The Ontario Court of Appeal released its decision in Hydro One Inc. v. Ontario (Financial Services Commission) on January 11, 2010. This was an appeal from the Ontario Divisional Court – see our Labour & Employment in the News dated April 18, 2008, that reported on the Divisional Court’s decision. The court dismissed the appeal, in favour of members of the Hydro One Pension Plan (the “Plan”).

The central issue in the case was whether the number of terminations of employment of members of the Plan could be considered “significant” under the Ontario Pension Benefits Act, thereby constituting grounds for a partial wind-up order. The court held that the number of terminations, although very small relative to the total number of members of the Plan, was significant in terms of a subset of Plan members.

A partial wind-up can have significant financial and administrative implications for plan sponsors and plan members. Most notably, under Ontario’s (and Nova Scotia’s) legislation, members affected by a partial wind-up and whose combined age and years of service total at least 55, are entitled to grow into any enhanced early retirement provisions in the pension plan in question. This is referred to as “grow-in” rights.

The Plan was comprised of three distinct groups of members, two unionized, and one non-unionized. Out of 3,913 active members, 2,761 belonged to the Power Workers’ Union, 773 belonged to the Society of Energy Professionals, and 379 were non-union salaried employees. The restructuring activities over a period of a couple of years resulted in a total of 126 terminations of employment of members of the Plan, 53 of whom were members of the Society and 73 of whom were non-union salaried employees.

The two affected groups applied to the Superintendent to partially wind-up the Plan. The Superintendent declined to make the order for either group on the basis that the various restructuring activities of Hydro One did not constitute a single reorganization and that the total number of affected employees, namely 126 out of close to 4,000, was not significant.

The Superintendent’s decision was appealed to the Financial Services Tribunal. The Tribunal decided in favour of the non-union salaried Plan member group on the basis that the 73 affected members of that group was significant when compared to the number of members of that group alone (379). It did not decide in favour of the group of members represented by the Society because the number of affected members was not significant relative to that group (53 out of 773). In addition, the Society members were represented by a union and had negotiated the terms of separation.

The following two levels of appeal, to the Divisional Court and to the Court of Appeal, upheld the Tribunal’s decision. The main issue before the Court of Appeal, and which is of interest to employers with registered pension plans governed either by the Ontario Pension Benefits Act or by pension legislation in all other Canadian jurisdictions that recognize partial wind-ups, is what criteria may be used by pension regulators to determine whether a partial plan wind-up may be ordered.

Phrased in a different way, are there circumstances in which it would be appropriate for a regulator to order a partial plan wind-up where the number of affected pension plan members is not significant relative to the total membership in the plan? The court confirmed that there may be such circumstances. Hydro One was one such case.

The court’s decision was premised on the Ontario Pension Benefits Act being public policy legislation that, in the words of the earlier decision of the Ontario Court of Appeal in GenCorp Canada Inc. v. Ontario, “evinces a special solicitude for employees affected by plant closures.” Further, the criteria in the legislation upon which the regulator is to make a determination of whether or not there is a partial wind-up are not clear, thereby vesting the regulator with needed discretion. In particular, a partial wind-up may be ordered where the number of affected members is “significant,” without further definition.

The court upheld the decision of the Divisional Court which concluded that the meaning of what is a “significant” number of members, and consequently the regulator’s decision whether or not to order a partial wind-up, may vary depending upon the particular circumstances. It may mean an absolute number of members. It may also mean a proportion of members, either to the total number of plan members, or to a subset of the total membership. The court concluded that the legislation:

“requires that the trigger for a wind-up order be an event that endangers the continued availability of pension benefits for a material number of plan members, assessed in the context of the applicable pension plan.”

The court also outlined circumstances in which a “subset” analysis may be appropriate:

  • whether the plan distiguishes between different groups
  • whether the affected members belong to an identifiable and distinct group
  • the size of the subgroup relative to the employer's workforce
  • whether the reorganization affected a targeted group of employees
  • whether the affected group was a proportionately older group, closer to retirement
  • whether the terminations were voluntary or involuntary
  • whether the ordering of a partial wind-up would threaten the viability of the pension plan
  •  other circumstances that could jeopardize the security of pension benefits for the remaining plan members.

The uncertainty surrounding partial wind-ups has plagued plan sponsors for the past twenty years in Ontario and in other jurisdictions across Canada. It is an area of the law that has resulted in protracted litigation and has been recognized as in need of reform. Quebec was the first off the mark to eliminate partial wind-ups from its pension legislation.

Ontario is due to follow, as proposed in Bill 236 – see our Pension Pulse dated December 11, 2009. However, Ontario also proposes to expand the application of “grow-in” rights to all terminations of employment other than for cause. Ontario would be the only jurisdiction in Canada to have such provisions in pension legislation. The proposed changes to the legislation will eliminate the controversies over what constitutes a partial wind-up, but will add significantly to the cost of operating a defined benefit pension plan, particularly those which have rich early retirement provisions.