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Pensions – Where Do We Go From Here?

By: Voula Michaelidis

The Supreme Court of Canada’s decision in Monsanto Canada Inc. v. Ontario (Superintendent of Financial Services) sent ripples through the Defined Benefit pension plan community not only in Ontario, but across the country. And while many may disagree with its findings, Voula Michaelidis, of Kuretzky Vassos LLP, explains it had its own reasons for reaching the decision it did.

Participation in an employer’s pension plan is a valuable benefit offered in many workplaces. Pensions provide advantages for both employees and employers. For employees, they are assured a source of income upon retirement. For employers, pensions are used as a tool to attract employees and as a valuable form of compensation.

As more Canadians approach the age of retirement, the issue of pensions has become increasingly more important and debated. Thus, more attention is being focused on the complex area of pensions and pension law in our courts.

In July of 2004, the Supreme Court of Canada released its long-awaited decision in Monsanto Canada Inc. v. Ontario. The main issue before the Court was when there is a partial wind-up of a Defined Benefit pension plan, must the actuarial surplus be distributed at that time? The answer depended on the interpretation of subsection 70(6) of Ontario’s Pension Benefits Act (PBA) which states:

“On the partial wind-up of a pension plan, members, former members, and other persons entitled to benefits under the pension plan shall have rights and benefits that are not less than the rights and benefits they would have on a full wind-up of the pension plan on the effective date of the partial wind-up.”

To understand this issue, it is important to appreciate the distinction between a ‘wind-up’ and a ‘partial wind-up.’ Both terms are defined in section 1 of the PBA. A ‘wind-up’ refers to “the termination of a pension plan and the distribution of the assets of the pension fund.” A ‘partial wind-up’ is more specifically defined as “the termination of a part of a pension plan and the distribution of the assets of the pension fund related to that part of the pension plan.”

Form One Plan
The facts of the case are as follows. On January 1, 1996, M o n s a n t o Canada Inc. consolidated three separate pension plans related to its various operations to form one plan called the Pension Plan for Employees of Monsanto Canada Inc. (the Plan). Subsequently, the company underwent a reorganization involving a staff reduction and a plant closure. Atotal of 146 employees who were active members in the Plan (Affected Members) received notice that their employment would cease between December 31, 1996, and December 31, 1998.

Monsanto Canada Inc. was required to present a partial wind-up report to the Superintendent of Financial Services. The company reported that the partial wind-up of the Plan was to be effective on May 31, 1997. The company’s actuaries determined that there would be an actuarial surplus of approximately $19.1 million. The pro rata share of the surplus related to the part of the Plan being wound up was approximately $3.1 million. Monsanto Canada Inc. proposed to address the surplus when the Plan was fully wound-up at some future date. The Superintendent of Financial Services refused to approve the report. One of the reasons provided was that the report failed to provide for a distribution of the surplus assets related to the part of the Plan being wound-up at the time of the partial wind-up.

This issue was debated and the case went through a series of appeals. On the first appeal, the majority of the Financial Services Tribunal (Tribunal) disagreed with the Superintendent of Financial Services and ordered her to approve the report. Specifically, the majority of the Tribunal concluded that subsection 70(6) provided for no more than a right to participate in a surplus distribution if and when the Plan were to be fully wound-up.

On appeal, the Ontario Divisional Court overturned the Tribunal’s decision. The Court of Appeal for Ontario agreed with the Ontario Divisional Court.

Monsanto Canada Inc. and the Association of Canadian Pension Management (ACPM) appealed to the Supreme Court of Canada.

Standard Of Review
One of the preliminary issues addressed by the Supreme Court of Canada was the standard of review of the Tribunal’s decision. The Court concluded that the appropriate standard of review was that of correctness. Therefore, the Tribunal’s decision did not have to be reasonable, but correct. The Court went further and stated that the Tribunal does not necessarily have any “specific expertise” on such pension matters. This is a very surprising comment and may cause people to question the role and utility of the Tribunal.

The parties agreed that the rights protected by subsection 70(6) of the PBA are not less than those rights and benefits that the Affected Members would have if there were a full wind-up on the date of partial wind-up. However, the parties disagreed on the timing and the interpretation of the phrase “on the effective date of the partial wind-up.” Monsanto Canada Inc. and the ACPM argued that, at most, subsection 70(6) provided the Affected Members with a vested right, as of the effective date of the partial wind-up, to participate in the surplus distribution, if and when the Plan were to fully wind-up. It is only at this time that an actual, and not actuarial, surplus can be determined.

Conversely, the respondents submitted that since subsection 70(6) requires the rights and benefits on a partial wind-up to not be less than those available on a full wind-up, if the parties agreed that a surplus distribution would occur on a full wind-up, then subsection 70(6) must require a surplus distribution on a partial wind-up. This becomes the effective date for measuring and realizing the Affected Members’ rights and benefits.

The Supreme Court of Canada preferred the respondents’ interpretation as it more properly reflected the ordinary and grammatical meaning of the section. Therefore, a partial wind-up would require a full wind-up to notionally occur in order to evaluate the pro rata share of the assets and liabilities related to the partial windup, followed by a continuation of the rest of the Plan.

Historical Context
The Court considered the historical context of subsection 70(6) of the PBA. While pension plans have a longstanding role in Canada’s workplace, the concept of a pension fund actuarial surplus is a fairly recent concept. A surplus is defined in the PBA as “the excess of the value of the assets of a pension fund related to a pension plan over the value of the liabilities under the pension plan.” Asurplus can only arise in a DB pension plan and not in a Defined Contribution plan.

In a DB pension plan, benefits or plan liabilities are not contingent on the level of or return on contributions. Plan members are guaranteed specific benefits at retirement in an amount fixed by a determined formula. Each year, contributions are made on the basis of an actuary’s estimate of the amount that must be presently invested in order to provide the stipulated benefits at the time the pension is paid out.

A surplus occurs if the value of the assets of the fund is found to be greater than originally estimated. The surplus is considered ‘actuarial’ because it has not been realized through the liquidation of assets and the payment of liabilities. Theoretically, it is like a windfall. The Supreme Court of Canada also considered the objective of the PBA. The PBA is public policy legislation and recognizes the importance of income security and protection. The PBA’s goal is to establish minimum standards and to protect and safeguard the pension benefits and rights of members, former members, and other parties entitled to receive benefits under a private pension plan.

The Supreme Court of Canada stated that the PBA aims to “ensure a balance between employee and employer interests that will be beneficial for both groups and for the greater public interest in established pension standards.”

Court Was Cautious
The Court was cautious about intervening since private pension plans are voluntary and the Court did not want to discourage employers from making pension plan decisions that are advantageous to employees.

The Supreme Court of Canada was not persuaded by arguments that employers assume risks and responsibilities with DB plans and that requiring the distribution of a surplus is a heavy burden that will result in funds being contributed to according to less cautious actuarial estimates, fewer DB plans, and fewer private pension plans. Rather, the Supreme Court of Canada focused on the positive aspects of pension plans for employers such as an incentive for attracting employees, decreased turnover, improved morale, increased productivity and efficiency, and enhanced company loyalty.

Also, the Court stated that the requirement to distribute the surplus is value-neutral to the issue of entitlement which is determined separately under the Plan and the PBA and that the statutory scheme protects against underfunding.

The Court balanced the interests of the Affected Members and employees who remained in the Plan. If Affected Members were required to wait for a full wind-up at an indeterminate future date to share in the distribution of the surplus, they would be in a worse position than continuing employees. Affected Members have lost their jobs and their income and their level of pensionable earnings are reduced and it is unlikely they will receive the same level of benefits in alternate employment.

The Court concluded that it was logical for Affected Members to be subject to the risks of the Plan while actively enrolled in the Plan, but not after they have been terminated from it. Therefore, section 70(6) ensures that Affected Members on partial wind-up are not in a worse position than a future full wind-up group.

The Court rejected the argument that requiring the pro rata share of the actuarial surplus to be distributed at the time of partial wind-up would compromise the continuing integrity of the pension fund for the members who remained in the Plan. The fund would still be in a surplus after the distribution, except that the amount of surplus would be reduced in proportion to the size and level of entitlement, if any, of the partial wind-up group and subject to the statutory restrictions on withdrawal of the surplus by the employer.

Practically, the Court also recognized the increased mobility of the workforce. Affected Members should be able to determine their status at the time of the termination of their employment to arrange their financial affairs and not be indefinitely linked to the employer. Conversely, if Affected Members only have a right to the distribution of the surplus when the Plan is fully wound up, it may be difficult to contact them or they may no longer be alive to realize their rights.

The Supreme Court of Canada concluded that considering the text, scheme, and purpose of the PBA, subsection 70(6) requires the distribution of the actuarial surplus related to the part of the Plan being wound up on the effective date of the partial wind-up.

Positive Outcome
It should be noted that although this was a positive outcome for the Affected Members, the Supreme Court of Canada did not rule on the issue of entitlement to the surplus.

Many employers were disappointed with the Supreme Court of Canada’s decision. The decision may not be an economical one for employers and may adversely affect DB pension plans in their workplaces. Employees may challenge the employer’s investment and plan design choices if a surplus is less than anticipated.

Also, the costs and challenges of maintaining DB pension plans may result in less employers offering such plans or no longer offering DB pension plans to new employees.

Employees will be left with no option but to look for other ways to save for retirement.

Voula Michaelidis is a lawyer practicing exclusively in the areas of employment law and labour law at Kuretzky Vassos LLP.

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