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© Copyright 2000 Rogers Media. The following article first appeared in the November 2000 edition of
BENEFITS CANADA magazine.
Surplus shake-up
An Ontario ruling has clouded the province's surplus sharing regulations. This could pave the way
for more disputes.
By Paul Litner
A recent decision of the Ontario divisional court, Kent vs. TecSyn International released in May,
has called into question the feasibility of surplus sharing agreements in Ontario.
Under Ontario's surplus withdrawal rules, employers must satisfy two separate tests prior to obtaining
regulatory approval for a surplus withdrawal:
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First, plan sponsors must establish that the pension plan provides for payment of surplus to the
employer on the wind-up of the pension plan. In other words, they must establish that they have a legal
right to the payment of surplus. This is known as the ownership requirement.
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Second, plan sponsors must establish that they have the approval of two-thirds of the members and
two-thirds of the former members of the plan--voting as separate classes--and the collective bargaining
agents for members, if any exist. This is known as the consent requirement.
OWNERSHIP REQUIREMENT
The ownership requirement is a significant impediment to employers seeking to withdraw surplus, and to
negotiated surplus sharing arrangements, mainly because legal entitlement to a payment of surplus from a
pension plan is difficult for an employer to establish.
Pension plans have long and complicated histories. Many were established pursuant to trust agreements which
contained provisions--due to Revenue Canada requirements at the time--stating that the pension fund is an
irrevocable trust and could not be used for any purpose other than for the benefit of plan members.
Through many years of surplus battles, the courts have often held that such historical trust provisions
prevent an employer from amending its plan to give the employer a right to surplus.
Faced with numerous court battles over surplus ownership--which benefited neither the employer nor the plan
members--Ontario passed its surplus sharing regulation in 1991, which brought into effect the consent
requirement.
Since that time, the Ontario regulator has attempted to take a pragmatic approach to surplus sharing
arrangements.
The regulator has been willing to consent to surplus withdrawals where an employer and a high number of
members consent to the surplus sharing arrangement, members are represented by legal counsel, all
procedural requirements are satisfied and the current plan provisions permit the payment to the employer.
In so doing, the Pension Commission of Ontario (the predecessor of the Financial Services Commission of
Ontario) successfully presided over a practice which enabled surplus sharing arrangements to be reached
between employers and members without the need for expensive, protracted and adversarial court proceedings,
where the consent requirement takes on much more importance than the ownership requirement.
LACK OF CLARITY
But the recent decision calls all of this into question. In the TecSyn case, the divisional court
held that the commission had no jurisdiction to approve a negotiated surplus sharing arrangement where
historical plan provisions did not clearly provide the employer with a right to surplus on wind-up. In that
case, the employer and over 94% of the plan members agreed to the surplus sharing. Four of those plan
members--executives whose benefits accounted for over half of the plan's liabilities--objected.
In contrast to Ontario regulations, federal regulations and Alberta provide for a claim to surplus based on
entitlement or consent of members. If Ontario's legislation is not revamped to mirror these changes
it is inevitable that surplus disputes will find their way back into the courts. This would not be a good
solution for anyone concerned.
Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP in
Toronto. plitner@osler.com.
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