are also going to be legal and factual issues about how you divide the funding surplus between Ontario members and other members. This too will be a complicated problem requiring high-priced legal and financial advice. And once the estimated surplus is paid out, how do you put a multi-jurisdictional plan back together again? You may have to carve out the Ontario portion, whatever that is, and operate it as a separate plan, thereby increasing administration costs. None of these issues would have arisen if the court had adopted an interpretation that had been used by the pension industry in Ontario – by lawyers, actuaries, and regulators – for the last 30 years.
But this problem doesn’t just affect Ontario. Many other jurisdictions have the same or similar language. The courts in those jurisdictions do not have to follow Ontario’s highest court, but the Monsanto decision will no doubt be persuasive. Employers may want to consider closing operations in Quebec, B.C. or Alberta before closing down operations in other jurisdictions, if they have a choice and they wish to avoid the effects of Monsanto.
The ruling also raises serious concerns for multi-employer pension plans. The case provides terminating employers, as well as terminating plan members, with an incentive to seek a partial wind-up. The disputes that will inevitably arise will have the same factual issues but with several additional parties.
Where a partial wind-up is imposed on a multi-employer plan, administrators may have to produce an historical record of contributions, pay-outs, earnings, and administrative expenses by employer and by plan member to resolve disputes. Given the courts’ view that the statutory language is so clear, they may find themselves facing claims for misadministration if they can’t produce these records.
If the trust documentation does not, from inception, provide for how the plan is to be divided on partial wind-up, it may not be possible to amend it without unanimous beneficiary consent. Multi-employer plans will also have the same challenges as multijurisdictional plans in putting plan funding back together as an integrated whole following a pay-out of a funding surplus on partial wind-up.
Lawyers and actuaries will no doubt get paid significant fees to sort out the various legal and factual issues that will arise. No doubt most of these fees and expenses will be paid from pension funds.
But until these issues get resolved it may be difficult to find an actuary prepared to sign a partial wind-up report that allocates or attributes surplus to the wound-up part of a plan or to a particular group of members affected by the partial wind-up. Of course, this won’t be a problem if the plan provides for how this is to be done. But most plans don’t, and this could be a minefield for negligence claims against actuaries and lawyers who provide unqualified views on how to do it.
The proposed pension changes in Bill 198 would have resolved almost all of these issues. It would have allowed actuarial surplus to remain in the pension plan where it could have been used to negotiate improved benefits for active employees and pensioners. Incredibly, before the decision in Monsanto was released, this was something many critics said should be forced to happen.
Critics of Bill 198 will at this stage point out that it did not prevent surplus payouts on partial wind-up. What they don’t mention is that this would only have been allowed with full disclosure to remaining members. There would have been a duly authorized plan amendment, duly reflected in the plan’s finances, and duly registered with the pension regulator. Unlike the situation with Monsanto, a surplus pay-out would not be required to happen automatically under Bill 198, and it would not happen without notice to the continuing employees and pensioners.
The effect of the Monsanto case is to turn an estimated paper-funding cushion into a real benefit. Doing this automatically when there is a lay-off may seriously increase the financial risk to pensioners and to continuing employees. Where a plan has a surplus at the time of a partial wind-up, distribution of the estimated actuarial surplus will be an unexpected windfall to the laid-off employees, and a potential financial disaster for continuing employees, pensioners, and contributing employers. There is little doubt a required distribution of surplus on partial wind-up increases funding uncertainty and administrative costs. It also decreases overall benefit security.
Bill 198 would have provided certainty and protection. Instead, continuing employees, pensioners, employers, and their shareholders (which may be other pension funds) will be losers. Already overworked pension regulators will see a dramatic increase in their workloads, especially if you consider the possible retroactive application of this decision to partial wind-ups that have occurred in Ontario over the past 30 years. Persons laid-off when a pension plan has a surplus will get extra pension benefits and they might also get surplus they did not expect – someday.
The winners are likely to be lawyers, actuaries, third party administrators, and other professionals who will have no end of fee-paying work sorting out the issues raised by the Monsanto decision. But even some of them may get burned as a result of legally unsupportable allocations or attributions they may have endorsed. There is really no good news for anyone unless this decision is overturned on appeal or changed by legislation.
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