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© Copyright 2000 Rogers Media. The following article first appeared in the June 2000 edition of
BENEFITS CANADA magazine.
Understanding Monsanto
Monsanto Canada's decision to close an Ontario plant led to a partial wind-up of its pension plan.
The Financial Services Tribunal has decided that a surplus distribution is not necessary.
By Hugh O'Reilly
The financial services tribunalrecently released its decision in the case of Monsanto Canada Inc. and The
Superintendent of the Financial Services Commission of Ontario (FSCO). This decision was much anticipated
by the pension community in Ontario. In particular, the position taken by the Superintendent with respect
to the treatment of surplus in the context of a partial wind-up is seen as having far reaching effects on
the operation of pension plans in Ontario. However, the extent to which the Tribunal's decision actually
resolves those issues remains to be seen.
Before examining the outcome, it's useful to review the decision itself. Mississauga, Ont.-based Monsanto
closed one of its plants and terminated the employment of 146 members in its pension plan. All of the
employees who were let go received severance, and about one-third also received pension enhancements. The
enhancements were achieved through two plan amendments filed with Ontario's pension regulator.
After the pension plan amendments were filed, Monsanto's actuary submitted a partial wind-up report. The
report states that the Monsanto plan had a surplus of about $14.3 million after the cost of the pension
improvements (about $4.82 million) was taken into account. It also discloses that the pension improvements
were funded both from the pro-rata share of the market value of assets for the terminated employees, and
from the remaining surplus in the plan.
The Superintendent refused to approve the report on the basis that it did not meet the requirements of the
Pension Benefits Act (PBA) of Ontario. The Superintendent also determined that the interests of Monsanto
plan members were not protected because:
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The report did not provide distribution of surplus to terminated plan members.
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The report provided for surplus to be used for pension improvements, even though this amounted to
Monsanto paying surplus to itself in order to avoid more cash severance to employees.
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Pension improvements were to be given only to about one-third of the terminated plan members, and in
the Superintendent's view, this violated principles of trust law which require proportionate and
equitable sharing of surplus between all plan members.
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Notice of the partial wind-up given to the terminated members was deficient because it didn't include a
statement of the method for distributing and allocating plan surplus.
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It was inconsistent with the concept of a partial wind-up because it proposed that members could leave
their deferred pension entitlement in the plan. The Superintendent says the partial wind-up requires
the distribution of all assets.
In a two-to-one decision, the Tribunal ruled in favour of Monsanto. In so doing, it concluded that section
70(6) of the PBA (which provides that members who are terminated as a result of a partial wind-up are
entitled to the same rights and benefits that they would receive on a total plan termination) should not be
interpreted to mean that surplus should be distributed to plan members who were terminated as a result of
the partial plan wind-up.
On the basis of the Supreme Court of Canada's decision in Schmidt vs. Air Products, the Tribunal instead
determined that a member's right to surplus in an ongoing plan hinges on the plan's termination. As a
result, the Tribunal concluded that section 70(6) does not require surplus to be distributed to terminated
members. Instead, this provision preserves the right of terminated members to participate in a surplus
distribution in the event that the plan is completely terminated at a future date. Consequently, a surplus
distribution is not required when a plan is partially wound-up.
DIFFICULT TO INTERPRET
The Tribunal ruled that funding pension improvements through surplus does not amount to a payment of
surplus to Monsanto because the company didn't receive a payment out of surplus, and any benefit it did
receive from the pension improvements was "speculative at best." The Tribunal unanimously concluded that in
the absence of an express statutory provision that addresses the issue, members could be given the option
of leaving their pension entitlement in the plan.
While the Tribunal did not need to address the issue, it also held that the FSCO had an unequivocal past
practice which lead Monsanto to believe that the report would be accepted. In the absence of any notice of
the proposed change in policy, the Superintendent was required to apply the former policy.
As the Monsanto decision demonstrates, section 70(6) of the PBA is extremely difficult to interpret. On the
surface, it clearly states that members who are terminated as a result of a partial wind-up are entitled to
the same benefits they would receive if they were terminated as a result of a total plan termination.
When viewed from this perspective, the Superintendent's stance that surplus should be distributed to
terminated members is not as far fetched as it initially appears. However, in the absence of any analysis
of the Monsanto plan provisions, it's difficult to see how the Superintendent reached the conclusion that a
partial wind-up requires a payout of surplus to plan members. If the plan provided that the employer was
entitled to the surplus, this approach would be hard to justify.
The effect of Schmidt vs. Air Products also needs to be factored into the analysis. The Tribunal's
conclusion that the right to surplus is both a contingent and collective right of all plan members is an
intriguing one. Payment of surplus to employees terminated as a result of a partial wind-up could grant
those members rights that are superior to the rights of employees who continue to be active plan members.
If all members have a contingent right to surplus, monies should not be distributed until such time as the
right has materialized, or when the plan is completely terminated. This way, all members entitled to a
share of surplus will be treated in a similar manner.
The approach taken by the Superintendent can also be characterized as overly rigid. A blanket rule
requiring surplus distribution may limit an employer's ability to enhance the benefits of older plan
members, and potentially create conflict between shorter and longer service members.
Regarding pension improvements as a surplus withdrawal by an employer on the basis that it reduces
severance costs is also extreme as it would be difficult to determine what, if any, direct benefit the
employer received. It's also important to note that on a strict reading of the PBA this provision is hard
to justify because no monies were directly paid to the employer. As a result, it's hard to view the pension
enhancements as amounting to a surplus withdrawal in favour of the employer.
Similarly, requiring that all pension benefits be transferred out of the plan would seem to be taking the
concept of a partial wind-up too literally. Given that the plan will continue after the partial wind-up, it
is not unreasonable to allow members to keep their benefits in the plan.
Another problem with the approach taken in rejecting the report is that it does not seem to be in keeping
with the underlying policy framework of the PBA itself. The PBA specifically contemplates legislatively
enhanced pension benefits for older employees whose pension membership is terminated as a result of a
partial or complete plan wind-up. When viewed from this perspective, the provision of pension improvements
can be viewed as an extension of the special solicitude that is demonstrated toward older plan members
under the PBA.
APPLYING THE CASE
The most difficult issue to assess, however, is the impact of the Monsanto decision on future partial
wind-ups. Although the Tribunal states that the PBA does not require a surplus distribution if there is a
partial wind-up, it does not say that this could never result from a partial wind-up. One wonders if the
outcome would be the same if an employer did not enhance benefits.
The impact of Monsanto on FSCO gives rise to some concern. Given the commentary on legitimate expectations,
will regulators be less willing to act? And will this lack of action lead to regulatory gridlock?
It's worth noting that the decision in Monsanto is being appealed. In the meantime, employers who partially
wind-up their plans should keep the facts of this case in mind. While it provides helpful guidance, it does
not necessarily mean that employers will never have to pay surplus out of a plan on a partial wind-up.
Hugh O'Reilly is a lawyer with Torys in Toronto.
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