Transamerica: Trust Law applied to Plan Mergers/Asset Transfers
One of the first cases to cause a great deal of concern among pension plan sponsors was the Transamerica Life Canada v. ING Canada case that ended up in the Ontario Court of Appeal in 2003. Transamerica involved a dispute between two companies arising from a transaction that occurred in 2000. In that transaction, Transamerica acquired the shares of a company (NN Life) that sponsored a pension plan. Transamerica purchased the shares of NN Life from ING. As part of the sale, ING represented that the NN Life pension plan was fully funded, and that all necessary contributions had been made to it. This seemed like a fairly straightforward and non-controversial representation, since the financial statements that were disclosed to the buyer showed a pension surplus of more than $4 million.
Following the purchase, however, Transamerica alleged that certain contribution holidays taken by NN Life were not in fact permitted, and therefore the representation made by ING was not true. Transamerica also alleged that the financial statements showing the surplus position of the pension plan were misleading. Transamerica therefore sought damages from ING.
To understand the unique aspects of this case, it is necessary to go back to 1989. The company that Transamerica purchased, NN Life, was created from an amalgamation in 1989 involving NN Life and Halifax Life. When the two companies were merged, their pension plans were also merged. The pension plan merger was approved by the Pension Commission of Ontario, the predecessor to the Financial Services Commission of Ontario, but the PCO attached certain conditions to its approval, based on its interpretation of the trust agreement for the Halifax Plan. The PCO said that if NN Life wanted to merge the pension plans, funds from the Halifax Life plan had to be held separate and distinct from the assets of the NN Life plan.
NN Life agreed to the PCO’s conditions. After the pension plan merger, NN Life did in fact maintain the transferred assets separately—for example, assets from the two plans were held under two separate trust agreements. Despite the fact that there were two trust funds, however, NN Life used surplus from the Halifax Life trust to fund benefits for the NN Life portion of the plan, which was in deficit. In fact, between 1989 and 2000, NN Life did not make any contributions to the trust fund relating to the NN Life members, despite the fact that that portion of the plan was technically in a deficit position.
Transamerica claimed that NN Life should not have used surplus from one part of the plan to fund contributions to the other, and that it had therefore not contributed as much as it should have to the pension plan. In its defence, ING argued that even though there were separate trust funds, from a legal standpoint there was only one pension plan, and therefore it was allowed to take surplus in one part of the fund into account in determining the overall funded status of the plan. Both the lower court and the Court of Appeal agreed with Transamerica, saying the funds should have been kept separate.
When pension lawyers saw the lower court’s decision, it seemed that the very unusual facts of the case, involving the specific promise which NN Life had made to the PCO to keep the two trust funds separate, led to the court’s decision, and there were few worries that the case would have implications beyond the two companies in question. On closer reading, however, the courts went further than that. The Court of Appeal broadly stated that since the historical trust language in the Halifax Life plan contained “exclusivity language,” that is, language to the effect that no part of the trust fund could be used for purposes other than the exclusive benefit of the members of the plan, those trust funds could only be used for the exclusive benefit of the Halifax Life employees, and should not have been used for any other groups, including the NN Life employees.
Taken to its logical conclusion, the wording of the Court of Appeal’s decision would mean that if there was “exclusivity language” in historical trust documents, which is very common, the assets of a plan can never be merged with those of another plan.
Although it followed quite a while after the Schmidt case, the result in Transamerica can be traced directly to it. Had the Supreme Court in Schmidt decided that a pension trust was a purpose trust, set up to provide defined benefits for pension plan members, then presumably so long as the promised benefits were being provided, there would be no controversy over merging pension plans and using surplus from one plan to offset a deficit in another plan. If pension trusts are considered classic trusts, however, then even surplus assets are potentially caught by any restrictions found in the historical trust documents, such as the very common provision stating that trust funds are to be held for the “exclusive benefit” of members.
