The most important pension case in years will be decided sometime next year, but what happens in the meantime?
Sometime next year, the Supreme Court of Canada will rule on the most important pension case in years. At issue in the Monsanto case is what is to be done with a pension surplus at the time of a partial plan windup.
The important question is whether Ontario’s Pension Benefits Act requires that surplus be distributed on a partial plan windup. The Financial Services Tribunal in the first level decision held that it does not. The Ontario Court of Appeal and the Ontario Divisional Court each unanimously held that it does. The Supreme Court agreed in June to hear Monsanto’s appeal of the Ontario Court of Appeal. The hearing is scheduled for February, and the decision will probably not be handed down immediately.
In the meantime, the law states surplus must be distributed on a partial windup in Ontario. Pending the outcome of the case, the Financial Services Commission of Ontario is not enforcing that law, although it has issued a warning that employers should keep adequate assets in their plans to meet obligations in the event of a decision upholding the Court of Appeal.
The question is, then, whether any action needs be taken at this time. The answer is a most emphatic “yes.” Employers and administrators who fail to take into account, or to disclose, their exposure can be seriously criticized, both from the point of view of a breach of duty to plan members and for misleading shareholders.
Who’s affected? Clearly plans with Ontario members who went through a partial plan windup at a time when the plan was in surplus are affected. But since all pension legislation in Canada, including federal legislation, has, or had at one time, a similar provision to Ontario’s, a plan could be affected if it had employees anywhere in Canada on the date of the partial windup.
Shouldn’t employers determine the surplus and pay it now? Probably not, unless the facts are very simple and the amount of money is not large. Once the money is given out, it cannot be recovered if the Supreme Court decides surplus does not have to be paid.
The legal and actuarial problems of determining, allocating and distributing surplus on a partial plan windup can be difficult and complex, particularly when the partial windup occurred some time in the past, if benefit improvements were given on the partial windup, and where the plan may have undergone other partial windups, plan mergers or asset transfers in or out of the plan.
At this point, the treatment of members outside Ontario is also problematic.
If a surplus is determined and if the employer is to receive any share, it would have to be distributed in accordance with the sometimes complex processes of the various jurisdictions. Quebec legislation prohibits the payment of surplus to an employer while the plan is ongoing, adding a further complication.
What should employers do while waiting for Monsanto? Employers and administrators should determine exposure, and if practical preserve sufficient funds to cover the exposure. They should ensure their actuaries and legal counsel are aware of all partial plan windups that have taken place in the life of the plan. Actuaries should be asked for an estimate of exposure to a mandated surplus distribution from past partial windups.
Beyond this, it’s a good idea to discuss with the actuary, and legal counsel, as appropriate:
•Whether the assets equal to the amount of the estimated partial windup surplus should be notionally segregated and invested differently from the main body of plan assets.
•Whether it is advisable to take contribution holidays or give benefit improvements using such assets, taking into consideration the financial position of the plan.
•How to disclose the risk of a mandated surplus distribution in financial statements, if the amount appears to be material.
What is the pension industry doing? The Association of Canadian Pension Management (ACPM) is a party in the appeal to the Supreme Court of Canada, and is lobbying all governments. However, it is difficult politically for governments to pass legislation with retroactive effect, and it is unrealistic to expect that all jurisdictions will amend legislation in the same way. The best hope is that the Supreme Court of Canada overrules the Ontario Court of Appeal and settles once and for all that surplus must not be paid out at the time of partial plan windup. The ACPM is urging other governments to intervene in the hearing. Employers may wish to do the same.
Priscilla Healy is a principal with Towers Perrin and chair of the Advocacy and Government Relations Committee for the Association of Canadian Pension Management. She can be contacted at (416) 231-2134 or [email protected].
The important question is whether Ontario’s Pension Benefits Act requires that surplus be distributed on a partial plan windup. The Financial Services Tribunal in the first level decision held that it does not. The Ontario Court of Appeal and the Ontario Divisional Court each unanimously held that it does. The Supreme Court agreed in June to hear Monsanto’s appeal of the Ontario Court of Appeal. The hearing is scheduled for February, and the decision will probably not be handed down immediately.
In the meantime, the law states surplus must be distributed on a partial windup in Ontario. Pending the outcome of the case, the Financial Services Commission of Ontario is not enforcing that law, although it has issued a warning that employers should keep adequate assets in their plans to meet obligations in the event of a decision upholding the Court of Appeal.
The question is, then, whether any action needs be taken at this time. The answer is a most emphatic “yes.” Employers and administrators who fail to take into account, or to disclose, their exposure can be seriously criticized, both from the point of view of a breach of duty to plan members and for misleading shareholders.
Who’s affected? Clearly plans with Ontario members who went through a partial plan windup at a time when the plan was in surplus are affected. But since all pension legislation in Canada, including federal legislation, has, or had at one time, a similar provision to Ontario’s, a plan could be affected if it had employees anywhere in Canada on the date of the partial windup.
Shouldn’t employers determine the surplus and pay it now? Probably not, unless the facts are very simple and the amount of money is not large. Once the money is given out, it cannot be recovered if the Supreme Court decides surplus does not have to be paid.
The legal and actuarial problems of determining, allocating and distributing surplus on a partial plan windup can be difficult and complex, particularly when the partial windup occurred some time in the past, if benefit improvements were given on the partial windup, and where the plan may have undergone other partial windups, plan mergers or asset transfers in or out of the plan.
At this point, the treatment of members outside Ontario is also problematic.
If a surplus is determined and if the employer is to receive any share, it would have to be distributed in accordance with the sometimes complex processes of the various jurisdictions. Quebec legislation prohibits the payment of surplus to an employer while the plan is ongoing, adding a further complication.
What should employers do while waiting for Monsanto? Employers and administrators should determine exposure, and if practical preserve sufficient funds to cover the exposure. They should ensure their actuaries and legal counsel are aware of all partial plan windups that have taken place in the life of the plan. Actuaries should be asked for an estimate of exposure to a mandated surplus distribution from past partial windups.
Beyond this, it’s a good idea to discuss with the actuary, and legal counsel, as appropriate:
•Whether the assets equal to the amount of the estimated partial windup surplus should be notionally segregated and invested differently from the main body of plan assets.
•Whether it is advisable to take contribution holidays or give benefit improvements using such assets, taking into consideration the financial position of the plan.
•How to disclose the risk of a mandated surplus distribution in financial statements, if the amount appears to be material.
What is the pension industry doing? The Association of Canadian Pension Management (ACPM) is a party in the appeal to the Supreme Court of Canada, and is lobbying all governments. However, it is difficult politically for governments to pass legislation with retroactive effect, and it is unrealistic to expect that all jurisdictions will amend legislation in the same way. The best hope is that the Supreme Court of Canada overrules the Ontario Court of Appeal and settles once and for all that surplus must not be paid out at the time of partial plan windup. The ACPM is urging other governments to intervene in the hearing. Employers may wish to do the same.
Priscilla Healy is a principal with Towers Perrin and chair of the Advocacy and Government Relations Committee for the Association of Canadian Pension Management. She can be contacted at (416) 231-2134 or [email protected].
