Ontario legislation clears up pension surplus uncertainty

By David Brown
|Canadian HR Reporter|Last Updated: 12/16/2002

Pension rules proposed by the Ontario government are good news for plan sponsors but have employee groups up in arms.

The proposed changes offer clarification about the payout of pension surpluses during a partial wind up. In any instance where a plan is partially wound up, through a unit closure for example, employers will not be obligated to pay employees leaving the plan any surplus.

This is a favourable change for employers, said Priscilla Healy, a principal with Towers Perrin, and the chair of the advocacy and government relations committee for the Association of Canadian Pension Management. “Now it is clear that you do not have to pay out surplus. The members who are affected will retain rights for full wind up.”

There has been a great deal of uncertainty about partial wind up surpluses since December 1998 when the Superintendent of the Financial Services Commission of Ontario (FSCO) refused a partial wind up proposal from Monsanto Canada Ltd. on the grounds that, among other things, it did not contain provisions to distribute any surplus.

In large part, the problem stemmed from poorly worded legislation in the Ontario Pension Benefits Act that deals with partial wind ups, specifically section 70(6).

FSCO maintained Monsanto was obligated to distribute the actuarial surplus that existed to members affected by a partial wind up. That decision was later upheld by Ontario’s Superior Court of Justice but is now before the court of appeal. (A decision from the court of appeal is imminent but was not available at press time.)

The proposed rule changes, included in Ontario’s omnibus Bill 198, introduced in late October, include changes related to surpluses during a full wind up and for ongoing plans.

With ongoing plans in Ontario, it has been very difficult to tap into a surplus, said Healy. In some cases, plans could have huge surpluses that keep growing and it was very difficult for the employer to use it. “You had to get 100 per cent consent and in a large plan that is almost impossible to get,” she said.

While the changes are good news for plan sponsors, labour groups and some pension lawyers accuse the government of making it easier for employers to take pension funds from plan members.

In a position paper presented to the Ministry of Finance, the Ontario Federation of Labour maintains that while employers may not have known it, since 1991 they were in fact obligated to distribute any surplus that existed at the time of a wind up.

The paper also explained why members should be entitled to some portion of a surplus. “Typically, it is older workers who lose their employment as a result of such restructurings.

“Many of them are never able to replace what they have lost. Some do not find new employment, while many others find employment at wages considerably inferior to those they received prior to the downsizing. Typically, the pensions to which they are, or may become entitled, are not indexed, and their ability to accrue a decent pension is compromised by the fact that they are no longer participating in the pension plan.

“Surplus distributions to these terminated employees — where the plans in question have surpluses — provides them with some small measure of assistance.”

In an Ontario government background paper intended to address concerns raised about the changes, the government stated “Until 1998, when the Monsanto case started, employers were not required to pay out surplus on a partial plan wind up. Currently, employers are required to pay out the surpluses in all cases of partial plan wind up, which could place some plans in jeopardy. The amendments will restore the law to what was understood prior to 1998 and clarify the continuing rights of members affected.

“This is not a raid on employee surplus,” said Sheryl Smolkin, director of Watson Wyatt Worldwide’s Canadian Research and Information Centre. The standard across Canada has been that if there is a partial wind up the surplus is not automatically payable at the time of the wind up. The law in Ontario was ambiguous and the Monsanto decision was out of sync with the rest of the country, she said.

Lawyers representing employees had a different view. “Employees and pensioners are the losers under the Ontario Government’s cynical rewriting of Ontario’s pension surplus legislation,” said pension lawyer Mark Zigler of the law firm of Koskie Minsky.

The firm maintains the legislation does represent a raid on surplus. “Under Bill 198, employers (but not employees) are now allowed to apply to withdraw surplus from ongoing pension plans. Such withdrawals can affect the safety of people’s pensions.”

As for the notion that the changes bring Ontario in line with the rest of the country, the Koskie Minsky release stated, “No other province permits an employer to unilaterally apply for surplus from a pension plan without an agreement with employees.”

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