Canada: Supreme Court Provides Guidance on Plan Administrator and Sponsor Duties, Surplus and Expense Issues

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Pension & Employee Benefits, October 2010

The unanimous Supreme Court of Canada (SCC) decision in Burke v. Hudson's Bay Co. determines that: (1) given the plan documentation at issue, there was no obligation to transfer surplus pension plan assets on the sale of the business; and (2) the employer had the right to charge expenses against the pension plan.

FACTS

This appeal arises out of the sale of a division of the Hudson's Bay Company (HBC) to the North West Company (NWC). The employees of the division were transferred to NWC and their pension benefits were transferred to a new pension plan established by NWC. At the time of the transfer, the HBC pension plan had a projected surplus. HBC negotiated with NWC and transferred enough of the pension fund to cover the transferred employees' defined benefit liabilities but did not transfer any of the surplus funds.

The transferred employees alleged that HBC had breached its fiduciary duties and was required to transfer a portion of the projected surplus to the NWC plan. They argued that the result of the failure to transfer a pro rata share of the surplus was uneven treatment, with the remaining HBC employees benefiting from a plan in surplus when the transferred employees did not. They also argued that HBC improperly charged pension plan administration expenses to its pension fund.

The trial judge found in favour of HBC on the issue of administrative expenses but held that the employees had an equitable interest in the surplus. HBC appealed the issue of surplus and the transferred employees cross-appealed on the issue of administrative expenses. The Ontario Court of Appeal allowed the appeal and dismissed the cross-appeal.

RESULT

The SCC concluded that the pension plan documentation allowed HBC to charge pension administration expenses to the fund. The SCC also concluded that there was no obligation on HBC to transfer a pro rata portion of the surplus on the sale, given the fact that the employees were not entitled to surplus on a plan termination.

It is important to note that the SCC stated that with respect to the transfer of surplus funds on the sale of a business that "the resolution of the issue of surplus transfer when the pension plan documents indicate that employees are entitled to surplus on plan termination is best left to another case where that issue arises."

Therefore, unfortunately, there still remains legal uncertainty with respect to what assets must be transferred where pension assets are transferred in the context of the sale of business. As a practical matter, this is likely to mean that vendors will be reluctant to transfer assets to a purchaser's pension plan where they are in surplus, as a full analysis of historical entitlement to surplus would be required to know whether there is a risk that surplus must be transferred. This would be difficult and expensive to do in the context of a sale of a business. Accordingly, given that pension legislation does not require a transfer of benefits on a sale of a business, the easiest route for employers will be to retain the pension liabilities, at least, in the case of a pension plan with surplus.

In addition, under the recently passed amendments to the Pension Benefits Act (Ontario) (PBA) when the sale of business asset transfer rule changes are proclaimed to be in effect, the value of the transferred assets must include a portion of the surplus which is to be determined in accordance with rules to be provided in the regulations. Accordingly, it appears that once the PBA amendments and regulations come into force, this issue of the required transfer amount will be clarified. However, employers are likely to be reluctant to transfer pension assets even if the rules are clear if more than a nominal amount of surplus is required to be transferred.

HELPFUL STATEMENTS FOR EMPLOYERS GENERALLY

  1. No Obligation to Compel Surplus Funding. The SCC stated that although in practice actuarial surplus may provide a cushion against solvency swings, employees have no right to compel surplus funding to provide this extra protection. "As the plan was a defined benefit plan, HBC assumed the risk of ensuring that sufficient assets existed to fund the liabilities (i.e. defined benefits) of the pension. The employer's duty is to ensure that funds at all times meet the fixed benefits promised by the employer. Unlike defined contribution pension plans in which the employee bears the risk of fluctuations in capital markets, the risk of unfunded liabilities falls on HBC, as it is obligated under its defined benefit plan to provide the employees with their defined benefits. The right of the employees is that their defined benefits be adequately funded, not that an actuarial surplus be funded."
  2. The Application of the "Even-Handed" Rule. With respect to the even-handedness rule, the SCC stated that just because a plan sponsor had a fiduciary duty does not obligate the administrator under a purported duty of even-handedness to confer benefits upon one class of employees to which they have no right under the pension plan. In this case, the SCC found that neither the retained, nor the transferred, employees had an equitable interest in plan surplus. Accordingly, there was no duty of even-handedness applicable to the surplus.
  3. The Duty of Due Administration. With respect to the duty of due administration, the SCC found in this case that what occurred between HBC and NWC was a legitimate commercial transaction. HBC and NWC negotiated over the purchase price of the assets including the pension assets to be transferred. As NWC was not willing to pay for the benefit of any surplus, none was to be transferred. However, both companies complied with legislative requirements. In addition, HBC was entitled to rely on the terms of the pension plan which limited employees' rights and interests to their defined benefits. Accordingly, the SCC found that HBC's legal obligations with respect to its employees, including the fiduciary duties to transferred employees, were satisfied in this case by protecting their defined benefits. "Based on the plan documentation, HBC did not have a fiduciary obligation to transfer a portion of the actuarial surplus."
  4. Scope of Fiduciary Duty. While the SCC found that the plan administrator was a fiduciary, given that the employees were not found to have a right to surplus on plan termination, the SCC stated the fact that an employer may voluntarily increase pension benefits out of surplus did not extend fiduciary obligations. Rather, the employees' equitable interest was limited to their defined benefits.

ANALYSIS

Pension Administrative Expenses

The original 1961 trust agreement provided the following with respect to expenses:

"21. Compensation of Trustee

The Trustee shall be entitled to such compensation as may from time to time be mutually agreed in writing with the Company. Such compensation and all other disbursements made and expenses incurred in the management of the Fund shall be paid by the Company."

Certain employee booklets with respect to the HBC plan stated that the entire cost of administrating the plan would be borne or paid by the company. The SCC concluded that Article 21 was not ambiguous and therefore it was not necessary to consider the booklets as an interpretative aid. The SCC found that Article 21 dealt with expenses incurred by the trustee in the management of the fund and did not address plan administrative expenses. The plan text which deals with the administration of the plan was silent on plan administrative expenses. The SCC then reached the same conclusion as it did in Kerry and found that the employer was only required to pay trustee expenses and that plan administrative expenses could be paid from the pension fund.

TRANSFER OF SURPLUS:

The SCC noted that the issue of transferring surplus on the sale of a business was a novel question.

The SCC found that HBC as plan administrator was a fiduciary.

The SCC found that the provisions of the 1987 Pension Benefits Act (PBA) which deemed the transfer of pension assets are, on the sale of a business, to be a continuation of the HBC plan was to ensure the protection of defined benefits already accrued. The SCC, however, said that they did not believe that section 81 resolved the issue. The Court held that the pension legislation in question was not a complete code, but rather only provided a minimum standard and the plan documentation could impose a higher standard:

"As this Court said in Monsanto (speaking of the Pension Benefits Act, R.S.O. 1990, c. P.8), the PBA's purpose is to establish minimum standards and regulatory supervision in order to protect and safeguard the pension benefits and rights of members, former members and others entitled to receive benefits under private pension plans' (para. 38 (emphasis added)). In my opinion, s. 81(5) does exactly that — establishes a minimum standard for the transfer of pension assets. The terms of the relevant plan and trust documentation may impose a higher standard."

The SCC contrasted Buschau and the application of the trust rule in Saunders v. Vautier which it said would have allowed the employees to circumvent the statutory rules.

In this case, the pension fund was held in a trust and therefore both the trust and plan documents were relevant in determining the rights and obligations of employees and employer under the plan.

The SCC found that the plan text at issue limited the employees' interest to their defined benefits, and that unlike in the Schmidt case, they were not entitled to surplus on termination.

To reach this conclusion, the SCC found that Articles 11.03, 12.022 to 12.024 and 14.01 of the original pension plan in this case expressly limited employees' rights to their defined retirement benefits. The SCC also noted that the plan documents did not contain any language that would typically give employees an entitlement to surplus. Rather, except for the 1984 trust agreement, none of the pension plan documents included the "exclusive benefit" or "non-diversion" language which was found to result in an employee entitlement to surplus in Schmidt. Instead of using the language in Schmidt, the pension plan text indicates that the trust fund was held exclusively for the purposes of the plan and that no part could be diverted except for the purposes of the plan. The SCC analyzed the exclusive benefit language that existed, and found that it was inconsistent with the provisions elsewhere in the pension plan which limited the employees' rights. The SCC also noted a number of examples which indicated the pension plan text was the dominant document over the trust agreement.

COSTS

The SCC in this case followed the analysis of the Ontario Court of Appeal and found that it was appropriate for costs to be paid out of the pension trust fund because this case dealt with issues surrounding the due administration of the pension trust fund and was for the benefit of all the beneficiaries. Accordingly, the SCC ordered that the cost of both parties were to be paid on a solicitor-and-client basis out of the pension trust fund.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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