Originally published in The Lawyers Weekly, September
The Ontario Court of Appeal recently gave a significant victory
to pension plan sponsors.
In Burke v. Hudson's Bay Company,  O.J. No.
1945, the Hudson's Bay Company sponsored a defined benefit
pension plan. The plan's fund was subject to a trust. The
original plan limited members' entitlement on the plan's
termination to the present value of their defined benefits.
The plan's text was amended in 1980 to give the Bay
entitlement to surplus. The original trust agreement required the
Bay to pay management expenses and prohibited amendments that
allowed the fund to be used for purposes other than those specified
in the plan. In 1971 and 1984, amendments to the trust agreement
authorized the payment of all administrative expenses from the
fund. The 1984 amendment also limited the use of the fund to
purposes for the members' exclusive benefit. Until 1984,
pension booklets stated that the Bay was paying all plan expenses.
The booklets contained two disclaimers: (i) that they were a
summary, referring employees to the plan documentation; and (ii)
that the Bay could modify the plan in any way.
Since 1982, the fund has been in a surplus position. Some
employees believed the surplus would be used to improve their
pension and benefits. However, the Bay used it to take contribution
holidays and pay plan expenses.
In 1987, the Bay sold the assets of its Northern Stores Division
(NSD) to the North West Company (NWC), which offered to employ all
NSD employees and to provide a plan with equivalent pension and
benefits and recognition of prior years of service. The Bay
transferred the plan assets attributable to the transferred
employees to the NWC plan, but did not transfer a proportionate
share of the surplus.
The two main issues before the court were (i) whether the Bay
was required to transfer a portion of the plan's surplus to the
NWC plan; and (ii) whether plan expenses could be paid from the
The court held that the Bay was not required to transfer part of
the surplus unless the plan members were entitled to the surplus
when NSD was sold. According to the Supreme Court of Canada's
decision in Schmidt v. Air Products Canada Ltd., 
S.C.J. No. 48, members' entitlement to surplus is governed by
the plan documentation.
Although the trust agreement was amended in 1984 to require that
the fund be used for the members' exclusive benefit, the court
noted that the plan text was the dominant document. Since the plan
text limited members' entitlement on plan termination to the
value of their defined benefits and entitled the Bay to surplus,
the court held that members had no right to surplus. Since plan
members were not entitled to surplus, the Bay was not required to
transfer part of the surplus.
Citing its decision in Kerry (Canada) Inc. v. DCA Employees
Pension Committee,  O.J. No. 3321 (Kerry), the
court affirmed that the ability to pay plan expenses from the fund
turns on the plan documentation and that silence does not oblige
the sponsor to pay.
To determine whether the amendments to the trust agreement were
valid, the court had to ascertain the plan's purpose. The court
found that the purpose was to meet the promises made to its
members, which required that the plan continue. And to continue,
the plan had to be properly administered and the fund properly
managed. Thus, the 1971 and 1984 amendments were valid because
administrative expenses were incurred to ensure proper
administration and management of the plan.
Although the pension booklets indicated that the Bay was paying
plan expenses when they were actually being paid from the fund, the
disclaimers prevented a misrepresentation. Specifically, the plan
documentation showed that expenses were being paid from the fund
and the Bay's broad amending power was a signal not to rely on
When transferring pension assets on the sale of a business,
Burke allows a plan sponsor to retain surplus where it can
demonstrate entitlement to surplus on plan termination. However,
where plan members are entitled to surplus on plan termination, the
result may be different.
With respect to the payment of plan expenses, Burke
strengthens Kerry, providing that where the plan text is
silent but the trust agreement requires that the sponsor pay plan
expenses, an amendment to the plan text permitting the payment of
plan expenses from the fund is valid.
Burke reinforces the importance of plan documentation
and provides that disclaimers in employee communications can ensure
that plan texts supersede employee communications. In a broader
sense, Burke and Kerry are the court's
attempts to preserve the defined benefit system by allowing plan
sponsors more control over surplus.
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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