Supreme Court says pension surplus must be paid out at partial wind up
Ontario employees effected by a partial pension plan wind up are entitled to a share of what, if any, surplus exists at the time of the wind up, according to the Supreme Court of Canada.
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.”
Since 1998 Monsanto Canada has been trying to wind up a portion of its pension plan after going through a reorganization and laying off 146 employees. The company was prevented from doing so because it refused to pay those employees a share of the actuarial pension surplus at the time of the partial wind up. Monsanto said they were only entitled to a share of the surplus at the time of a full wind up.
The Supreme Court disagreed and said Ontario’s pension legislation meant for effected employees to be treated as if the pension plan was winding up in full.
At the time of the partial wind up, there was an actuarial surplus of $19.1 million, meaning the effected employees will be entitled to divide $3.1 million.
Pension experts advocating for plan sponsors say being forced to hand over money at the time of a partial wind up — when there may not be any surplus at the time of a full wind up — will discourage employers from funding any plan into surplus. The result might be more reserved funding strategies, with sponsors putting the absolute minimum into the plan. In other words, the decision could have the adverse effect of producing more underfunded plans as has happened in recent years after stock markets went into downfall.
This decision is bad for everyone but a handful of people, said Paul Purcell Canadian retirement practice leader at Mercer Human Resource Consulting.
It represents a windfall for the few people effected by a partial plan wind up, but most other members of a defined benefit plan could suffer as a result, he said.
The decision will push more plan sponsors to get 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.
“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.
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.”
Since 1998 Monsanto Canada has been trying to wind up a portion of its pension plan after going through a reorganization and laying off 146 employees. The company was prevented from doing so because it refused to pay those employees a share of the actuarial pension surplus at the time of the partial wind up. Monsanto said they were only entitled to a share of the surplus at the time of a full wind up.
The Supreme Court disagreed and said Ontario’s pension legislation meant for effected employees to be treated as if the pension plan was winding up in full.
At the time of the partial wind up, there was an actuarial surplus of $19.1 million, meaning the effected employees will be entitled to divide $3.1 million.
Pension experts advocating for plan sponsors say being forced to hand over money at the time of a partial wind up — when there may not be any surplus at the time of a full wind up — will discourage employers from funding any plan into surplus. The result might be more reserved funding strategies, with sponsors putting the absolute minimum into the plan. In other words, the decision could have the adverse effect of producing more underfunded plans as has happened in recent years after stock markets went into downfall.
This decision is bad for everyone but a handful of people, said Paul Purcell Canadian retirement practice leader at Mercer Human Resource Consulting.
It represents a windfall for the few people effected by a partial plan wind up, but most other members of a defined benefit plan could suffer as a result, he said.
The decision will push more plan sponsors to get 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.
“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.
