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© Copyright 2000 Rogers Media. The following article first appeared in the April 2001 edition of
BENEFITS CANADA magazine.
Plan merger problems
A B.C. ruling gives pension plan beneficiaries the right to terminate a pension plan. What are the
implications for plan sponsors?
By Paul Litner
For the past several years, pension plan mergers have been a relatively risk-free exercise for employers.
But recent court decisions and changes to regulatory policies indicate that trust law and surplus issues
may make plan mergers much more problematic going forward.
In Ontario, members of a pension plan have successfully overturned the Superintendent's approval of a plan
merger.
They claimed that issues of partial plan wind-ups and the crystallization of rights to surplus had to be
dealt with before a merger was considered.
In other words, plan members' contingent rights to surplus upon plan wind-up can not be defeated by a plan
merger.
As a result of this ruling, the Financial Services Commission of Ontario is now--as a matter of
practice--requiring applicants to demonstrate why the reasoning in that case (Huus vs. Weavexx) does
not prohibit a merger of the applicant's plans.
VIEW FROM THE WEST
The courts in British Columbia have also joined the fray. In a recent case, members of a plan in surplus
objected to its merger with other plans in deficit, claiming that a merger of the plans in these
circumstances constituted a breach of trust.
The court did not accept that argument, however. Consistent with earlier rulings on the subject, it
concluded that a merger does not terminate the trust.
But in this case, the court did go on to state that members of a closed plan (where members continue to
accrue benefits but no new members are allowed to join) were permitted to invoke an ancient trust law
principle--known as the rule in Saunders vs. Vautier--to bring the trust to an end.
Under that rule, if all the beneficiaries of a trust are known and are of legal age and sound mind, they
may agree to end the trust and require payment of the remaining trust assets as they see fit.
This may understandably set off a few alarm bells in the plan sponsor community. However, it's important to
know that the rule in Saunders vs. Vautier is extremely difficult to invoke in practice.
How can you ever show that you have the consent of all future beneficiaries of a pension plan trust?
CONCERNS RAISED
Nevertheless, the possibility that beneficiaries of a pension plan, acting in concert, can use an archaic
trust law principle to unilaterally terminate a pension plan raises a number of concerns--both legal and
practical.
First of all, it brushes aside the fact that the pension plan and trust exist as part of the employment
contract.
Secondly, it ignores the fact that the employer typically retains the right to reopen that plan to new
members at any time--reopening the class of trust beneficiaries at the same time.
The possibility that plan members, acting as a class, can terminate a pension plan at any time to compel a
distribution of surplus--against the wishes of the plan sponsor--may also improperly override plan
provisions and provincial legislation. This would give only the employer, or the regulator in limited
circumstances, the right to terminate a pension plan.
So far, neither the courts nor the regulators are declaring plan mergers invalid as a result of these
concerns. Nor are they denying a plan sponsor's right to merge two pension plans.
These developments do demonstrate that pension plan mergers are clearly subject to increasing scrutiny and
legal challenges. Clearly, they are not the relatively straightforward exercises that they used to be.
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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