A recent decision of the Ontario Superior Court (Court) illustrates complexities that can arise where a pension plan is partially wound up, triggering a requirement to settle surplus entitlements on the partial wind-up, and the surplus subsequently vanishes.
In Kidd v. The Canada Life Assurance Company et al, Canada Life had declared a partial wind-up of the Canada Life Canadian Pension Plan (Plan) in 2003 in relation to members who were terminated or retired as a result of the integration of Canada Life and Great West Life Assurance Company (the Integration Group). The Integration Group had commenced a class to determine, amongst other issues, the ownership of surplus on a partial windup of the Plan. The parties settled the action and under the terms of settlement Canada Life agreed to distribute approximately 70% of the estimated partial wind-up surplus to, amongst others, the Integration Group. The Integration Group members were informed that their estimated share of the surplus was worth approximately $55 million. As part of the settlement, Canada Life would in effect restart its pension plan under a new trust (the Ongoing Plan), which would receive the assets from the wound-up portion of the Plan. The plaintiffs in the class action and Canada Life successfully campaigned to secure the support of the class members for the proposed settlement and the settlement was ultimately approved by the court (the Approved Settlement). Class counsel was to receive approximately $5 million in fees and disbursements under the Approved Settlement.
After the Approved Settlement received court approval, the partial wind-up surplus diminished significantly due to falling interest rates and a greater than anticipated number of partial wind-up members who chose (or were deemed to have chosen) an annuity. As a further complication, the annuity market in Canada had effectively shut down and annuities were not available to be purchased. By August 31, 2012, the partial wind-up surplus was $2.6 million (i.e., Integration Group’s share was $1.8 million).
As a result of the changed circumstances, the parties commenced discussions aimed at amending the Approved Settlement. Also, as Canada Life was unable to solicit bids for annuities on the partial wind-up, it proposed to unilaterally transfer the assets and liabilities of the Integration Group to the Ongoing Plan and proceed with the implementation of the Approved Settlement. The Integration Group objected to this unilateral action. The parties ultimately entered into court-facilitated mediation and agreed to amended terms of settlement (the Amended Settlement) under which:
- Canada Life would fund top-up payments (at a cost of approx. $1.2 million) to ensure promised minimum surplus payments of $1,000 could be made;
- Canada Life waived its right to receive a reimbursement of professional fees and interest on a reimbursement of expenses (estimated value $1.3 million);
- The plaintiffs (and certain other members) waived their entitlement to reimbursement of future legal fees previously approved by the court (estimated at $200,000); and
The assets and liabilities for Integration Group members who elected to receive deferred or immediate pensions would be transferred to the Ongoing Plan. The assets and liabilities would be notionally segregated and if a surplus for the notionally segregated group exists as at December 31, 2014, there would be a second distribution to the Integration Group subject to certain conditions, including:
- 10% of the 2014 surplus would be deducted from the distribution amount and remain in the Ongoing Plan; and
- The potential second distribution to eligible Members would be capped at $15 million.
The Court was asked to approve the Amended Settlement. The essential question before the Court was whether the Amended Settlement was fair, reasonable and in the best interest of those affected by it. The Integration Group and Canada Life argued that the Amended Settlement met the test of fairness as the members of the Plan on the partial wind-up would receive more than they would have received under the terms of the Approved Settlement if it was implemented with the reduced surplus. In addition, they had the prospect of receiving additional amounts if the surplus position of the segregated portion of the Ongoing Plan rebounded by the end of 2014. A group of class members objected to the Amended Settlement essentially on the basis that Canada Life stood to gain disproportionately to the class members.
The Court held that the Amended Settlement did not meet the tests of fairness for several reasons, including:
- It felt that a 70%/30% surplus split was not fair to the partial wind-up members in view of the diminished amount of surplus, particularly in circumstances where Canada Life stood to receive certain advantages under the Ongoing Plan (i.e., the right to claim 100% of any future surplus). Also, Canada Life would be in a position to economically recover the lost surplus if the surplus conditions right themselves.
- The $15 million cap on the potential second surplus distribution unduly favoured Canada Life.
- Since Canada Life had mounted a cross-country campaign to seek member approval of the Approved Settlement, the Court felt it had a “moral duty” to fully share in the disappointment over the circumstances of the Approved Settlement. In short, the Court felt that Canada Life was not sharing enough of the pain.
- The Court felt that a December 31, 2014 re-calculation date to reassess the surplus position of the segregated assets/liabilities in the Ongoing Plan was too early to allow economic conditions to rebound, and a December 31, 2017 date would be a fairer date.
- Class counsel received substantial amounts under the Approved Settlement and did not share adequately in the pain under the Amended Settlement.
The court recognized it was in a “double bind” – it could either approve the Amended Settlement (which entailed a greatly reduced award of surplus to partial wind-up members but was monetarily greater that the amounts that would be available for distribution if it was rejected) or reject the Amended Settlement and force the parties to resume costly and protracted litigation over the greatly diminished surplus. Nevertheless, the court rejected the court-facilitated Amended Settlement as it felt the potential gains were unbalanced in favour of Canada Life.
This is an unfortunate case with no obvious winners in the outcome. This decision demonstrates that where parties to a surplus sharing arrangement are unable to implement the terms of the original arrangement due to greatly diminished surplus, the court will scrutinize the terms of any subsequent deal to ensure all parties (including counsel if necessary) share adequately in the pain and disappointment.