The Ontario Court of Appeal has released a decision that is relevant to all employers with defined benefit pension plans in Ontario who have terminated employees due to a reorganization or discontinuance of part of their business, or who are currently planning to do so. It relates to partial plan wind ups.

In a unanimous decision released January 11, 2010 in Hydro One Inc. v. Ontario (Financial Services Commission), the Ontario Court of Appeal held that a partial wind up of Hydro One’s Pension Plan is warranted under the Pension Benefits Act where 76 management employees were terminated as a result of a business reorganization. The Act requires that a “significant” number of plan members must be terminated in order to trigger a partial wind up. While the 76 terminations may not be significant when measured against the 4,000 active members of the Hydro One Plan as a whole, the Court reasoned, they were significant when measured against a “sub-set” of the 400 total management members of the Plan.

For terminated employees, a partial wind up has the effect of providing immediate vesting and, in some cases, statutory benefit enhancements for early retirement benefits. There is also a potential to share in any surplus assets in the plan. From an employer’s perspective, a partial wind up can impose costly funding obligations.

The issue should be moot if the Ontario Government passes Bill 236, its proposed pension reform legislation, which received first reading on December 9, 2009. The Bill will eliminate partial wind ups entirely but only if the effective date is after the Bill comes into force. Pending passage of the Bill, the implications of the Court’s decision should be carefully considered.

The only real issue in the appeal was whether a significant number of Plan members had been terminated as a result of Hydro One’s business reorganization. The Court of Appeal reached its conclusion based on “the expansive and unrestricted language” of the statute, and “the remedial and protective nature of the Act in general”. It found that in cases such as Hydro One, it was appropriate for the court to determine the significance of the number of plan members terminated as a “sub-set” of the plan membership as a whole. The Court enumerated a number of factors that are relevant in deciding whether to focus on a sub-set of a plan’s membership, including:

  • Whether the terminations were voluntary or involuntary
  • Whether the terminated members were proportionately older employees who were close to retirement  
  • Whether specific employees were targeted in the business reorganization or discontinuance  
  • Whether the terminated members represented an identifiable sub-set of the employer’s workforce, such that a separate pension plan could have been established just for them  
  • Whether a partial wind up of the sub-set of plan members would threaten the continued viability of the employer’s pension plan.  

It held a partial wind up of the management employee sub-set was warranted in Hydro One’s case primarily because the business reorganization targeted older management employees who were close to retirement, and whose terminations were involuntary. Non-management employees who had accepted voluntary severance packages were not included in the partial wind up, in part because they were represented by a trade union.

The Court of Appeal judgment upheld the previous decisions of the Financial Services Tribunal and the Divisional Court in this case. Hydro One was supported in its position by the province’s pension regulator, the Superintendent of Financial Services, as well as the two trade unions that represent the balance of the Plan’s membership, the Society of Energy Professionals, and the Power Workers Union.