The Ontario Court of Appeal’s recent decision in Sutherland v. Hudson’s Bay Company has confirmed that the principles regarding entitlement to surplus on plan termination established by the Supreme Court of Canada back in 1994 still apply.

Background

Hudson’s Bay Company (HBC) closed its defined benefit (DB) plan to new members in 1988. In 1994, HBC re-opened the plan to employees of subsidiary companies who became members of a defined contribution (DC) component that was added to the DB plan. At the same time, HBC began using surplus in the plan to take contribution holidays with respect to the DC component of the plan.

The members of the original DB plan commenced a class action, arguing that HBC improperly used the surplus to pay the employer contributions to the DC plan. At trial, the judge ruled that while HBC was entitled to use the surplus to pay its contributions to the DC plan, the DB plan members were entitled to any surplus assets remaining on plan termination.

The members’ appeal of the cross-subsidization issue was abandoned; however HBC continued with its cross-appeal, challenging the trial judge’s conclusion that HBC was not entitled to any surplus assets remaining on the plan’s termination.

Ontario Court of Appeal Decision

The Court of Appeal applied the principles regarding entitlement to surplus on plan termination established by the Supreme Court of Canada in Schmidt v. Air Products of Canada Ltd. Finding that there was a trust governing entitlement to surplus in the plan and that HBC had not reserved a power of revocation, the Court of Appeal considered the terms of the original trust agreement. The Court of Appeal noted that the “exclusive benefit language” in the original HBC trust agreement was similar to the language considered in Schmidt, which the Supreme Court found entitled the members to surplus despite later amendments purporting to give surplus to the company.

The Court of Appeal then went on to reject HBC’s submission that the original plan text, which provided HBC with an entitlement to surplus, “trumped” the original trust agreement. Again relying on Schmidt, the Court of Appeal held that since the plan was funded through a trust, it was “governed by equity and to the extent that equitable principles conflict with plan provisions, equity must prevail.” Thus, the Court concluded that the original trust agreement, not the original plan text, “trumps”.

Finally, the Court of Appeal distinguished the present case from the Supreme Court’s decision in Burke v. Hudson’s Bay Company (where the Supreme Court found that employees transferred as a part of a sale of an HBC division were not entitled to a share of surplus).

The Court of Appeal began by noting that Burke did not change the law on surplus entitlement – established in Schmidt – but rather reinforced it. It then went on to find that the decision in Burke turned on language “which is materially different from the language of the original Trust Agreement in this case”. The Court held that in Burke, the original plan documentation expressly limited the employees’ rights to receipt of their pension benefits on retirement; whereas in the present case, the original plan documentation expressly created an irrevocable trust, over all of the assets in the pension trust fund, for the exclusive benefit of the employees.

As a result, the Court of Appeal concluded that the DB plan assets were impressed with a trust in favour of the plan members and they were entitled to any surplus assets in the plan on its termination.

It is worth noting that there was a dissenting judgment, which found in favour of HBC, finding that the “exclusive benefit language” relied upon by the majority must be “read in light of the whole document”, and “the whole document is the sum total of the original Plan and Trust Agreements trust agreement”.

This dissent may be cited should HBC seek leave to appeal the Ontario Court of Appeal’s decision to the Supreme Court of Canada.

What Does this Decision Mean for Plan Sponsors?

It appeared that the Supreme Court of Canada had been moving away from the strict application of trust law principles to pension plans, as evidenced by its decisions in Burke and Buschau v. Rogers Communications Inc., where it seemed to take a more pragmatic approach to pension plan entitlement issues. However, the Ontario Court of Appeal’s decision in Sutherland seems to herald a return to the strict application of trust law principles. While, at first glance, this would seem to be a troubling development, it should be read in light of the recent reform of the surplus entitlement rules in Ontario.