There are two main legislative approaches to employer surplus withdrawals in Canada: withdrawals based on contractual entitlement under the historical plan documents, and withdrawals based on member agreement. When an employer withdraws surplus on the basis of its contractual entitlement, it does not have to distribute surplus to members. However, if the withdrawal is based on member agreement, the employer must distribute part of the surplus to members in order to secure the requisite member consent.

Under current Ontario legislation, an employer that withdraws surplus must have both contractual entitlement and consent from members. As a result, plan sponsors are forced to distribute part of the surplus to members, even when they have clear contractual entitlement to all of it. The consultation paper says that employers should be able to withdraw surplus based on either contractual entitlement or member agreement, as opposed to both. With a clear contractual entitlement to surplus, a plan sponsor could apply to withdraw it without members' consent. This would bring a welcome end to the current legislation that essentially allows employees to hold employers ransom--even in the case of clear employer entitlement to surplus under the plan documentation.

The paper also proposes that if surplus remains undistributed after a prescribed period of time following a full wind-up, the superintendent may issue an order for final settlement of the remaining surplus. This would provide a remedy for members where the employer is unable to establish contractual entitlement or secure member agreement, for example, in cases where the plan documents clearly entitle the members to any surplus on a full wind-up.

Surplus distribution upon a partial plan wind-up.

When a pension plan is subject to a partial wind-up--which can occur in several incidents including the closure of part of the business--members are entitled to the same rights and benefits that they would have upon a full wind-up of the plan. This right has been in the legislation for decades, and it has been interpreted to mean that members are entitled to the same benefits upon a partial plan wind-up as they would have if the plan was fully wound up. These benefits include full vesting and grow-in to early retirement benefits. However, recent litigation, notably the Monsanto case, has created a debate around whether this legislation means that surplus is also distributed when a plan partially winds up.

The new proposals recommend that there be no required distribution of surplus on a partial plan wind-up. Employers would be permitted, but not required, to withdraw surplus on a partial wind-up only if they are able to secure the requisite member consent. This would bring to an end the possibility of forced surplus distributions on a partial wind-up (unless the plan documents require such a distribution).

This proposal is a welcome change but it should go even further. We need to prohibit any distribution of surplus in the case of a partial plan wind- up (other than as permitted for ongoing plans), on the grounds that it is not possible to determine what portion of the surplus is attributable to members affected by the partial wind-up. As the paper states, surplus attribution is a meaningless concept. The proposals criticize the concept of "surplus attribution to employee or employer contributions" and "surplus attribution to a specific time period." The same argument can be extended to the concept of surplus attribution to members affected by a partial wind-up.

There are presently two legislative approaches to determine whether a surplus sharing agreement has been achieved. One is based on a measure of members who dissent, while the other is based on the number of members who consent to distribution.

In Quebec, an employer's surplus proposal is binding unless 30% or more of the members dissent. In other jurisdictions, however, the legislator usually states that two-thirds of members must agree with distribution before it can be carried out. The Ontario government advocates the two-thirds consent approach, which maintains the existing legislation in this province.

However, under this approach, distribution is often delayed because members cannot be located. As well, they often do not understand materials explaining the distribution of surplus, or they simply do not respond to them. The Quebec approach has significant advantages, as the employer surplus proposal is essentially binding unless members take specific action to oppose the distribution of surplus.

Surplus distribution from an ongoing plan.

Ontario rules on the distribution of surplus to employers from an ongoing plan are restrictive, to say the least. Surplus can only be distributed when the plan sponsor has consent from all plan members (subject to a contingency reserve being kept in the plan). The government consultation paper makes two proposals on this front. First, it recommends reducing the rule of 100% member consent to two-thirds consent. Alternatively, it proposes that employers may withdraw surplus based on contractual entitlement alone.

In terms of other proposals, the paper proposes that, in the event there is no surplus distribution at the time of a partial plan wind-up, affected members have a right to consent to a future surplus distribution. Where an employer proposes a surplus sharing agreement and the member consent is below the prescribed level, but above 50% of the members and former members who voted, it is proposed that the employer may refer the matter to arbitration, rather than renegotiate the proposal.

The Ontario proposals are welcome, and they are strategically aligned with initiatives in other jurisdictions. BC