On October 7, 2010, the Supreme Court of Canada released its decision in Burke v. Hudson's Bay Co., upholding the Ontario Court of Appeal’s ruling that Hudson’s Bay Co. (HBC) was permitted to charge plan administration expenses to the pension fund, and did not have a fiduciary obligation to transfer a portion of the actuarial surplus to the transferred employees’ pension plan on the sale of a part of HBC’s business.
Notwithstanding the win for HBC, the conclusion in this case does not necessarily apply to other employers who sponsor defined benefit plans. It will still be necessary to carry out a review of historical plan documents in order to confirm that any proposed action, whether it involves charging plan administration expenses to the pension assets or transferring assets and liabilities to another plan with or without related surplus, is permitted.
The case arose as a result of the sale of a division of HBC and the related transfer of pension plan members, along with assets equal to these members’ liabilities, to the purchaser’s new pension plan. The transferred plan members commenced an action, arguing that the transfer should have included a pro rata share of the HBC plan surplus. They also sought an order requiring HBC to repay to the fund amounts that had been used to take contribution holidays and to pay plan expenses from 1982 to 1986.
At trial, the judge decided that not including surplus with the transfer of assets to the new plan amounted to a breach of trust, and ordered that a further sum of money be transferred from the HBC plan to the purchaser’s plan. However, the trial judge determined that HBC was entitled to use plan funds for paying plan expenses and taking contribution holidays.
HBC appealed the decision with respect to the transfer of surplus issue, while the transferred plan members cross-appealed on the plan expenses issue.
The Ontario Court of Appeal held that based on a review of the historical plan documents, the members were not entitled to the surplus, and therefore the failure to transfer a portion of the surplus was not a breach of trust. On the plan expenses issue the Court of Appeal determined (as later confirmed in the Kerry case) that since the plan text had been silent on plan expenses from inception until express wording was introduced in 1985, HBC had always been permitted to pay plan administration expenses from the plan fund.
Supreme Court of Canada Decision
The transferred employees appealed the Court of Appeal’s decision on both the surplus transfer and the plan expenses issues to the Supreme Court of Canada (SCC). The SCC dismissed the appeal on both counts.
On the plan expenses issue, the SCC followed its reasoning in Nolan v. Kerry (Canada) Inc., where it held that there is no statutory or common law authority that obliges an employer to pay the expenses of a pension plan and as such, the obligations of the employer will be determined by the plan text and the trust documents. Silence in the documents on the treatment of expenses is not a prohibition. Accordingly, HBC could charge plan administration expenses to the pension fund.
On the surplus transfer issue, the SCC confirmed that it was necessary to examine the current and historical HBC plan documents to determine whether the transferred employees had an “equitable interest” in the plan’s actuarial surplus while the plan was ongoing. Noting, among other things, that the “exclusive benefit” language in the HBC trust agreement was restricted to promised benefits and did not give employees entitlement to surplus, the Court concluded that no such equitable interest in surplus existed. The SCC implicitly confirmed the distinction between an employer’s duties when acting as plan sponsor and an employer’s “fiduciary duties” when acting as administrator, and concluded that since HBC negotiated the transfer from the HBC plan to the new purchaser’s plan wearing its sponsor hat, the terms of such transfer were not subject to the rule of even handedness. The Court concluded that absent any member entitlement to surplus based on the specific plan language, the administrator’s fiduciary obligations to protect any such rights did not come into play.
The Court went on to comment that it was not deciding whether the outcome could be different if the plan documents include language that entitles the employees to surplus.
This decision does not purport to deal with other situations involving actuarial surplus and plan transfer. Each situation must be evaluated on a case‑by‑case basis. Specifically, the resolution of the issue of surplus transfer when the pension plan documents indicate that employees are entitled to surplus on plan termination is best left to another case where that issue arises.
Implications for Employers
While this decision provides some support for employers who want to pay plan expenses from a plan fund or leave surplus in a plan involved in a corporate transaction, the SCC emphasized the case specific nature of their analysis and the need to review the particular plan documents at issue. As a consequence, employers will have to review their plan documents carefully to ensure that they permit such actions.
With respect to the need to transfer surplus on a sale, there remain a number of unanswered questions. For example, what if a plan has exclusive benefit or other language which confers surplus entitlement on members generally, or specifically on plan wind up? How do these rights intersect with negotiated transfers in sale transactions where plan wind ups are, in most jurisdictions, deemed by pension legislation not to occur? Members leaving the plan on individual terminations do not normally have surplus transfer rights, so why should such rights be conferred in sale situations?
To further complicate matters for Ontario employers, the recent amendments in Bill 236 include a provision specifying that asset transfers from one pension plan to another as a part of a sale of business or an internal reorganization must include a pro rata portion of any surplus determined in the prescribed way. This change has not yet been proclaimed in force, but the potential result will likely be that Ontario employers wishing to transfer pension plan assets and liabilities and/or to merge plans will have to ensure that the appropriate amount of surplus is also transferred notwithstanding the SCC’s decision on the matter.