The Supreme Court of Canada yesterday released another landmark pension decision in which it ruled that pension plan members have no entitlement to surplus funds in their employer’s pension plan: http://scc.lexum.umontreal.ca/en/2010/2010scc34/2010scc34.html While the decision is based on particular facts, the court made some far-reaching statements that will be of interest to all employer sponsors and administrators of defined benefit pension plans, whether in surplus or in deficit.
The facts of this case are straightforward. Hudson’s Bay Company sold its Northern Stores Division to the North West Company. As part of the sale, a number of HBC employees transferred to North West together with whatever pension benefits they had earned under the HBC pension plan. Consequently, there was a transfer of pension assets and liabilities from the HBC pension plan to the North West pension plan.
At the time the sale of the division was consummated, the HBC pension plan was in a surplus position. HBC transferred enough assets from its pension fund to cover the transferred employees’ defined benefits, but did not transfer any surplus funds; the pension surplus stayed in the HBC pension fund. HBC and North West had discussed whether a portion of the surplus assets should be transferred, but this would have increased the purchase price for North West. Both parties agreed not to transfer any surplus assets.
The issue before the court was whether HBC had an obligation to transfer surplus assets to the North West pension plan, representing the proportionate interest of the transferred employees in the HBC pension fund. The employees who brought the action argued that they had an “equitable” interest in the surplus; they also argued that without a transfer of surplus assets, they would be deprived of future benefit improvements. They would also lose the benefit of a cushion against solvency deficits that might arise in future.
The employees alleged that the failure by HBC to transfer surplus assets contravened the terms of the pension plan and underlying trust and constituted a breach of fiduciary duties. In addition to these issues, the employees raised a subsidiary complaint that HBC had wrongly paid expenses from its pension fund over several years. This issue is tied to the main issues, because it also relates to the use of surplus assets.
The court confirmed that HBC in its role as administrator of its pension plan was a fiduciary. In carrying out its duties as administrator, (i) HBC had discretionary authority, (ii) the exercise of the discretion could affect the interests of the plan members, and (iii) the plan members were in a vulnerable position vis-à-vis HBC’s discretionary authority. This is the three-part test previously established by the court as to the existence of a fiduciary relationship.
The employees argued that as a fiduciary, HBC had a duty of even-handedness in the handling of the surplus assets. In other words, the transferred employees should have been treated equally with the members of the HBC pension plan who remained with HBC. By leaving all the surplus assets in the HBC plan, HBC employees were receiving special treatment.
All fiduciaries, including pension fiduciaries, have a duty of even-handedness in the exercise of their discretionary authority. However, the court held that: “The duty of even-handedness must be anchored in the terms of the pension plan documentation. It does not operate in a vacuum.” Put another way, the duty of even-handedness did not require HBC to confer benefits on the group of transferred employees they did not otherwise have under the terms of the pension plan documents.
In reviewing the plan documents, both the historical pension plan texts and trust agreements, the court found that the members of the HBC pension plan did not have a current or future interest in the surplus assets. None of the plan documents included the “exclusive benefit” or “non-diversion” language found in many other pension plans that have been the subject of legal disputes. Given that the employees had no entitlement to surplus even upon plan termination, their claims to a portion of the surplus as part of the transfer to North West necessarily failed.
The net result of this decision is that HBC’s legal and fiduciary obligations toward both its employees and the transferred employees who had pension entitlements under the HBC pension plan did not extend to the surplus assets. HBC’s duties were satisfied by protecting the plan members’ defined benefits. HBC was therefore legally entitled to decide not to transfer surplus assets to the North West pension plan; it was also entitled to use surplus assets to pay expenses from the pension plan.
This decision is good news for employers who sponsor defined benefit pension plans. The decision helps to settle some of the intergenerational tension inherent in defined benefit pension plans. Whenever pension plan terms are changed to the benefit or detriment of one group of members, another group in the pension plan; whether new members, long-service members, terminated members or retirees; can advance arguments that they are not being treated fairly.
For example, if benefits under a pension plan are improved for active members, retirees can argue that this uses assets of the pension plan disproportionately, thereby putting the retirees at a disadvantage. Retirees can also argue, in a contributory plan, that their contributions built up the pension fund and therefore if improvements are made, the retirees should benefit in the form of indexation. Similarly, if benefits are given only to retired members, active members can argue that they are disadvantaged.
The case holds that pension legislation does not prohibit an employer from making decisions in respect of a pension plan that favour one group over another. There is also no fiduciary principle that would extend the duty of even-handedness to augment rights of pension plan members that they do not otherwise have as evidenced in the pension plan documents. Pension plan administrators have considerable latitude in carrying out their fiduciary duties within the four corners of a pension plan.r