Long-awaited Monsanto decision says pension surplus must be paid out at partial windup. Critics fear viability of DB plans at stake
The court ruled in late July that 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. The decision could encourage former plan members from other defined benefit pension plans to make similar claims costing employers millions in payouts.
Since 1998 Monsanto Canada had been trying to wind up a portion of its pension plan after going through a reorganization and laying off 146 employees. The windup proposal was rejected by the Superintendent of Financial Services because it did not pay laid off employees a share of the $19.1 million actuarial pension surplus that existed at the time.
Monsanto said the employees were only entitled to a share of the surplus at the time of a full windup.
The Supreme Court disagreed and said Ontario’s pension legislation meant for affected employees to be treated as if the pension plan was winding up in full.
The court ruled that section 70(6) of Ontario’s Pension and Benefits Act “requires the distribution of a proportional share of actuarial surplus when a defined benefit pension plan is partially wound up.”
The decision was based on an interpretation of Ontario’s pension laws, but it’s expected that, due to the similarity of pension legislation, the principle will be applied everywhere but in British Columbia, Alberta and Quebec.
In those jurisdictions, provincial governments have acted in different ways in recent years to protect employers from the forced distribution of surplus before full plan windup.
While there is agreement among pension industry experts that the decision is a victory for plan members affected by a windup, there is less agreement on just how negative the implications could be for plan sponsors.
Those lauding the decision said it is only fair people losing their job should get some part of the surplus they helped create, and that some of the rhetoric emanating from pro-employer camps is overheated. A victory for workers does not represent an injustice for plan sponsors, they say, and the prospect that the decision will dissuade sponsors from introducing new defined benefit pension plans is hypothetical at best.
But the more pessimistic among the pundits say the decision raises a number of new questions and poses more potential problems.
For example, the court said surplus must be distributed but it did not say anything about entitlement. This raises the possibility of protracted and likely contentious negotiations between plan members and plan sponsors over who gets what.
In Ontario, special consent regulations introduced in 1990 mean that even if the pension document clearly states the sponsor is entitled to any surplus, the sponsor must still get consent from two-thirds of affected members before actually distributing the surplus, explained Randy Bauslaugh, a partner in the Toronto office of Blake, Cassels and Graydon LLP. “From the employee’s perspective it is a case of, ‘What is mine is mine and what is yours, we share,’” said Bauslaugh. It also remains uncertain what will happen if both sides cannot come to agreement.
And because the decision is retroactive, plan sponsors could find themselves owing surplus money to former plan members, laid off years ago — going as far back as 1969 in Ontario.
While Ontario’s pension regulator, the Financial Service Commission of Ontario, would not confirm how many partial windup cases were already in its system awaiting the Monsanto decision, it’s believed to be well over 200. What is worse, say critics of the decision, is that other plan member groups affected by a layoff years ago, may now resurface to claim the layoff constituted a partial windup and seek some part of a surplus that existed at that time, even if the surplus no longer exists — or even if the plan is in deficit.
“This case raises more issues than it solves,” said Bauslaugh.
One of his clients was facing a call for a surplus distribution related to one partial windup and was awaiting the Monsanto decision. But technically the same client could be ruled to have gone through as many as 10 other partial windups before the one already being addressed.
If that is the case, the company could be required to go back and figure out the surplus for all of the preceding windups before getting to the one already on deck, said Bauslaugh. “Then the question is ‘Do we even have a surplus for that one?’”
Stephen Bigsby, executive director of the Association of Canadian Pension Management, said the group is very disappointed by the ruling.
Some plan sponsors will have to come up with millions of dollars to cover a surplus that existed years ago but has long since vanished, he said.
“Does it mean they will shut down DB (defined benefit) plans tomorrow? Of course not.” But it could have far-reaching implications, including the discouragement of new DB plans in the future, he said.
While labour groups, including the Canadian Labour Congress, intervened in the case arguing workers should be entitled to surplus, the practice will hurt more of its members than it helps, he said.
If plan sponsors have to come up with millions of dollars to pay former workers, they’ll be much less inclined to meet the demands for increases made by union leaders for the workers still with the organization. Similarly, where indexing for retiree benefits is at the discretion of the employer, retirees can expect less generous increases, as sponsors seek to demonstrate to shareholders every effort is being made to mitigate pension liabilities.
The people who will benefit the most are lawyers because there will almost certainly be a marked increase in pension fights before the courts, Bigsby said. But even many of the law firms realize that though they’ll see a spike in business, this is fundamentally bad for the pension industry, he added.
Paul Purcell, Canadian retirement practice leader at Mercer Human Resource Consulting, also said the decision is bad for everyone but a handful of people.
The decision could lead to more plan sponsors getting out of offering a defined benefit plan altogether, while others will think twice about how much they put into the plan if they aren’t going to control any surplus that arises, he said.
It will discourage employers from funding any plan into surplus. The result will be more conservative funding strategies that could have the adverse effect of producing more underfunded plans as has happened in recent years after stock markets went into downfall, he said.
“The message to employers is fund your plan to the minimum extent possible. And an environment that encourages sponsors to fund at a deficit has to be bad news for the rest of the members out there,” he said.
In the wake of the Supreme Court decision, there were calls for the Ontario government to follow the lead of B.C., Alberta and Quebec and make legislative changes to ensure plan sponsors are not forced to hand over pension surplus.
At a minimum, the Ontario government needs to add a clarification to section 70(6), which states that a partial windup should not trigger distribution of any surplus, said Bigsby. In effect this is what was legislated in Alberta.
However, sponsors would be unwise to hold their breath, said Bauslaugh.
The Supreme Court is of the opinion this is a fair and equitable way to run pensions, he said. “Realistically, I don’t see any government having the fortitude to do the right thing and pass legislation to take away the unexpected windfall the Supreme Court has just granted to some plan members. This ruling spells financial disaster for remaining plan members and for the existence of defined benefit plans if they don’t do the right thing,” he added.
For more on the Monsanto case and pension surplus enter “Monsanto” in the search box on the top left-hand side of this page or click on the related articles links below.
To read the full story, login below.
Not a subscriber?Start your subscription today!