More Ontario pension turmoil

An Ontario Court has ruled employers must distribute pension surplus money in the case of partial wind ups.

“The ramifications are very serious. They’re on plan members, employers, plan administrators and pension regulators,” said Priscilla Healy, a principal at consulting firm Towers Perrin. “You’ve got the benefit security of the remaining members affected. The remaining members and the leaving members will have a conflict.”

The decision supports a ruling from the Financial Services Commission of Ontario (FSCO) rejecting a plan for a partial pension wind up proposed by Monsanto Canada Ltd. because there were no provisions to distribute the surplus to members included in the wind up.

In large part, the problem stems from poorly worded legislation in the Ontario Pension Benefits Act. Both sides agree that the issue of partial wind ups has become complicated by confusing language in the act that deals with partial wind ups, specifically section 70(6).

In December 1998, FSCO maintained that, according to the act, Monsanto was obligated to distribute the actuarial surplus that existed to members affected by a partial wind up. A different interpretation from the Financial Services Tribunal overturned that decision in April 2000.

Now this latest ruling by Ontario’s Superior Court of Justice agrees with the original FSCO interpretation.

“It means the employer must distribute the surplus related to the partial wind up,” said Dave Gordon, director of FSCO’s pension plans branch.

The decision could still be taken to the Ontario Court of Appeal.

The question at the centre of the controversy is when is a surplus really a surplus.

If a pension plan is partially dismantled during favourable economic times, it will have a surplus that must be distributed amongst leaving members. But if the stock market then falls by the time the company has fully wound up, the surplus may have dried up, leaving a deficit for remaining members, said Healy. Her firm worked as the actuary for Monsanto.

“There has been a bombshell thrown into the system,” she added. “It is definitely the most disturbing decision — (by) regulators, the government or judiciary — I’ve ever seen.”

Employers may be reluctant to declare surpluses in pension plans, to overfund their pension plans or to start a new pension plan.

“Employers will be reluctant to give benefit improvements to affected members on a partial wind up in view of the additional distribution of surplus that will be required,” she predicted. “They’ll get their statutory benefits and they’ll get nothing else.”

She expects there to be an increase in pension plan mergers, in an attempt to reduce any surpluses.

The ramifications of the ruling may extend back into history, affecting more than 150 partial plan wind ups in Ontario that have previously been filed. These cases may have to be re-opened.

Companies planning to merge or acquire another company must now consider the potential burden of their companies’ pension surpluses. Decisions will be more complex.

“The cost of doing business in Ontario is going to increase for all employers who have prudently overfunded their pension plans. They’re the ones that are going to get hit,” Healy said.

In its decision, the court also called for the language of the Pension and Benefits Act to be made clearer. Until that time, its decision is meant to serve as guidance on the intention of the legislation.

“This was our view of what the legislation required and it is nice to have the court confirm that our view had merit to it. It gives us some clarification of the legislation,” Gordon said. “We’re here to administer the legislation so it is helpful. More than anything as a regulator we wanted clarification.”

The government of Ontario announced in December 2000 that public consultations would be held on new pension surplus sharing rules.

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