The Ontario Court of Appeal’s recent decision in Sutherland v. Hudson’s Bay Company has confirmed that the principles regarding entitlement to surplus on plan termination established by the Supreme Court of Canada back in 1994 still apply.
Continue Reading...Yesterday Bill 120, Securing Pension Benefits Now and for the Future Act, 2010, received royal assent. As discussed in previous posts (see October 22, October 29 and December 6, 2010 posts), Bill 120 made a number of significant changes to the Ontario Pension Benefits Act, including:
Continue Reading...Bill 120, Securing Pension Benefits Now and for the Future Act, 2010, was amended by the Standing Committee on Finance and Economic Affairs, and was ordered for Third Reading on December 1, 2010. While the amendments address some of the concerns we raised in our submission to the government, a number of issues remain outstanding.
Continue Reading...Earlier this month, the Ontario government introduced Bill 120, The Securing Pension Benefits Now and for the Future Act, 2010 for first reading. While we commend the government for pushing ahead with pension reform, we are concerned that a number of the amendments may not resolve ongoing issues as intended or may in fact have unintended consequences.
We have begun posting items on our blog expressing some of our thoughts on Bill 120 (for example, see our October 22, 2010 post on the Bill's surplus withdrawal provisions) and we have also made a submission to the Ontario government outlining our concerns in greater detail. Our submission includes the following recommendations:
Continue Reading...With the introduction of Bill 120, the Securing Pension Benefits Now and for the Future Act, 2010, on October 19, 2010, the Ontario government moved forward with its stated objective to continue its reform of the province’s pension system. This second stage of pension reform follows on the heels of Bill 236, which received royal assent earlier this year. (Please see our May 20, 2010 post for a summary of Bill 236.)
This is the first of several posts we will be making on the draft legislation. I am going to start by looking at one of the most contentious issues in pension law, the withdrawal of surplus.
Continue Reading...On October 19, 2010, the Ontario government introduced the second stage of pension reform – Bill 120, The Securing Pension Benefits Now and for the Future Act, 2010.
A press release indicated that Bill 120 would include amendments aimed at:
The Ontario government also expressed its continued interest in a “modest and gradual” expansion of the Canada Pension Plan and further pension innovation.
We will provide a more detailed post on these most recent legislative amendments later this week.
On October 7, 2010, the Supreme Court of Canada released its decision in Burke v. Hudson's Bay Co., upholding the Ontario Court of Appeal’s ruling that Hudson’s Bay Co. (HBC) was permitted to charge plan administration expenses to the pension fund, and did not have a fiduciary obligation to transfer a portion of the actuarial surplus to the transferred employees’ pension plan on the sale of a part of HBC’s business.
Notwithstanding the win for HBC, the conclusion in this case does not necessarily apply to other employers who sponsor defined benefit plans. It will still be necessary to carry out a review of historical plan documents in order to confirm that any proposed action, whether it involves charging plan administration expenses to the pension assets or transferring assets and liabilities to another plan with or without related surplus, is permitted.
Continue Reading...In late August of this year, the Ontario government announced the second stage of pension reform. While we were pleased to see that the government was continuing to move forward with its reforms to the Ontario pension system, we were concerned that these proposals did very little to encourage employers in the private sector to establish or maintain defined benefit pension plans. (Please see our August 25, 2010 post for a summary of the government’s announcement.)
Continue Reading...As indicated in our previous post on Bill 236 (the Pension Benefits Amendment Act, 2010), the provisions that address surplus withdrawal on full or partial wind-up have come into force. There is still some controversy, however, surrounding how the Financial Services Commission of Ontario (FSCO) is interpreting the new provisions.
On September 20, 2010, FSCO released a Q&A to address questions in this regard.
In short, FSCO’s Q&A states that, when making an application to withdraw surplus from a pension plan, an employer is required to do one of two things:
(a) demonstrate entitlement to surplus under the historical terms of the plan and obtain the agreement of 2/3 of the members (or the agreement of the collective bargaining agent) and 2/3 of the former members and others entitled to payments under the pension plan;
or
(b) obtain the consent of all the members, former members and other persons entitled to payments under the pension plan.
Continue Reading...As indicated in a previous post, among the very few aspects of Bill 236, the Pension Benefits Amendment Act, 2010 to come into force on royal assent were the provisions addressing surplus withdrawal on full or partial wind-up. Some issues of concern regarding these provisions have already arisen, as they have been subject to competing interpretations.
Under the old Ontario Pension Benefits Act rules for employer surplus withdrawals on plan wind-up, even if an employer obtained the necessary number of affected plan member consents, it nevertheless had to demonstrate legal entitlement to surplus in order for a surplus sharing arrangement to receive regulatory approval and proceed to distribution. Under Ontario’s new wind-up surplus rules, the employer has the option of sharing surplus with members after obtaining the necessary number of affected member consents, or demonstrating legal entitlement to surplus without member consent and potentially withdrawing all of the surplus for itself. Employers no longer have to do both (that is, prove entitlement and obtain member consents). On full wind-up, for example, section 79(3) of the PBA is the applicable provision:
(3) Subject to section 89, the Superintendent shall not consent to payment of surplus to an employer out of a pension plan that is being wound up in whole unless all of the criteria set out in subsection (3.2) are satisfied and,
(a) the pension plan provides for payment of surplus to the employer on the wind up of the pension plan; or
(b) a written agreement of the employer and the members, former members and other persons entitled to payments on the date of the wind up is made in accordance with such conditions as may be prescribed and authorizes payment of surplus to the employer.
As is often the case in the midst of pension reform, however, the path ahead is not yet clear. Two potential issues have arisen that may delay full realization of the intended results of the legislation.
Continue Reading...As indicated in a previous post, most of the provisions of Bill 236, Pension Benefits Amendment Act, 2010, which recently received Royal Assent, have not yet come into force, but there is one important exception - the new surplus withdrawal regime for full and partial wind ups.
Under the old plan wind up surplus withdrawal rules, an employer had to obtain both the necessary number of member consents and establish its surplus ownership rights at common law. Historically, FSCO took a strict approach to the latter requirement and refused to approve a surplus withdrawal application unless the employer was clearly entitled to the surplus. In most cases employers could not meet this high bar and it was necessary to obtain court approval before applying to FSCO. This added to the cost and complexity of the application and created additional delays.
As of May 18, 2010 the old regime is gone and a new one is in place. Under Sections 63(1) to (3.2) of Bill 236, on full or partial wind up of its pension plan the employer has the option of establishing legal ownership of any surplus at common law or obtaining the required level of agreement from affected members to a surplus sharing arrangement. It is no longer necessary for the employer to satisfy both requirements.
It is too early to predict the full impact of the new regime as the amendment contemplates the enactment of regulations which have not yet been passed. Technically, however, the new regime is now in force.
Bill 236, Pension Benefits Amendment Act, 2010, received royal assent on May 18, 2010. As discussed in previous posts (from April 21, 2010 and December 10, 2009) Bill 236 makes a number of significant changes to the Ontario Pension Benefits Act, including:
Following several days of public hearings and receipt of many written submissions, on April 19, 2010 the Standing Committee on Finance and Economic Affairs reported on Ontario Bill 236, Pension Benefits Amendment Act, 2010, making a number of amendments to the Bill.
Probably the most significant change in the revised version of the Bill, which was ordered for third reading, was the extension of the modified surplus sharing regime to partial wind-ups.
The current surplus sharing regime requires employers to satisfy member consent thresholds AND demonstrate surplus ownership. Bill 236 (similar to the federal regime) originally permitted employers to withdraw surplus from their pension plans on full wind-up without needing to prove surplus ownership if member consent thresholds were satisfied and other prescribed requirements were satisfied. Future and pending partial wind-up surplus withdrawals (prior to the elimination of partial wind-ups in 2012) were, however, being treated differently under Bill 236 and remained subject to troublesome conflicts in the current legislation which have caused problems for employers and affected members for years. Revised Bill 236 fixes the problem by prescribing identical treatment for full and partial wind-up surplus distributions. This means that once the Bill becomes law, plan sponsors with pending partial wind-ups (and pending partial wind-up surplus distributions) will be able to take advantage of this modified surplus sharing regime and withdraw surplus by proving ownership or with the required level of member consent.
Continue Reading...Yesterday’s Budget announcement by the Ontario government included its “vision” for further pension reform – with the emphasis being on changes to the funding of defined benefit plans.
Ontario began its reform of the pension system late last year with the introduction of Bill 236, which it described as the “first stage” of a multi-step process to reform the province’s occupational pension system. With the tabling of Budget, the government began taking steps towards the next stage by setting out three principles upon which the pension reform will be based:
Following through on its announcement last fall, the federal government has recently tabled a Notice of Ways and Means Motion, which includes amendments to the Income Tax Act increasing the pension plan surplus threshold from 10% to 25%.
These amendments, which will apply to all registered pension plans, whether federally or provincially regulated, beginning with 2010 current service contributions, will allow employers to accumulate greater surpluses in their plans. The theory is that in doing so employers will be encouraged to contribute more to their plans, thereby increasing benefit security and reducing funding volatility.
While many in the pension industry have been lobbying for these changes to the tax rules for some time, the willingness of employers to take advantage of these amendments may be influenced by their perceived ability (or lack thereof) to access such surplus under current provincial pension standards legislation. The so-called “asymmetry issue” (where those responsible for funding deficits are not given equivalent access to surplus) is an issue that can only be fully resolved by legislative reform, which is still pending across Canada.
In January 2010, the Financial Services Commission of Ontario (FSCO) released a consultation paper outlining proposals to streamline the regulatory review process for defined benefit (DB) applications (PDF). The proposals outlined in the most recent paper – an earlier consultation process had taken place in the spring of 2009 – are designed to lead to more accurate and timely processing of applications involving DB pension plans (including applications in respect of surplus withdrawals, wind ups, asset transfers, refunds of employer overpayments and refunds of member contributions).
The paper proposes several solutions to address problems inherent in processing DB applications:
The Ontario Court of Appeal’s recent decision in Hydro One confirmed that the Superintendent may use a “subset analysis” when assessing the “significance” of plan member terminations for purposes of ordering a partial plan wind-up. The impact of this decision may be limited, however, if the amendments to the Ontario Pension Benefits Act (PBA) wind-up provisions included in Bill 236 are passed.
Currently, s. 69(1)(d) of the PBA gives the Superintendent the discretion to order a partial plan wind-up if a “significant” number of plan members are terminated as a result of a business reorganization. In the past, cases have held that the “significance” inquiry may be conducted on one or both of the following two bases: the absolute number of terminations or a percentage of the total number of active plan members. The Hydro One case considered a third scenario: whether the Superintendent can carry out the “significance” analysis based on the number of terminated members falling within a defined subset of plan members.
In Hydro One, there were different categories of plan members based on whether or not they were represented by unions. The absolute number of terminations was 73. As a percentage, the terminations represented 2% of the total plan membership (4000) and 18% of the category at issue. Based on the latter test, the Financial Services Tribunal held that the number of terminations was significant. (PDF) The Divisional Court upheld the Tribunal’s decision.
The Court of Appeal agreed with the Tribunal and the Divisional Court. Noting that the public policy and remedial objectives of the PBA require it to be given a “liberal interpretation”, and that the term “significant” is not defined under the PBA, the Court found that a flexible and contextual approach should be taken when assessing whether a “significant” number of plan members has been terminated, thereby triggering a partial wind-up order by the Superintendent. Not surprisingly, the Court concluded that a subset analysis was consistent with a the remedial nature of the PBA and the long line of authorities that have considered s. 69(1)(d).
The Hydro One case is likely one of the last disputes over the meaning of “significant” in s. 69(1)(d). The decision will continue to be relevant during the transition period while partial wind-ups are being phased out, but will ultimately be moot. (Under Bill 236, partial wind ups with an effective date prior to January 1, 2012 will be grandfathered, after which partial wind-ups will be eliminated.)
The elimination of partial wind-ups means that employers will no longer be required to distribute surplus out of the plan based on the test in s. 69(1)(d). However, the elimination of partial wind-ups is not a panacea. The trade off is that the other main benefit conferred on Ontario plan members by partial wind-ups – “grow in rights” – must in future be provided to all eligible involuntary terminations (other than for cause).
On December 9, 2009 the Ontario government announced the first stage of a multi-step process to reform the province’s occupational pension system – the Pension Benefits Amendment Act, 2009 (Bill 236). The next stage is scheduled to be released in the spring of 2010.
It appears that the government is taking its cue from the Arthurs Report released one year ago, and rolling out legislation that provides some fixes to problems that have plagued the Ontario pension industry since the current pension legislation was enacted in 1987. The stated goal of the Arthurs Report was to balance the interests of employees and employers. Bill 236 seems to be tracking the recommendations in the Arthurs Report quite closely. As a result, some changes will be welcomed by sponsors; however, the proposals also contain enhancements for plan members that will increase benefit costs.
Here is a summary of the Bill with some initial thoughts on its key provisions.
1. Elimination of partial wind ups, introduction of immediate vesting and extension of “Rule of 55” grow-in benefits to all plan members whose employment is involuntarily terminated (other than for cause)
2. Forced annuitization eliminated
3. Facilitate plan mergers and asset transfers while protecting member benefit security
4. Increase transparency and access to information for plan members and pensioners
5. Enhanced regulatory oversight
6. Improve plan administration and reduce compliance costs
7. Surplus sharing settlements not subject to historical plan terms
8. Phased retirement
The Ontario government filed Regulation 447/09, extending the surplus sharing regulation (under the Ontario Pension Benefits Act) for two years to December 31, 2011. In addition, the regulations for Specified Ontario Multi-Employer Pension Plans have been extended for two years to 2012.
The Supreme Court of Canada has granted leave in Burke v. Hudson’s Bay Company.
As you may recall, the case involved the sale of a division of the Hudson’s Bay Company (HBC) and the related transfer of pension plan members, along with assets equal to these members' liabilities, to the purchaser’s new pension plan. The transferred plan members commenced a civil action, arguing that they also were entitled to a pro rata share of the surplus in the HBC plan. Additionally, the transferred plan members sought an order requiring HBC to repay to the fund amounts that had been used to take contribution holidays and to pay plan expenses from 1982 to 1986.
At trial, the judge decided that not including surplus with the transfer of assets to the new plan amounted to a breach of trust, and ordered that a further sum of money be transferred from the HBC plan to the purchaser’s plan. However, the trial judge determined that HBC was entitled to use plan funds for paying plan expenses and taking contribution holidays.
HBC appealed the decision with respect to the transfer of surplus issue, while the transferred plan members cross-appealed the trial judge’s decision that plan expenses may be paid from the fund.
The Ontario Court of Appeal stated that the issue relating to the transfer of surplus could be resolved by determining whether the transferred employees had any entitlement to the surplus based on the plan documents at the time of the sale. Upon review of the plan documents, the Court held that the plan members, including the transferred members, were not entitled to the surplus, and the failure to transfer a portion of the surplus was not a breach of trust.
With respect to the plan expense issue, the Court of Appeal applied its decision in Kerry (Canada) Inc. v. DCA Employees Pension Committee, and held that since the plan text had been silent on plan expenses from its inception until 1985, when the plan was amended to explicitly authorize payment of administrative expenses from the fund, HBC was always permitted to pay plan administration expenses from the fund. Subsequent amendments permitting trustee and fund management fees to be paid from the fund were also valid.
The case is expected to be heard by the Supreme Court in late 2010.
Is it permissible to re-open a closed pension plan and thereby quash the hopes of members to access the surplus bottled up in it? The latest decision in the Rogers v. Buschau saga suggests it is.
As some may remember, the sponsor, Rogers Communications Inc., had closed a defined benefit pension plan, registered under the federal Pension Benefits Standards Act (PBSA), to future employees, and attempted to withdraw surplus from the plan. After a series of appeals, Rogers repaid the surplus into the pension fund, and argued before the regulator that the plan should be amended so that new employees could join.
The members, undeterred by the Supreme Court of Canada’s ruling that the closed plan could not be terminated under an old common law doctrine (known as the rule in Saunders v. Vautier) requested that the regulator terminate the plan. The Superintendent refused to exercise her discretion to terminate the Rogers pension plan.
The members had the Superintendent’s decision reviewed by the Federal Court. The Federal Court of Canada agreed with the members, finding that the Superintendent’s refusal to exercise her discretion was unreasonable. The recent appeal handed down by the Federal Court of Appeal came to the opposite conclusion.
The Court noted that the Superintendent based her decision on the premise that the continued existence of a pension plan is a worthy goal and that the objects of the Plan and of the PBSA were better served by using the actuarial surplus in the plan to fund pensions for members of the Plan, including new members, rather than to provide a windfall to the current members of the plan.
Further, the Court of Appeal held that the Superintendent was under no duty to act in accordance with the wishes of the plan members.
The Federal Court of Appeal’s judgment joins a growing list of decisions that can be characterized as “pro-employer” -- in taking a dim view of efforts by members to access surplus funds in the context of internal plan reorganizations where the surplus could continue to be used to provide benefits.
The decision of the Ontario Superior Court of Justice in Re Hawker Siddeley Canada Inc. Pension Plan (PDF) presents an opportunity for employers to expedite the surplus distribution process by allowing surplus attributable to unlocated members and former members to be paid into Court.
When Hawker Siddeley Canada Inc. wound up its plan in 1996, the plan assets, including surplus, were distributed amongst the employer and the members and former members of the plan. Subsequent to the wind-up and distribution, an additional amount was received by the pension fund, related to certain annuity contracts that had been entered into. These additional funds were also treated as surplus and required further distribution, with a portion payable to the former plan members.
Because of the amount of time that had passed since the wind-up, Hawker Siddeley had difficulty locating a number of the former members. The Company therefore applied to the Court for an order approving the payment of surplus for those missing members into Court.
Given that the Ontario Pension Benefits Act does not provide a mechanism for distributing plan funds to missing members, the Court relied on the holding of the Supreme Court of Canada in Schmidt v. Air Products that where the pension legislation is silent, it is appropriate to apply general principles of trust law. Relying on Section 36 of the Ontario Trustee Act which permits a trustee to pay trust funds into Court, the Court ordered that the surplus funds for the missing members be paid into Court.
Much has been written on the Kerry case following its release by the Supreme Court in August 2009. The facts of the case are well known by now. But what salient points from the case should pension administrators and their advisors keep in mind? There are several, and in a nutshell, they are:
Kerry left unanswered one important question: if a pension plan funded through a trust requires the employer to pay the plan’s administrative expenses, can it be amended to permit the expenses to be paid from the fund? If so, is a broad power of amendment sufficient, or must the employer have reserved the power to revoke the trust at the time the trust was established? This issue will have to be decided in a future case.
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