While initial reaction to the Ontario Court of Appeal decision in the Burke v. Hudson’s Bay Company case was positive from those who represent plan sponsors’ interests, a closer reading suggests that the judgment may have actually further “muddied the waters” regarding the treatment of surplus in a commercial transaction.
The central issue in the Burke case revolved around whether employees who were transferred to a new company when HBC sold a division were entitled to a transfer of a pro rata share of the pension surplus in their former pension fund to their new pension fund. (For more details on the facts of the case, click here.)
The end result was that the Court of Appeal overturned the Ontario Superior Court of Justice decision and ruled that the transferred plan members did not have any entitlement to surplus funds and therefore no surplus needed to be transferred to their new pension fund. The Court reached that conclusion on the basis of the following findings:
• The starting point for any determination of rights and obligations of the parties to a pension plan is the plan documentation and not the conduct of the parties or expectations
• The employee booklets did not derogate from the rights of the parties created by the plan documentation. The booklets referred members to the official plan text and stated that HBC retained the right to amend the plan at any time and in any way
• The sale did not result in a “crystallization” of the right to surplus as no partial wind-up was triggered
There is no doubt that this decision is good news for plan sponsors who are fortunate to have favourable wording in their historical plan texts and funding agreements. It affirms that there is no need to transfer a pro rata share of pension surplus in a commercial transaction unless the wording of historical pension plan documentation or specific provisions of the purchase and sale agreement afford surplus entitlement to members, or require a transfer of surplus funds.
Of course, the “certainty” afforded by this judgment is dependent on the case not going to appeal. The decision of whether or not to appeal the Burke case must be made by August 19, 2008. Whether or not leave is granted by the Supreme Court of Canada may depend on that court’s appetite to hear another pension case, given that the appeal in Kerry (Canada) Inc. v. DCA Employees Pension Committee will be heard late this year.
Decision leads to more questions
In the meantime, however, any assurance plan sponsors can take from the Burke decision is further tempered by the uncertainty resulting from the approach taken by the Court of Appeal and the questions the Court leaves unanswered:
- Does surplus need to be transferred where members do have entitlement? The judgment states that “other questions follow before it can be decided what, if anything, must be done in respect of the actuarial surplus in the Plan at the time of Sale” (emphasis added). It is possible then, that a court could decide in a future case that surplus can remain in the vendor’s pension plan. The more likely outcome is that additional protection would be afforded to members in that case and that a transfer of surplus may, in fact, be required. By leaving this question unanswered, vendors and purchasers have been left in a state of uncertainty.
- What is the value of plan surplus? In a commercial transaction, the value of pension surplus varies. Surplus is often seen by purchasers to be of questionable value. Vendors will tend to look for dollar-for-dollar adjustments to the purchase price in transferring surplus, but purchasers are reluctant to recognize and give full value. The Burke case puts more pressure on vendors and purchasers to negotiate the value of surplus in the face of not knowing what options they have.
- Are historical plan documents the definitive—even if not the best—authority? The Burke decision demonstrates a continuing reliance on the wording in the initial plan texts, funding agreements and employee communications, many of which may have never contemplated the existence of surplus, let alone entitlement to it. Given that there was no attempt to appropriate surplus in the Burke case, it is interesting that the same approach used in earlier cases beginning with Schmidt v. Air Products Canada Ltd. to determine the issue was used.
A different approach
Could the Burke case have been resolved in a way that did not give rise to these other pressing questions?
Policy Statement 2, issued by the Pension Commission of Ontario (now the Financial Services Commission of Ontario) on July 28, 1988 (indexed as A700-200), offers parties to a commercial transaction the option of leaving surplus in the vendor’s continuing pension plan, even if the accrued benefits are transferred over. If surplus is left in the vendor’s plan, then the members who become participants in the purchaser’s pension plan retain any rights they may have to the surplus retained in the vendor’s plan. This is somewhat analogous to the situation where the members’ accrued liabilities, and the corresponding assets, are left in the vendor’s continuing pension plan.
There are obvious differences, of course. Accrued pension liabilities that are left in a vendor’s continuing pension plan must be provided for (e.g., funded), in the usual manner, in accordance with the prescribed standards under applicable pension legislation. There are no similar specific requirements for maintaining surplus. However, pension legislation and the common law do impose certain standards when it comes to prudent investment and administration of a pension plan.
In the face of FSCO’s Policy Statement 2, did the Court of Appeal need to determine entitlement to surplus in order to decide the Burke case and conclude that a review of the historical plan documentation was necessary? The Court acknowledged that the right to surplus does not crystallize until a wind-up of the pension plan occurs. On this basis, it may have been possible to use the option in the Policy Statement and leave the surplus in the vendor’s pension plan. In our view, it is better left to the parties to a commercial transaction to determine what is purchased and what is not; what is of value to the purchaser and what is not; what the vendor will give away for the agreed purchase price and what it will not.
Of course, the employees of the purchased business are not parties to the purchase and sale agreement. Still, the potential rights and entitlements of these employees can be addressed through the standards of care and related obligations imposed on pension plan administrators by statute and the common law.
Following this alternate approach could mean that the costly and complex process of determining surplus entitlement, along the lines of the Court of Appeal’s analysis in Burke, could be delayed until the wind-up of the vendor’s pension plan, should a surplus exist at that time.
Sheldon Wayne, a lawyer, and Todd Hellstrom are both members of Hewitt Associates’ legal group and are based in Toronto. firstname.lastname@example.org; email@example.com.