With the introduction of Bill 120, the Securing Pension Benefits Now and for the Future Act, 2010, on October 19, 2010, the Ontario government moved forward with its stated objective to continue its reform of the province’s pension system. This second stage of pension reform follows on the heels of Bill 236, which received royal assent earlier this year. (Please see our May 20, 2010 post for a summary of Bill 236.)

This is the first of several posts we will be making on the draft legislation. I am going to start by looking at one of the most contentious issues in pension law, the withdrawal of surplus.

The Bill 236 amendments related to surplus withdrawals (which were some of the very few provisions that came into force on royal assent) will be replaced with new provisions.

The Bill 120 provisions provide that when a plan is fully or partially wound up, surplus may be paid to an employer when it has reached an agreement with the union (or if there is no union with at least two-thirds of the plan members) and with such percentage of former members and other persons entitled to benefits that the Superintendent considers appropriate.

Clearly this amendment was made in response to the Financial Services Commission of Ontario’s (FSCO) controversial position that under Bill 236, in order for an employer surplus withdrawal to proceed, 100% consent of all members and former members of the plan was required – even on partial wind-up – unless the employer could also demonstrate that it is legally entitled to the surplus. (See my September 24, 2010 blog post for further discussion of FSCO’s interpretation.)

What is not clear under Bill 120, however, is whether an employer will be able to withdraw surplus based on entitlement alone with no member consent. Also not clear is whether a surplus withdrawal on partial wind-up requires two-thirds consent from all plan members and former members, or only from those affected by the partial wind-up.

Also included in Bill 120 is a new arbitration provision that is triggered if the Superintendent does not consent to the payment of surplus to the employer, and no surplus sharing agreement has been entered into, within a prescribed period of time after the plan wind-up.

The arbitration provisions introduce an element of discretion on the part of the Superintendent, which one hopes will be exercised with a view to the practical realities of surplus withdrawals. Working out the details of a complex surplus sharing proposal, in some cases involving hundreds or thousands of plan members, can take a significant amount of time, and arbitrations should not be triggered if the parties are working in good faith towards a negotiated settlement.