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© Copyright 2000 Rogers Media. The following article first appeared in the January 2001 edition of
BENEFITS CANADA magazine.
Seeking surplus
Royal Trust pensioners are demanding a share of their plan's surplus. They have exactly the wrong
idea.
By Dian Cohen
When company share prices go up--as seen in the astounding rise of all major global stock market indexes in
the 10 years leading up to early 2000--a lot of people get rich. And a lot of other people not directly
involved in the selection, purchase and sale of stocks want to share in the wealth. Consider the case of
the Royal Trust pensioners suing their parent company, the Royal Bank, for a share of the $150-million
surplus that has accumulated in their fund. The case is based, in part, on the size of the surplus, which
the pensioners' lawyer says is excessive.
The frequency with which groups of pensioners distantly related to plans with lots of money attempt to make
the case that some or all of that money is theirs is distressing. The fact is that as long as a plan hasn't
been wound up, the surplus is simply an estimate. It isn't real until, upon wind-up, the dollar value of
the plan's obligations has been subtracted from the market value of its assets. If, at that time, there's
money left over, that's surplus. In the meantime, it's better to have an estimated surplus than no surplus
at all.
In the late 1960s and early 1970s almost every plan had what it euphemistically called an "experience
deficiency." If it were wound up, the plan wouldn't have the funds to cover the pension obligation. With
share prices bobbing down 30%, 50% and even 90% from their highs not even a year ago, plan sponsors are
probably relieved that they have estimated surpluses. They are not likely to part with them voluntarily,
nor should they.
The Royal Trust case is an interesting one, mostly because so little is known about the original trust
document. There are questions that need to be answered, including: Was the plan sponsor acting as employer
or administrator?
The employer function gives the company full responsibility to create, wind-up, amend and fund the plan,
and in doing so, to act in its own best interest. Everything else is an administrative function, and the
administrator has to act in the best interest of the members.
Taking contribution holidays or amending the plan are both legitimate employer functions, according to
Jayne Cassanova, a lawyer and consultant with Watson Wyatt Canada in Toronto. And these employee functions
need only be in the best interests of the employer.
What the plan sponsor can do is spelled out in the original pension plan documents. The employer has the
right to amend the plan going forward, and benefits accrued cannot be reduced without prior notice to the
members. Yet we don't know what Royal Trust did, because the pensioner's statement of claim doesn't quote
from the document and Cassanova says only plan sponsors and members are entitled to see this document.
One pensioner involved in the lawsuit says Royal Trust lowered the basis of calculating the pension in the
1980s to 1.25% of earnings from 2%. However, Graeme Harris, a senior adviser with the bank, says plan
members were given sufficient notice of the change. He adds that the suit is "without merit." Why that is
so will not be known until the bank files a statement of defense with the court.
Another unknown is whether the lawsuit will ever get to trial. It had not received class action status at
press time, and without it, the case may not proceed.
One thing is certain, this lawsuit will be closely watched. Whatever the outcome, you can be sure that the
surplus will not be used solely for enhancing pensioners' retirement income. It would be unreasonable for a
judgment to favour pensioners and not include active plan members. But even this seems unlikely. There's
not a person in or out of the investment world who wouldn't recognize the prudence of being ahead of the
pension obligation, even on an estimated basis.
Dian Cohen is an economics consultant with a special interest in
pension issues.
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CONFERENCES
DC Plan Summit
Jan. 17 to 20, 2001
Chateau Lake Louise, Alberta
A forum for discussion and debate among leading thinkers in the field of defined contribution plans.
Presented by BENEFITS CANADA. Call (416) 596-5559.
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