The recent Supreme Court of Canada(SCC)decision in the case of Buschau v. Rogers(Buschau)represents a critical and positive shift in the Court’s view of defined benefit(DB)pension plans and reinforces the importance of establishing the right conditions for properly funding such arrangements. The Court’s decision also recognizes that pension plans have a unique set of legal principles that cannot, and should not, be intrinsically equated with traditional common law trust principles. Accordingly, the SCC ruled that plan members could not effect a termination of the pension trust and that the legislative scheme establishes the appropriate process for dealing with pension issues.

The clarity provided by the SCC’s decision was necessary in the aftermath of the Schmidt case, where the Court found that pension trusts were classic trusts, which are subject to “all applicable trust law principles”. The Buschau case has confirmed that trust principles should not be resorted to at the expense of the true objectives of pension law. Indeed, this is the precise reason that a distinctive legislative scheme exists to deal with pension issues.

DB plans are an important part of Canadian economic and social policy. Their fundamental objective is to provide for long-term retirement benefit security. In addition, DB plans provide a source of stable capital for the Canadian economy, and have a positive effect on corporate governance and accountability.

Through its decision in the Buschau case, the SCC recognized the importance of DB plans. It acknowledged that making it prohibitive for employers to establish and properly fund the pension plans that they voluntarily create endangers social policy objectives. As a result, the Court held that the statutory pension scheme could not be overridden by the rule in Saunders v. Vautier, which permits a trust to be terminated if all of the beneficiaries are adult, of full mental capacity and consent to the termination.

Disregarding the statutory scheme designed specifically to regulate pensions was found to be contrary to pension plan objectives. Providing retirement benefits is not assisted by allowing the distribution of plan capital or surplus at the behest of plan members. Indeed, the Court pointed to the specific conditions for termination under the federal Pension Benefits Standards Act. Though the decision was not unanimous as to whether those conditions had been met, the Court did find that the proper recourse was adherence to the statutory process and not to principles of classic trust law.

The SCC decision recognizes the reality that pension plans are voluntarily created by employers and that an imbalance in employer-employee interests may frustrate the ultimate goal—long-term benefit security for retirees. Disregarding the true purpose of pension plans will lead to underfunded, dysfunctional plans. This does a disservice not only to employers but also, to a greater extent, plan beneficiaries.

To achieve healthy and prosperous DB pension plans there must be a balance between employer and employee interests. The SCC responded to this issue by finding that traditional trust law principles, that allow the beneficiaries of a trust to wind up the trust, would constitute a “very significant derogation from an employer’s right to voluntarily choose to offer or continue a pension plan.”

Allowing for the unilateral termination of a DB pension plan by its members would disrupt the vital balance between employer and employee interests. It would also frustrate attempts to properly fund DB plans, imposing more risk on plan sponsors without regard for the long-term consequences to plan members. The Pension Benefits Standards Act is designed to address these unique issues and should not be displaced by common law trust principles.

Governments must improve pension plan regulation and legislation across Canada to make it more desirable for employers to establish, maintain, and properly fund DB plans for the benefit of plan members.

Becky J. West is chair of the Advocacy and Government Relations Committee with the Association of Canadian Pension Management(ACPM).

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