Canada: Partial Plan Wind Ups In Ontario: FST Decision That Annuitization Not Required

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Pension & Employee Benefits, December 2009

On Wednesday, December 2, 2009, the Ontario Financial Services Tribunal (FST) released its decision in Imperial Oil Limited v. Superintendent Financial Services, Dyer, Rose, et al., intervenors, and determined that in the context of a partial wind up under the Pensions Benefits Act Ontario (PBA), a plan administrator could meet its obligations to provide pensions for members affected by a partial plan wind up by providing those pensions through the on-going plan, i.e., not being required to annuitize benefits of affected members who have chosen a deferred pension.

This finding is directly contrary to the policy W100-231 of the Financial Services Commission of Ontario (FSCO), which reads as follows:

All immediate and deferred pensions in the wound up portion of the pension plan must be provided through the purchase of life annuities from an insurance company licensed in Canada to provide such annuities.

Imperial Oil Limited (IOL) had argued that the governing provision of the PBA is s.70(6), which provides that members affected by a partial wind up must be given "rights and benefits that are not less than the rights and benefits they would have had on a full wind up of the pension plan." They then argued that given that the PBA provides on a plan wind up that members must be offered the transfer or portability options under s.42(1), and in this case affected members were offered these options, the rights as required by s.70(6) had in fact been provided. IOL argued that the PBA is silent on what happens if members do not choose to transfer their entitlements and therefore that IOL's decision to continue to provide pensions through the on-going plan respected the rights of members to continuing benefit and that there is no legal requirement to annuitize.

IOL went on to note that the policy reasons against annuitization were (1) that there was often a significant cost to the annuitization, (2) that ad hoc increases would no longer be available to those members whose benefits had been annuitized, and (3) that certain non-pension retirement benefits were tied to being a pension plan member in many plans and therefore these benefits would also be lost to members who were annuitized. It is not clear from the decision the extent to which the FST was influenced by these policy arguments.

The Superintendent's position was summed up as follows:

If the Act is to be interpreted in its ordinary and grammatical meaning, the following points are clear:

(a) the assets related to a partial wind up must be allocated and distributed on partial wind up;

(b) the assets related to a partial wind up are not limited to surplus assets;

(c) the act of distributing has to mean something other than simply allocating the assets within the plan; otherwise, the language in clause 70(1)(c) would not use the words "allocated and distributed";

(d) based on dictionary definitions, a distribution involves a payment out or dispersal and not simply a segregation from within;

(e) the Act gives an additional right to a transfer on partial wind up that is not available to a member who is terminated and entitled to an immediate pension in circumstances that do not constitute a partial wind up.

The FST struggled with the fact that while the PBA was clear that members affected by a partial wind up or full wind up remain entitled to the pension that was promised under the plan, the PBA is not so clear on how the pensions are to be provided in a wind up situation. The FST stated that while it may be a practical necessity that annuitization is required on a full wind up, there is no specific provision of the PBA that mandates annuity purchased in wind up situations. (A question for another day may be whether annuitization could also be avoided in a full plan wind up.) Therefore, the question before the FST was whether the same "practical necessity" compels the same result in a partial wind up or whether in view of the fact that the original pension plan continues to exist as an on-going plan there is another equally practical and less expensive mechanism, i.e., the transfer back to the on-going plan both the assets and liabilities.

It must be remembered that the FST found in the Monsanto case, in both the majority and the dissenting opinion, that there was no requirement to annuitize benefits.¹

Decision

The FST concluded that the option of providing pensions through a continuing pension plan in a partial wind up is not precluded by the PBA. The FST said that this was consistent with FSCO's own approach to the "distribution" of the employer-owned portion of surplus triggered by a partial wind up, where it permitted that money be left in the pension plan rather than paid out. The FST also stated that this result best effects the policies underlying the PBA. Accordingly, the FST found that the distribution required on a partial wind up could be satisfied by paying amounts "back to the on-going plan."

Two Caveats

1. The FST notes at the end of its decision that it has only considered "the facts and arguments raised in this case" and states that there was no question in this case about IOL's ability to accept the liabilities and continue to provide the benefits "the parties have explicitly assured us that if we find in favour of IOL's interpretation of 'distribution', the continuing Plans will be able to provide benefits to affected members and accordingly, we need not concern ourselves with the plan documents." The FST goes on to state therefore "Additional issues which we do not now foresee may arise in other cases, which would make annuitization only prudent course of action. We leave those issues to future cases." Therefore the issue of prudence will still be a consideration in determining whether annuitization is required.

2. The FST also appears to leave open an argument with respect to the requirement to annuitize based not on the definition of what constituted the distribution but rather on whether the conditions in s.70(6) have been satisfied. We would argue that there is no reason for another FST panel to find s.70(6) applicable in another plan situation. It would seem that if annuitization was to be maintained as a right pursuant to s.70(6), it would have to apply to all cases equally.

Likelihood of Appeal

The Superintendent has a 30-day right to seek to appeal to the Ontario Divisional Court, and therefore we will watch with interest whether an appeal was filed. Preliminary indications are that an appeal is unlikely.

Footnotes

1There is no provision in the Act dealing specifically with the question of whether the members of a partial wind up group can be given the option of leaving their pension entitlements in the plan, as they clearly could if they had terminated their employment outside the context of a wind up. We do not think that the Act implicitly precludes this option. Accordingly, we conclude that Monsanto was free to give the Affected Members the option of leaving their pension entitlements in the Plan. We take some comfort in the fact that this is a practical result for all concerned. [para.50]

[Dissent]

I see no reason for a strict interpretation of the meaning of the word "distribution" in this instance. There is no need for a partial wind up to duplicate in every detail a full wind up, where there is no disadvantage to the affected members. "Distribution" on partial wind up need only require that assets, including surplus, related to the partial wind up group, must be segregated from the assets related to the on-going plan group. Individual terminating members within the partial wind up group would retain their section 42 transfer rights, but the option of transferring accrued deferred benefits to the on-going plan need not be precluded.

While it may turn out in many partial wind ups that all assets would indeed be removed from the plan, I see no reason to limit these options for a partial wind up, if the rights of the affected plan members are not impaired. [para. 109-110]

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