Since our last Pension Alert, there have been a number of developments on the litigation front of interest to the pension community. We summarize those decisions below. If you believe that one or more of these decisions may affect you, the Pensions Group at Borden Ladner Gervais LLP would be pleased to discuss them with you.
By way of overview:
- The Ontario Court of Appeal has held in Burke v. Hudson's Bay Company that when a company division is sold and employees are transferred to a new pension plan, a proportionate share of actuarial surplus need not be transferred if the employees do not own surplus.
- The Federal Court of Appeal has held in the Marine Atlantic case that actuarial surplus does not have to be distributed on the partial termination of a federally-regulated pension plan.
- The Alberta Court of Queen's Bench has held in Lloyd v. Imperial Oil that an employer does not owe fiduciary duties when amending its pension plan.
- A proposed class action has been commenced against Nortel with respect to changes to its pension plan and retirement benefits.
Burke v. Hudson’s Bay Company
The Ontario Court of Appeal has released its decision in Burke v. Hudson’s Bay Company, overturning a lower court decision that had held that on the sale of a division of a company and transfer of employees, a proportionate share of surplus must also be transferred to the successor pension plan.
The court held that, like any surplus distribution question, the threshold question in this type of determination is whether the employees in question had an entitlement to the surplus funds in question. Based on the plan documentation at issue, the court held that the transferred employees had no entitlement to the surplus in the plan, despite slightly adverse wording in some of the pension booklets and trust agreements and the perception of some of the transferred employees that surplus would be used for benefit improvements. Since the transferred employees had no entitlement, the surplus was properly maintained in the original plan.
The court went on to consider the lower court’s concern that failing to transfer surplus would benefit only the members retained in the original plan. However, the court held that since there was no termination of the pension plan, and thus no "crystallization" of surplus, the surplus was properly retained in the original plan to be accessed for improvement of benefits or contribution holidays; the transferred employees had benefited equally from the surplus up to the date of the transfer.
The payment of expenses from the pension fund was also challenged by the employees. The Court of Appeal upheld the lower court’s determination that such expenses could properly be paid from the pension fund. Relying heavily on its earlier decision in Kerry (Canada) Inc. v. DCA Employees Pension Committee, the court based its decision on the pension plan documentation, mindful that silence in the documentation does not create an obligation on the employer to pay the plan expenses. The court determined that the plan text required the employer to pay for trustee compensation and expenses (which was clearly set out in the trust agreement), but not for other plan administration expenses.
In holding that actuarial surplus need not necessarily be transferred along with employees, the decision may be viewed as favourable to companies who are undergoing or are contemplating corporate transactions. However, the decision may require additional due diligence in corporate transactions. Since the decision implies that whether or not actuarial surplus must be transferred depends upon who owns the surplus, it may require companies to obtain surplus ownership opinions in cases involving the transfer of assets to a new pension plan.
Cousins v. Canada (Attorney General)
In a welcome development for sponsors of federally-regulated pension plans, the Federal Court of Appeal has held in Cousins v. Canada (Attorney General) (more often referred to as the Marine Atlantic case) that the Pension Benefits Standards Act, 1985 (Canada) (the "PBSA") does not require a portion of the actuarial surplus in a defined benefit pension plan to be distributed at the time of a partial termination.
In reaching its decision, the Federal Court of Appeal distinguished the decision of the Supreme Court of Canada in Monsanto Canada Inc. v. Ontario (Superintendent of Financial Services) on the basis of the difference in wording between the Pension Benefits Act (Ontario) (the "PBA") and the PBSA. Specifically, the Court held that:
- Pursuant to section 70(6) of the PBA, plan beneficiaries affected by a partial wind up are entitled to "rights and benefits that are not less than the rights and benefits they would have on a full wind up of the pension plan on the effective date of the partial wind up". "Wind up" is defined in section 1 of the PBA to mean not only the termination of the pension plan but also the "distribution of the assets of the pension fund". Correspondingly, "partial wind-up" is defined to include distribution of the assets of the pension fund related to the part of the pension plan that is terminated.
- While the PBSA provides that on a "partial termination" of a pension plan the rights of affected members "shall not be less than what they would have been if the whole of the plan had been terminated on the same date as the partial termination", a "termination" is not defined to include or require the distribution of pension assets. The PBSA defines "termination" and "winding-up" separately, with only the latter including the distribution of assets. Under the PBSA, therefore, "termination" and "winding-up" occur at different times.
- Accordingly, Monsanto was distinguishable, since it was based upon differently-worded legislation that requires the distribution of surplus on a full wind-up of a pension plan and therefore grants beneficiaries affected by a partial wind-up an equivalent right to share in a portion of any actuarial surplus existing at the time. By contrast, members affected by a partial termination under the PBSA are entitled only to rights equivalent to those they would have on a full termination of the plan, not on a full winding-up.
- Surplus distribution on winding-up will be governed by the terms of the relevant plan documents.
The plan members have until September 25, 2008 to seek leave to appeal to the Supreme Court of Canada from the decision of the Federal Court of Appeal.
Lloyd v. Imperial Oil Limited
The Alberta Court of Queen’s Bench dismissed a claim by former employees of Imperial Oil in a mirror case to the 1995 Pension Commission of Ontario (the "PCO", now the Financial Services Tribunal of Ontario) decision in Re Imperial Oil. In both cases, the employees claimed that an amendment to an early retirement provision requiring that employees be terminated for "reasons of efficiency" before accessing the unreduced early retirement decisions was improper as a breach of the applicable statute and the employer’s fiduciary duty.
The Alberta court held that the issue had been definitively determined by the Ontario tribunal. In case it was incorrect that the issues had been previously decided, the court went on to address the employees’ claim. It determined that the amendment was proper; it did not reduce an accrued benefit, as none of the affected employees had reached the eligibility age at the time of the amendment. Secondly, the court held (as had the PCO) that the employer did not owe fiduciary duties to the employees when making the amendment. It was acting as plan sponsor; fiduciary duties arise when acting as the plan administrator. Finally, the court held that the employer had not breached the duty of good faith, as there was no breach of the plan or legislation. The employer is permitted to act in its self-interest as long as its acts are consistent with the pension scheme. This decision thus reinforces the "two hats" doctrine, under which an employer’s two roles as plan sponsor and plan administrator, and the consequences of acting in each role, are recognized.
Nortel Class Action
In a case that bears watching, a proposed class action was launched against Nortel Networks Corporation and Nortel Networks Limited on June 20, 2008 regarding changes to their pension plan and retirement benefits.
The representative plaintiff is a Nortel employee who is a member of Nortel’s defined benefit ("DB") pension plan. According to the Statement of Claim, Nortel announced on June 26, 2006 that it intended to end the DB program as of January 1, 2008, and replace it with a defined contribution ("DC") pension plan. Members of the DB plan would be eligible to be grandfathered if they met certain criteria consisting of various combinations of age and years of service. Age and service criteria also had to be met in order to continue to be eligible for retiree benefits. Finally, effective January 1, 2008, Nortel would no longer take into account future salary increases when calculating the value of members’ pensions.
The claim is brought on behalf of DB plan members who did not meet the grandfathering criteria to remain in the DB plan, and those members who no longer qualify for retiree benefits. It seeks a declaration that the changes are void for failing to provide the notice to members required under the PBA, or damages arising from the failure to provide notice. Alternatively, the Statement of Claim proposes that members of the class were entitled to reasonable notice of the changes as an implied term of their employment contracts. Compensation for loss of retiree benefits is sought on the basis of the greater of the replacement cost of the benefits, or the value of the lost benefits.