The basis for the members’ claim was that from time to time HBC had improved benefits for pensioners, using the surplus in its pension plan. If the members were transferred to the buyer’s pension plan and no surplus was transferred, then there would be no surplus to be used to improve their benefits when they ultimately retired.
To understand why this case caused plan sponsors such concern, it is very important to note the following facts.
• First, the affected members conceded that HBC had no contractual obligation to make future benefit improvements for pensioners.
• Second, the court held that HBC had the legal right to use surplus in its pension plan to pay administrative expenses and to take contribution holidays. That is, it could simply have used up all the surplus, and members would have no recourse.
• Third, the amount of assets transferred by HBC into the buyer’s pension plan was negotiated at arms length and permitted by the pension statute. There was no legal requirement to transfer any surplus.
The court at first instance held that “the employees had some expectation that improvements would be made” to their pensions. The court said that the members had been deprived of “the possibility of improvement to the new plan” and that the failure to transfer surplus “represented a breach of trust on the part of HBC.”
So, relying on the fact that the HBC pension trust was a “classic trust,” the court held that a mere expectation, far short of a contractual obligation, had to be protected, and ordered that surplus be transferred out of the HBC plan into the buyer’s plan.
Fortunately for plan sponsors, however, the Ontario Court of Appeal recently overturned the lower court’s decision, in a decision released May 20, 2008. The first important finding of the Court of Appeal was that the expectation of certain beneficiaries is not a “legitimate basis for creating legal rights and obligations at odds with the provisions of the plan documentation.” This is a common-sense result.
The second important finding of the Court of Appeal was that the plan documentation can displace general trust principles. In the case at hand, the court found that the trust documentation did not give the members any rights to surplus, either while the plan was ongoing or on termination. As a result, the general principle that beneficiaries must be treated with an “even hand” did not apply to require a transfer of pro rata surplus to the buyer’s pension plan. While this conclusion is itself rooted in traditional trust law concepts, it is a welcome departure from the lower court’s reasoning which, according to the Court of Appeal, seemed to be rooted more in “basic notions of fairness” than in any firm legal concept.
Conclusion
Plan sponsors have certainly welcomed this common-sense approach. It may be that the recent decisions from the Supreme Court and the Ontario Court of Appeal signal a general retreat from the strict application of trust law principles. The Supreme Court appears to have sent a strong signal in this regard, in the Buschau case.
In submissions to the Ontario Expert Commission on Pensions (OECP), which was formed by the Government of Ontario to consider possible pension law reform, our firm, along with other participants, strongly advocated for changes to be made to the Pension Benefits Act to ensure that there are clear statutory rules for mergers, expense payments, contribution holidays, asset transfers, and surplus withdrawals so that disputes based on old trust law principles can be avoided. Whether the OECP sees fit to recommend a legislative fix, to remove some of these disputes from the courts, remains to be seen.
Ian McSweeney and Douglas Rienzo are partners in Osler, Hoskin & Harcourt LLP’s Pensions & Benefits department in Toronto. This article is based on a presentation given by Ian McSweeney at the Conference Board of Canada’s 2008 Pensions Summit: Securing the Future.