© Copyright 2000 Rogers Media. The following article first appeared in the May 2001 edition of BENEFITS CANADA magazine.

Surplus Struggle

Monsanto Canada Inc.'s partial wind-up has become one of the biggest battles over surplus the pension community has seen. Plan sponsors are trying to make sense of a ruling that defies the very essence of what surplus means to them.

By Kathryn Dorrell

The Ontario Divisional Court's decision to order Monsanto Canada Inc. to distribute pension surplus to terminated employees as a result of a partial plan wind-up has ignited a firestorm as plan sponsors and their advisers grapple with the ruling's implications. Here's how the surplus saga--which has been drawn out over more than four years and three judgments--has played out.

The case began when Mississauga, Ont.-based Monsanto closed one of its plants and laid off 146 employees who were members of its pension plan. The company submitted a partial wind-up report to the Financial Services Commission of Ontario (FSCO) in August 1997, stating that the plan had a surplus of about $14.3 million after pension improvements (about $4.82 million) were taken into account. In the report, Monsanto offered to distribute surplus to the terminated members, if and when the plan was ever fully wound up.

The Superintendent of FSCO refused to approve the report, saying that it failed to meet the requirements of the Pension Benefits Act (PBA) of Ontario and protect interests of Monsanto plan members--notably because it didn't distribute surplus to all terminated members. At this point, Monsanto's terminated employees stepped up to the plate, expressing what they regard as their right to surplus.

Monsanto appealed FSCO's ruling to the Financial Services Tribunal. The Tribunal ruled in favour of Monsanto. FSCO then challenged the Tribunal's ruling, which was heard by the Ontario Divisional Court. In late March, the court overturned the Tribunal's decision, requiring Monsanto to distribute surplus to all terminated employees.

Monsanto is appealing the latest decision to the Ontario Court of Appeal. The court will decide this summer whether to hear the case. It is expected to do so, given the concern the industry has raised over the issue. If the appeal is heard, a ruling is anticipated next spring.

VARYING INTERPRETATIONS

Not surprisingly, organized labour considers the court's ruling as a victory for employees. "It's a welcome change to see [the court] recognize that a partial wind-up can be a crystallizing event for surplus distribution," says Hugh Mackenzie, research director of the United Steelworkers of America (USWA) in Toronto. Noel-Bentley sees things differently. "I really believe the ruling is a misinterpretation of what the PBA intends," she says, adding that the volatility in current equity markets illustrates just how fleeting surplus really is.

"Surplus only exists at the time of a full wind-up of a plan, otherwise you penalize employees who continue in the plan," adds Gretchen Van Riesen, senior director, pension and benefits policy, CIBC in Toronto, speaking in her role as chair of the Association of Canadian Pension Management's (ACPM) government advocacy and relations committee. "This decision acts against members as much as it does against sponsors."

As these comments illustrate, the Monsanto case strikes at the very heart of the surplus debate--just who owns and controls surplus, and how it should be used. Labour groups argue that members help generate surplus through their contributions and should be entitled to a portion of it when they are let go. For their part, employers firmly believe that distribution upon partial wind-up hurts organizations and members by putting the financial security of the pension fund in jeopardy. Some experts go as far as to say that the ruling will actually lead to reduced funding of pension plans on the part of employers who will try to avoid accruing any surplus at all.

IN THE BEGINNING

The Monsanto debate begins with legislation governing the distribution of surplus in Ontario--which is outlined in section 70(6) of the PBA. The Act 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. As straightforward as this legislation seems, the conflicting positions taken by FSCO, the Ontario Divisional Court and the Tribunal illustrate that it's open to varying interpretations--expert ones at that.

"You can't look at FSCO's interpretation and say 'that's off the wall and crazy' because it's not," says Hugh O'Reilly, a partner with Torys in Toronto. FSCO will not discuss its position in light of the appeal. But O'Reilly--who disagrees with the distribution of surplus on partial wind-up--says as a regulator, FSCO's options were limited. He adds that regulators are required to enforce the Act as it is written.

The reason FSCO's and the court's stance took the pension community aback lies largely with a landmark Alberta case, Schmidt vs. Air Products. In that 1994 case, the Supreme Court of Canada ruled that members' rights to surplus in an ongoing plan hinge on the plan's termination. "Consequently, a surplus distribution is not required when a plan is partially wound-up," explains O'Reilly. The Tribunal took the Schmidt case into consideration when it rejected FSCO's interpretation of the Act. So did the ACPM, which is listed as an intervener in the appeal documents.

For others, the Ontario legislation is as clear as FSCO's and the court's rulings are accurate interpretations of the legislation. "The Act isn't vague. I think it's clear what has to be done," says Murray Gold, a partner with Toronto-based Koskie Minsky, whose firm represents Monsanto's terminated employees. He points out that two respected bodies--FSCO and the divisional court--with expertise in reading legislation determined that surplus should be distributed on partial wind-up.

Regardless of how the Act is interpreted, the distribution of surplus upon partial wind-up is regarded as being inconsistent with the essence of a defined benefit (DB) plan. Both O'Reilly and Glorianne Stromberg, the author of two key industry reports on pension regulation, make this argument. Stromberg says the concept of surplus sharing in the case of DB plans is flawed because it ignores the real possibility that distribution could leave the sponsor with unfunded liabilities down the road. "We seem to have lost sight of the fact that these plans are based on the employer's contractual obligation to pay a defined benefit," she says.

Not surprisingly, organized labour has a different take on the issue. For unions, the Monsanto ruling firmly entrenches employees' right to surplus in a DB arrangement. "This [decision] stands for the notion that has been accepted in many other areas of pension law--pensions are rights that accrue over your lifetime," says Mackenzie of the USWA. "That's what early vesting and commuted value amendments, and the grow-in benefits implemented in Ontario and Nova Scotia [that enhance longer service employees' benefits upon termination], stand for. This is just extending that [concept] to surplus."

The USWA doesn't buy the argument that distribution rewards those who may lose their jobs when the surplus coffers are rich, while penalizing other members. "The market goes up, the market goes down. Some people get rich when they buy stocks, others lose a ton of money. Exactly the same issue arises in a total wind-up as in a partial wind-up," Mackenzie says.

LAYING DOWN THE LAW

It remains to be seen if the ruling will impact plan sponsors' funding of DB plans in light of the fact that any excess money in plan coffers may no longer act as a buffer in bad economic times, but as a means to fatten up terminated employees' benefits.

"Why would an employer put more money in a pension plan when every time there was a minor reorganization they had to give it away?" asks Malcolm Hamilton, an actuary and principal with William M. Mercer Ltd. in Toronto. "The court has [ensured] that there will not be better benefits but [instead, we'll have] not-terribly-well-funded plans. It's horrible public policy."

Van Riesen adds that employers may use contribution holidays more frequently to avoid building up a surplus and even "crank down their actuarial assumptions" to fund their contributions less conservatively.

Gold believes such talk serves only to fuel plan sponsors' fears, adding that the ruling should not impact the funding of DB plans. "Actuaries are subject to professional standards and it is not open to sponsors to improperly fund their plans."

Joyce Stephenson of Maple Leaf Foods in Toronto also takes a moderate approach. As a member of the Financial Services Tribunal, she is frustrated by the court's decision, but says the ruling certainly isn't a death knell for DB plans.

Another uncertainty lies with what impact the court ruling will have on past partial wind-ups and reports currently with FSCO. "The implications both retroactively and prospectively are enormous," says Van Riesen.

Gold is confident that partial wind-up cases already approved by FSCO will not be re-opened. As for the unresolved reports sitting with FSCO, he says it's clear how the ruling should be applied. "Until there's a stay of the decision, FSCO should be requiring that partial wind-up reports include provisions for distribution of surplus." Kevin Aselstine, retirement practice business leader with Towers Perrin in Toronto, adds that his firm is instructing plan sponsors not to push for a quick resolution on a partial plan wind-up because it's not in their best interest.

READY FOR ROUND FOUR

The pension community hasn't lost any time in mounting an aggressive defense in what may become round four of the surplus struggle. "While we're waiting to hear if the appeal will be heard we are switching our focus to lobbying the provincial finance minister, saying, 'there's another way to address this besides through the courts, and that's through a change in the law,' " says Aselstine.

The industry's vigilance may have already paid off. One legal expert says that the Ontario Court of Appeal usually doesn't concern itself with pension matters, but the level of concern raised in this case is probably enough to ensure that the Monsanto appeal will indeed be heard.

If round four of the debate proceeds, the victor is any one's guess at this point. Only one thing is certain: this issue isn't going away. With the slowdown in the economy that has led major organizations such as Ontario automakers to announce significant layoffs, it's likely there will be more partial plan wind-ups over the next few years as the struggle for surplus continues.

Beyond Ontario's borders

What impact will the Monsanto ruling have on plan sponsors in other provinces? Stay tuned Nova Scotians.

The Ontario Divisional Court's decision that Monsanto Canada Inc. must distribute surplus to all of its terminated employees due to a partial wind-up of its pension plan accentuates the regional differences in Canadian pension legislation. This understandably frustrates national plan sponsors.

Under the new ruling, if Petro-Canada of Calgary, for example, closed an Ontario operation and partially wound up its pension plan it would have to distribute surplus to terminated Ontario employees. The same action in Alberta would not result in any distribution of surplus.

Hugh O'Reilly, a partner with Torys in Toronto, doesn't think the Monsanto ruling will have much of an impact outside of Ontario, with the possible exception of Nova Scotia. That province's pension legislation is worded the same as the Ontario Pension Benefits Act, and accordingly, it's open to interpretation.

British Columbia and Alberta, on the other hand, have pension legislation that clearly states that a partial wind-up is an exception in the distribution of surplus. Quebec passed a bill within the past year that states surplus is not distributed upon partial wind-up.

However, it is dangerous to only look at surplus provisions in each province and not pension legislation in its entirety when making regional comparisons, says Murray Gold, a partner with Koskie Minsky in Toronto. Quebec's legislation, for instance, is considerably different on the issue of contribution holidays than Ontario. "They're [significantly] more favourable to members," says Gold of Quebec. He adds that Quebec does not have any vesting requirements (the right an employee gradually acquires by length of service to receive benefits such as payments from a pension fund), while Ontario does. "One of the purposes of partial wind-up rules, of course, is to vest people, and Quebec vests everybody."

Partial wind-ups explained

What constitutes a partial wind-up? The most obvious circumstance is an employer's decision to carry one out, which is usually done when part of the organization is shut down or a large number of employees are laid off.

The Superintendent of the Financial Services Commission of Ontario--along with regulators in other provinces--also has the authority to order a partial wind-up, but only under specific circumstances.

In Ontario, these conditions are spelled out in section 69 of the Pension Benefits Act. They include: a reorganization, downsizing or a plant closure by the employer in which a significant number of people lose their jobs; a funding or financial problem with the plan; the employer's failure to make contributions to the fund; bankruptcy; and the sale of all or part of the business or the firm's assets.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."