Tilting the surplus regs

An objective of the Ontario Ministry of Finance's consultation paper, Surplus Distribution from Defined Benefit Pension Plans, is to amend the Pension Benefits Act (PBA) "so that surplus distribution can be carried out in a fair, equitable and predictable manner." This goal is laudable. However, the government is proposing to undo a regulatory scheme that effectively balances the interests of employers, employees and pensioners.

The Ontario government introduced legislation to regulate pension surplus withdrawals in 1991. It was designed to protect the interests of plan members and address uncertainties in the PBA pertaining to surplus. These 'let's make a deal' regulations essentially required employers, plan members, retirees and deferred vested plan members to negotiate a surplus sharing arrangement acceptable to most, if not all, parties.

These regulations have worked effectively for almost 10 years to create a level playing field, which had previously been weighted in favour of employers. The requirement that parties with a true interest in the pension fund's assets have a voice in determining how surplus is withdrawn and distributed is both sensible and equitable. The current regulations have frequently avoided lengthy and costly winner-take-all litigation.

There were two drawbacks to the 1991 regulations though. First, they were originally viewed as temporary and had to be renewed in 1994, 1997, 1998 and 2000. Second, the regulations seem to be in conflict with a provision in the PBA which states that before an employer can receive any surplus, it must be shown that the pension plan provides for payment of surplus to the employer.

The surplus ownership provisions in many pension plans are often vague and confusing and require court clarification. As a result, most employers, plan members and pensioners have negotiated a surplus sharing arrangement rather than engage in lengthy and costly court hearings.

Unfortunately, the conflict between the PBA and Ontario's regulations was brought to the fore by the Ontario Divisional Court in Kent et al. vs. Tecsyn, a decision released last May. Amendments and changes are required to the current surplus sharing regulations to ensure they remain effective. Minor changes should also be made to the PBA to deal with the conflict highlighted in the Tecsyn case.

These changes should allow surplus sharing arrangements to be fairly negotiated regardless of the pension plan's provisions on surplus ownership. This would ensure that the regulatory framework for surplus withdrawal is fair and equitable to all parties concerned.

The regulations should also be made permanent to ensure that surplus withdrawals are carried out in a predictable manner. These two relatively simple changes would help the Ontario government achieve its own objectives.

The Ontario government is proposing to go well beyond the simple steps required to fix the current system. It is proposing to revamp the system entirely and weight it heavily in favour of employers. In the case of a full plan wind-up, the consultation paper proposes that employers be able to withdraw surplus upon a plan wind-up without the consent of current and former members where the plan sponsor "is clearly entitled to surplus on the basis of the plan documents."

This proposal is a departure from the current scheme, which always requires the employer to obtain consent from current and former members. The proposal is also a clear move favouring employers at an economic time when members may be most vulnerable.

If a pension plan is terminated either employees have lost their jobs or the security of a defined benefit pension plan has been removed by the employer. The pension surplus could be used to enhance retirement benefits and/or savings. Allowing employers to withdraw surplus without the consent of plan members and retirees will financially hurt these individuals when they could most be in need of financial assistance.

In the case of insolvent employers, the situation will be further exacerbated as employees will often have already lost wages, severance and vacation pay as well as other benefits. To then allow the employer's creditors to take pension assets is particularly harsh.

Some may argue that the system would be made fair to both employers and employees if members were also given the right to unilaterally withdraw surplus when a plan clearly entitled both current and former members to withdraw surplus on wind-up. This argument ignores the disparity in the financial ability of employers and employees to mount costly court proceedings to prove entitlement.

It also ignores the fact that the decision to terminate a pension plan is often made by the employer. Employees and pensioners do not have the ability to wind up the pension plan so that they can access surplus assets.

In the 1994 case of Schmidt vs. Air Products Canada Ltd., the Supreme Court of Canada encouraged legislated solutions to deal with surplus issues, not further litigation. Permitting surplus withdrawals for employers who claim to have clear ownership of surplus will only generate litigation as to the clarity of the ownership, discouraging negotiated solutions.

With respect to partial wind-ups, the proposals are a clear attempt to take away benefits conferred upon plan members and pensioners in the PBA, which were recently affirmed by the Ontario Divisional Court in the Monsanto case. The Divisional Court has stated that plan members and former members have the same right to surplus on a partial wind-up as they would have on a full wind-up. This is a fair balance between the interests of employers and former employees.

Current regulations do not give affected employees the entire surplus attributable to a partial wind-up group. They simply state that the employer and the former employees affected by the partial wind-up must reach an agreement to share surplus in an equitable manner.

The Ontario government's proposals would allow an employer to simply choose not to deal with any surplus on a partial wind-up. There are two problems with this approach. If there is no surplus distribution upon the partial wind-up, the employer can choose to use the surplus to take future contribution holidays or to improve benefits for employees whose employment was not terminated as a result of the reorganization or plant shutdown that gave rise to the partial wind-up.

If the plan is ever fully wound up there may no longer be any surplus left. And if an employer is allowed to defer any surplus distribution indefinitely or until the plan is wound up, the former employees affected by the partial wind-up may have deceased or be impossible to locate. These individuals and their beneficiaries may never receive any benefits from the surplus funds.

The paper also proposes to allow employers to withdraw surplus from ongoing plans without the consent of current and former members where the plan documents clearly entitle the employer to withdraw surplus. How this proposal fits in with the government's objective of achieving a fair and equitable solution is not abundantly clear. If the proposals were implemented, an employer that believes it is entitled to the entire surplus may withdraw it without the consent of employees and pensioners.

The current legal regime, which requires that 100% of the plan's beneficiaries must consent to a surplus distribution proposal from an ongoing plan, does need some revision to reduce the requisite levels of consent. However, if this level of consent is lowered the system would be fair and equitable.

The law regarding contribution holidays already favours employers. It allows employers to take contribution holidays unless the plan or another agreement fixes contributory requirements. The government's proposals shift the balance even further in favour of employers by proposing to amend the PBA to specifically state that an employer can take contribution holidays "unless the plan documents expressly state otherwise."

Even more troubling is the fact that one of the questions asked in the consultation paper is whether the PBA should be amended to allow contribution holidays "even if the plan documents expressly prohibit a reduction or suspension of employer contributions." Allowing employers to break their agreements to finance pension plans is hardly in the public's best interest.

Regardless of whether pension surplus is regarded as deferred wages or employer entitlements, the surplus regulations first implemented in 1991 have balanced the interests of employers, employees and pensioners.

Although, some minor changes are required to deal with technical concerns, the regulations requiring these parties to reach an acceptable surplus sharing agreement have been both fair and equitable--which is more than can be said of the proposals outlined in the Ontario government's consultation paper. BC

Michael Mazzuca is a partner in the pensions and employee benefits department at Koskie Minsky in Toronto. mmazzuca@koskieminsky.com.