As indicated in our previous post on Bill 236 (the Pension Benefits Amendment Act, 2010), the provisions that address surplus withdrawal on full or partial wind-up have come into force. There is still some controversy, however, surrounding how the Financial Services Commission of Ontario (FSCO) is interpreting the new provisions.

On September 20, 2010, FSCO released a Q&A to address questions in this regard. In short, FSCO’s Q&A states that, when making an application to withdraw surplus from a pension plan, an employer is required to do one of two things:

(a) demonstrate entitlement to surplus under the historical terms of the plan and obtain the agreement of 2/3 of the members (or the agreement of the collective bargaining agent) and 2/3 of the former members and others entitled to payments under the pension plan;

or

(b) obtain the consent of all the members, former members and other persons entitled to payments under the pension plan.

The new surplus withdrawal provisions in the Ontario Pension Benefits Act (PBA), however, do not in fact require that employers who are asserting entitlement to surplus also obtain member consent, nor does the amended PBA require 100% member consent where the employer has reached an agreement with the members to share the surplus.

Section 8 of the Regulations under the PBA has not yet been amended to reflect the changes to the PBA. Section 8 provides that unless all of the surplus is being paid to the affected members, surplus cannot be paid to the employer on wind-up unless the employer has obtained the agreement of 2/3 of affected members (or the agreement of the collective bargaining agent) and the agreement of 2/3 of the former members (per FSCO policy).

Our main concern arising out of the Q&A posted by FSCO rests with their interpretation of the new provisions as applied to surplus sharing agreements between employers and members. Where an employer is applying to withdraw surplus based on an agreement with the members, FSCO’s position is that 100% member consent is now required. They clearly are not applying the 2/3 consent threshold contained in s. 8 of the Regulations, except as an additional condition to surplus withdrawal based on employer entitlement under (a).

When the new surplus withdrawal rules were introduced, it seemed clear to most industry observers (particularly based on the conclusions in the Arthurs Report) that the intention behind the provisions was to facilitate the sharing of surplus between employers and employees where a surplus sharing agreement could be negotiated. In requiring unanimous member consent (virtually impossible to achieve in most circumstances), the exact opposite is achieved. Rather than facilitating surplus sharing arrangements, FSCO’s interpretation of the surplus withdrawal provisions makes these arrangements far more difficult to achieve, contrary to the clear intention behind the legislation. In effect, FSCO is taking the position that Bill 236 accomplished nothing in the area of surplus withdrawals.

In its recent announcement, FSCO referenced the Government of Ontario’s Technical Backgrounder, stating that the government will “provide more legal certainty and a binding arbitration process for surplus distribution on plan wind up, while continuing to allow payment to an employer where there is entitlement or a surplus-sharing agreement.” In light of this, FSCO has stated that employers may put pending surplus applications on hold until the government provides such “legal certainty”. This is not good news for parties to surplus sharing arrangements who may have already spent years waiting for their deals to be implemented. It is hoped that the government will step in quickly to ensure that its original objectives for pension reform in this area are actually implemented at the regulatory level.