‘Two hats’ pension doctrine endorsed by Supreme Court

Ruling involving HBC seen as good news for employers
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 11/15/2010

The “two hats doctrine of pension law — in which an employer may or may not have fiduciary obligations at different times — has effectively been endorsed by the Supreme Court of Canada, according to industry experts.

In Burke v. Hudson’s Bay Co., Canadian employers were delivered an encouraging ruling. Essentially, when a company sells a division, it might not have to transfer any of a pension plan’s actuarial surplus when transferring assets to cover a pension plan’s defined benefits for former employees. In addition, an employer is allowed to pay plan administration expenses out of the fund.

For a long time, pension lawyers and others have put forward the idea that the same company can wear two different hats, depending on what it’s doing with its pension plan at any particular time, said Gary Nachshen, a partner in the employment, labour and pension group at the Toronto office of Stikeman Elliott. So employers may have fiduciary obligations when they’re acting as administrators, and not have such obligations if they’re not.

“The Supreme Court didn’t use that expression but, really, running through most of the key parts of their analysis is that theory,” he said. “To me, that’s the broader impact or significance of the case — we effectively have an endorsement by the Supreme Court of the two hats doctrine of pension law.”

The decision confirmed organizations or companies sometimes have to play both roles at the same time, said Faisal Siddiqi, a principal in the retirement practice at Buck Consultants in Toronto. And that’s what HBC’s employee group was questioning: Which hat was HBC wearing when it approved expenses to be paid?

But most employers are careful to ensure that, when acting as plan sponsors, they make plan sponsor decisions and when acting as a plan administrators, they make plan administrator decisions, he said.

“It’s more governed by which governance model they’re following,” said Siddiqi.

Background to Burke v. Hudson’s Bay Co.

In 1982, the 20-year-old defined benefit (DB) pension plan at HBC generated its first actuarial surplus so the company began paying plan administration expenses out of the fund. Five years later, HBC sold a division and transferred about 1,200 employees. The purchasing company agreed to establish a new pension plan with benefits equal to those provided under the HBC plan, so HBC transferred enough assets to cover the defined benefits. While HBC had an actuarial surplus of $94 million at the time, none of this was transferred.

But the transferred employees said HBC, as plan administrator, breached its fiduciary duty to treat all members with an even hand. They said HBC should transfer some of the surplus to the successor plan and also should not have charged expenses to the pension fund for six years. A trial judge didn’t see a problem with HBC paying expenses from the surplus, but said the surplus was subject to trust principles and since the transferred employees were beneficiaries of the trust, they had an equitable interest in it, so HBC should transfer a portion of the surplus.

HBC appealed the surplus issue and the workers cross-appealed on the issue of expenses. The Ontario Court of Appeal upheld the lower court’s ruling on expenses but overruled the finding on surplus. Again, the employees appealed. And again they were denied, this time by the top court in the country.

The issue of the surplus raised “a novel question in pension law” as the sale occurred in the context of an ongoing pension plan, rather than a terminated or wound-up plan, said Supreme Court Justice Marshall Rothstein in his recent judgment.

“In all cases, the interests in the surplus of a pension plan have to be determined according to the words of the relevant documents and applicable contracts and trust principles and statutory provisions. Each situation must be evaluated on a case-by-case basis.”

A review of the original and subsequent pension plan documentation indicated the only employee benefits provided for under the terms of the plan were the defined retirement benefits. HBC’s only duty was to ensure funds at all times met the fixed benefits promised, so employees were only entitled to adequate funding, not that the actuarial surplus be funded.

“It cannot be said that the transferred employees had an equitable interest in the surplus on termination and, therefore, no floating equity in the actuarial surplus during continuation of the plan,” said Rothstein. “Just because HBC had fiduciary duties as plan administrator does not obligate it under any purported duty of even-handedness to confer benefits upon one class of employees to which they have no right under the plan.”

It’s an important, positive ruling for Canadian business, said Barry Glaspell, a litigation partner at the Toronto office of Borden Ladner Gervais. And there is a second important point, he said.

“When you’re doing a defined benefit plan split on the sale of a business or division, and if the plan is not like in Hudson’s Bay — if the plan language is fuzzy or even if there’s language in the plan that makes it clear the surplus is owned by plan members — the employer need not necessarily transfer a pro rata amount of that actuarial surplus on the plan split.”

The Supreme Court expressly leaves this open, which is significant, said Glaspell. Going forward, if a plan has language that seems or is clearly favourable to members, clients should seek an opinion to determine if members actually have equitable interest in surplus and, if so, whether it’s necessary to transfer a portion of the surplus to the new plan.

“The Supreme Court does not want to tie the hands of Canadian businesses in corporate restructuring transactions in a case that does not raise that issue, because the plan terms were clear,” he said. “This signals a very positive, more employer-friendly way of thinking about defined benefit plans generally.”

But employers should look at plan documents to ensure they have appropriate wording to deal with the transfer of assets and sales of businesses and whether they have clear entitlement to surplus in those circumstances, said Siddiqi. Many plans are old and have vague language that could lead to the two sides arguing about the surplus and since many plans don’t have a surplus right now, it’s a good time to review that language and make those kinds of amendments, he said.

Kerry decision confirmed

As for the expenses, the original plan documents did not expressly address administration expenses and subsequent trust agreements that allowed HBC to charge the expenses to the fund.

“The new trust agreements merely confirmed what was already implicitly provided for in the original trust agreement,” said Rothstein.

The issue of expenses comes up in DB plans all the time and has been dealt with in other cases, said Nachshen, citing Nolan v. Kerry (Canada).

“This Burke decision really just punctuates or underscores the Kerry decision, so now we have the Supreme Court saying twice that, unless there’s an express prohibition in the plan documents, then plan assets can be used to pay plan expenses,” he said.

However, the issue is still a bit grey in that there’s still discretion on what expenses can and cannot be charged to a pension fund, said Siddiqi.

“The difference becomes: Are expenses being charged that should be charged because you’re administering the fund or are they just being charged because there happens to be a fund plan there?”

But most plan administrators are careful with expenses they charge and try to make sure they’re legitimate, he said.

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