In a recently released decision, Hydro One Inc. v. Ontario (Financial Services Commission),1 the Ontario Court of Appeal reconsidered the threshold for when the Superintendent of Financial Services (the "Superintendent") may order a partial wind-up of a pension plan pursuant to paragraph 69(1)(d) of the Pension Benefits Act (Ontario) (the "PBA").2 The Court accepted a more flexible interpretation of this threshold, so that the Superintendent may, in appropriate cases, order a partial wind-up where a significant number of an identifiable subset of pension plan members are terminated as a result of a reorganization or partial discontinuance of an employer's business. The decision exacerbates the prevailing uncertainty to employers created by business changes that result in employee terminations. Employees who are affected by such changes often request a partial wind-up from the Superintendent, as it provides additional benefits such as immediate vesting, the ability to "grow-in" to early retirement benefits, and distribution of surplus that may be accumulated in the plan.
Paragraph 69(1)(d) of the PBA permits the Superintendent to order a partial wind-up if "a significant number of members of the pension plan cease to be employed by the employer as a result of the discontinuance of all or part of the business of the employer or as a result of the reorganization of the business of the employer." Prior to the Hydro One case, "significance" was assessed in one of two ways: either by the number of terminated plan members in comparison with the total number of active plan members prior to the business change, or by the absolute number of terminated plan members.
In Hydro One, the Court of Appeal agreed with the Financial Services Tribunal (the "Tribunal") and the Ontario Divisional Court that a third test for significance may also be applied. In appropriate cases, significance may be assessed by the relative size of the number of terminated employees in a defined subset of plan members compared with the total number of active members in that subset. In the case, 3534 pension plan members were represented by one of two unions, while the remaining 379 members were members of management without a collective agreement. The Court of Appeal held that it was reasonable for the Tribunal to order a partial wind-up in respect of 73 terminated members who were within the management subset, as they constituted a "significant number" of plan members within the meaning of paragraph 69(1)(d). This was notwithstanding the fact that these members constituted only 1.9% of the total active plan membership prior to the reorganization.
The Court of Appeal indicated that a subset analysis will not be appropriate in all cases. In determining whether a subset analysis should be applied, courts will have to consider the facts of each case, and be mindful of the purpose of the PBA to protect retirement income security while balancing the interests of employers and employees alike. The Court of Appeal also specified a number of factors to be considered, of which the following appear to have been most influential with the Court on the particular facts in Hydro One:
- That both unionized and non-unionized employees participated in the pension plan, and that a separate pension plan could have been established for the non-unionized employees;
- That the business reorganization targeted older, more senior management employees for termination in order to reduce payroll costs; and
- That whereas the terminated unionized employees negotiated a severance package in exchange for voluntary termination of employment, the non-unionized management employees were terminated involuntarily.
While Hydro One will make it more difficult for employers to predict whether a business change involving a workforce reduction may lead to a partial wind-up, the decision may be overtaken by forthcoming legislative amendments. The Ontario government has introduced proposed legislation to amend the PBA that would eliminate the concept of partial wind-ups. If the legislation is passed as currently framed, the Superintendent would still be able to order a wind-up of the entire plan, but the power would be triggered in the context of a business reorganization only if "all or substantially all" of the plan members, or "all or substantially all" of the business or assets of the employer, are affected.3
Until any such legislative changes come into force, however, employers will have to be mindful of the possible effects that a subset analysis may have on any proposed or already completed business discontinuances or reorganizations.
The Pension Group at Borden Ladner Gervais LLP would be pleased to discuss with you the implications of this decision and any other pension issues you may have.
1. 2010 ONCA 6 (released on January 11, 2010).
2. R.S.O. 1990, c. P.8.
3. Bill 236, An Act to amend the Pension Benefits Act, 1st Sess., 39th Leg., Ontario, cl. 51 (1st Reading on December 9, 2009).
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