Canada: Supreme Court Decides Employer Need Not Necessarily Transfer Portion of Surplus to Successor Plan for Transferred Employees

On October 7, 2010, the Supreme Court of Canada released its decision in Burke v. Hudson's Bay Co., which confirms the Ontario Court of Appeal's decision that a proportionate share of pension surplus in a defined benefit plan need not necessarily be transferred to a successor plan established for transferred employees on the sale of a division of a company.

From 1961, the Hudson's Bay Company (HBC) provided a contributory defined benefit plan for its employees. In 1987, HBC sold its Northern Stores Division to the North West Company (NWC). This resulted in approximately 1,200 employees being transferred from HBC to NWC. As part of the transaction, NWC agreed to establish a new pension plan providing the transferred employees with benefits at least equal to those provided under the HBC plan, and HBC transferred assets sufficient to cover the defined benefits of the affected employees. At the time of the transfer, however, the actuarial report showed that the HBC plan had a significant actuarial surplus. None of this surplus was transferred to the NWC plan.

Representatives of the transferred employees were successful in the Ontario Superior Court of Justice in obtaining an order requiring HBC to transfer a portion of the actuarial surplus to the NWC plan. Justice Campbell held that the transfer of certain employees to the NWC plan without a portion of actuarial surplus constituted differential treatment in breach of trust. This decision was overturned by the Court of Appeal.

The Supreme Court of Canada confirmed the holding of the Ontario Court of Appeal, with reasons written by Justice Rothstein on behalf of the full Court. The Court held that, like any surplus distribution question, the threshold question is whether the employees in question had an entitlement to the surplus funds. Although it is clear that employees may have an equitable interest in actual surplus on termination of a pension plan, the novel question raised in Burke is the nature of any interest in actuarial surplus while the plan is ongoing. In circumstances where employees are entitled to surplus on plan termination, the Court analogized their interest while the plan is ongoing to a "floating equity"– rather like the interest of a residual beneficiary under a will – which may or may not crystallize. Vesting of an entitlement to actual surplus remains contingent on (a) the plan terminating; (b) there being an actual surplus once the liabilities are satisfied; and (c) the employees surviving the date of the termination of the trust.

Furthermore, the Court held that the applicable plan documents did not entitle HBC employees to anything in excess of their defined benefits while the plan was ongoing, nor to the actuarial surplus in the pension plan on plan termination. Since none of the employees had an entitlement, the surplus was properly maintained in the original plan for improvement of benefits or contribution holidays.

The Court also rejected the employees' argument that HBC treated its retained employees differently from the transferred employees, since neither the retained nor transferred employees have an equitable interest in the surplus. The fact that HBC was a fiduciary as plan administrator did not obligate it to confer any benefits to one class of employees to which they had no right under the plan.

The Court also upheld the lower courts' determinations that pension plan expenses could properly be paid from the pension fund. The original trust agreement specified that HBC was required to pay the trustee's compensation and expenses but was silent on payment of other expenses. Relying on its earlier decision in Nolan v. Kerry (Canada) Inc., the Court held that silence in the documentation does not create an obligation on the employer to pay the plan expenses.

In holding that actuarial surplus need not necessarily be transferred along with employees, the decision may be viewed as favourable to companies who are undergoing or contemplating corporate transactions. However, the decision points to the need for additional due diligence in corporate transactions. The Court emphasized that its decision depended upon the text and context of the pension plan documentation at issue, and that each situation will have to be evaluated on a case-by-case basis. Whether actuarial surplus must be transferred depends upon who owns the surplus; that determination will often require companies to obtain surplus ownership opinions in cases involving the transfer of pension plan assets.

The Pension and Benefits Group at Borden Ladner Gervais LLP would be pleased to discuss with you the implications of this decision and any other pension or benefits issues you may have.

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