Monsanto decision a wakeup call for change

While many consider the Supreme Court of Canada’s decision in the <b>Monsanto</b> case a nail in the coffin of DB pension plans, the court has actually pointed the way to an improved system

In the summer of 2004 the Supreme Court of Canada ruled Ontario employees affected by a partial pension plan windup are entitled to some share of any surplus that existed at the time of the windup with the actual distribution dependent on plan text. And with that long-awaited decision in the infamous Monsanto case many observers began a death watch for defined benefit (DB) pension plans.

The decision garnered significant media attention with headlines such as “Court hands key pension victory to workers” (Toronto Star), “The end for DB pensions?” (National Post) and “Employers lose pension battle” (Canadian HR Reporter). As further evidence of the deemed importance of this case, both the Association of Canadian Pension Management (ACPM) and the Office of the Superintendent of Financial Institutions intervened on behalf of the Monsanto position. In a post-judgment press release, ACPM said it was “profoundly disappointed” with the Supreme Court decision, noting that “ACPM took its unprecedented decision to intervene for two overriding reasons. First, mandatory distribution of plan surplus from ongoing pension plans jeopardizes funding security for all plan members. Second, this decision has the potential to discourage the maintenance and establishment of DB plans in Canada.”

What are we to make of all this? Is this final Supreme Court decision really as bad for the future of DB pensions in Canada as the headlines and the ACPM suggest? It turns out that this question can be answered both “yes” and “no.”

A can of worms

Without a doubt, the decision represents a can of worms for Canada’s pension system in a number of ways.

At the time of the decision there were more than 200 partial windups of Ontario plans where there was a surplus at the date of partial windup. All of these plans had to go through some process to establish entitlement to the share of surplus allocated to the partial windup. In many of these situations, there will not even be a surplus today. The only clear winners here are the pension lawyers, actuaries, and accountants who will be paid handsomely to sort out this mess.

In plans that still have surplus assets, there will now be increased pressure on the Financial Services Commission of Ontario by affected plan members to declare partial windups in cases involving downsizing or reorganizations.

Employers with DB plans will instruct their actuaries to set funding targets as low as legally possible, thus decreasing the benefit security of plan members.

On top of these specific consequences, some observers of the Canadian pension scene predict that the Supreme Court ruling represents the final nail in the DB plan coffin because the decision further reduces any remaining incentives for employers to offer DB plans.

The Supreme Court’s pension view

The Supreme Court judgment anticipated this somber prediction, and expressed its own view that “there are many reasons for employers to maintain pension plans.” It lists such considerations as “attracting labour supply, reducing turnover, improving morale, increasing productivity and efficiency, and promoting loyalty to the corporation.”

The high court had quite a bit more to say about the context in which it felt its Monsanto decision should be viewed. Specifically, its arguments either stated directly or implied that:

•pensions have evolved over time from employer gratuities to enforceable legal claims;

•the intent of pension legislation is to strike “a fair and delicate balance” between employer and employee rights and obligations; and

•pension plans represent risk-sharing arrangements between employers and current and former employees. There should be a fair distribution of both risks and rewards between various stakeholder groups in any pension arrangement.

These three assertions give cause for reflection. First, is there anyone who would disagree with them? Taken together, they reflect a reasonable assessment of current reality. As such, they provide a solid foundation on which to redefine, and rebuild Canada’s workplace pension system.

This three-part foundation immediately prompts a further question that the Monsanto judgment did not directly address: “What are the necessary and sufficient conditions for the creation and maintenance of sustainable risk-sharing pension arrangements between employers and employees?” The Supreme Court is not alone in not addressing this. The paucity of genuine research and debate that has gone into answering this most supreme of pension policy questions is a remarkable fact in itself.

Why hasn’t a consensus been reached on a good answer this late in the game? It is because, while it’s in the public interest to arrive at a good answer, it may not obviously be in the direct interest of any specific stakeholder group to find that answer. Why? Because many specific interest groups benefit directly from Canada’s current adversarial workplace pension system.

Let’s start with the 146 former Monsanto employees who were given a shot at a proportion of the estimated $3 million of windup surplus. If they can establish entitlement to half of it, it would work out to a modest windfall of about $10,000 for each of them. And then there are the pension lawyers who make a living fighting these kinds of pension disputes in court. Then there are the many individuals who as pension administrators, actuarial consultants or pension accountants, have an intellectual and financial interest in maintaining the status quo. Then there are the corporate executives and union leaders who have their own reasons for not leading the charge for genuine pension reform.

What about governments? Are they not in the business of promoting the public good? Yes, but any government has only a limited amount of political capital to spend in any term of office. Pensions are a well-known political minefield. Pension regulators are closer to the action, but their primary job is to enforce current pension law, not to change it. So who is left to lead us to a better workplace pensions world? Only individuals who choose to make it their business to do so. Organizations such as ACPM and the Canadian Association of Pension Supervisory Authorities (CAPSA) can help channel the talents and energies of such individuals.

Some answers

So what can be done to reform the system?

ACPM could further develop the implications of the three principles it espouses to foster the growth and health of Canada’s retirement income system:

•clarity in pension legislation, regulation and arrangements;

•balanced consideration of stakeholder interests; and

•good governance and administration.

For the fiduciaries of corporate DB plans, the time has come to decide whether or not to continue to sponsor a DB plan, or to close it. In either case, it’s time to cease being brain-dead to the very material asset-liability mismatch risk embedded in virtually all of these plans. The choices are stark. This risk should either be properly managed or eliminated.

For fiduciaries of corporate defined contribution plans (or their Group RRSP surrogates), the choices are equally stark. Either continue with the current supplier-driven DC business model that offers plan participants too many choices at too high cost with too little oversight. Or consciously think through what a participant-driven DC business model would look like. This latter model would offer far fewer investment choices at low cost with skilled oversight that works in the best interest of participants. It would also offer an annuitization option for those participants who want to start buying life-long future cash flows now. The public policy challenge is to figure out how to create DC plans that conform to the participant-driven DC business model. At present there is no profit motive to create institutions that would adhere to such a business model.

The challenges ahead for industry-wide, public-sector DB plans lie in a somewhat different direction. While there is a better basis here for building sustainable risk-sharing pension arrangements, there are outstanding questions that have never been fully addressed. For example, what kind of risks are embedded in industry-wide and public sector pension deals? How are these risks shared among various stakeholder groups? As these stakeholder groups should include future generations of plan members and taxpayers, how are their pension deal interests represented? How should these various risk exposures be measured and reported? Clearer answers to these questions will lead the way to fairer, more transparent, and more sustainable industry-wide, public-sector pension plans.

So how should we score the impact of the Monsanto decision on Canada’s pension system? Boon or bane? In the short term, the decision has opened up a can or worms. However, the long-term impact will not necessarily be negative. Through its judgment, the Supreme Court created a solid foundation on which to redefine, and rebuild Canada’s workplace pension system. What are the necessary and sufficient conditions for creating and maintaining sustainable risk-sharing pension arrangements between employers and employees? That is the supreme pension policy question to be answered.

Keith Ambachtsheer is director of the Rotman International Centre for Pension Management at the University of Toronto. He is also a strategic advisor to major pension plans around the world. For more information contact (416) 925-7525 or visit www.kpa-advisory.com.


The Monsanto case

The DB decision sponsors feared

In 1996, as a result of a reorganization, 146 active employees of Monsanto Canada Inc. received notice that their employment would be terminated between year-end 1996 and year-end 1998.

The company offered these employees a package of benefits, including cash severance, medical and dental coverage, and pension improvements for more senior employees. In August 1997, the company submitted its pension plan partial windup proposal to the Financial Services Commission of Ontario.

The proposal stated that the 146 individuals could be entitled to surplus, if any, if the defined benefit (DB) pension plan was fully woundup at some later date. Over a year later, FSCO issued its refusal of the proposal, arguing that Ontario’s Pension Benefits Act required the distribution of surplus relating to that proportion of the plan being woundup (estimated to be about $3 million, with the actual distribution dependent on plan text).

Monsanto’s appeal of this decision before the Financial Services Tribunal was successful. However, the tribunal’s decision was overturned by a divisional court in March 2000. This lower court decision was upheld by the Ontario Court of Appeal in November 2002, and again by the Supreme Court of Canada in July 2004.

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