A year after a controversial Supreme Court of Canada decision required the distribution of surpluses in partially wound-up pension plans, Canadian employers are still struggling to comply with the ruling and determine its ultimate impact on their pension programs.

The full ramifications of the court's July 29, 2004, ruling will not be apparent for several years because many issues remain unresolved, but it has already had an impact on how Canadian employers manage their pension plans, pension experts say.

While some employers have changed their funding or investment policies as a result of the ruling, there has not been an exodus from defined benefit plans, as some pension experts predicted.

In Monsanto Canada Inc. vs. Ontario (Superintendent of Financial Services), Canada's high court upheld a regulatory determination that the Ontario Pension Benefits Act requires the distribution of a proportional share of actuarial surplus when a defined benefit pension plan is partially wound up (BI, Aug. 9, 2004). A partial wind-up refers to the termination of part of a pension plan and the distribution of the assets of the pension fund related to that part of the plan.

After the ruling was released, the Financial Services Commission of Ontario, which has responsibility for regulating pensions in the province, ordered the sponsors of the 281 plans directly impacted by the decision to file updated reports on the plans' funding positions.

Most of the sponsors have not yet filed the reports due to the complexity of the issues involved and the difficulty in collecting the historical data necessary to determine the funding position of the plans, observers say. "It's been a much more complex undertaking than plan sponsors originally thought it would be," said Stephen Pibworth, legal consultant for Hewitt Associates Canada in Toronto.

Even the employers directly involved with the litigation have unresolved issues. Pfizer Canada, which became a party in the case after purchasing the pharmaceutical unit at the heart of the partial wind-up, has not yet determined the amount of surplus that needs to be distributed, a spokeswoman for the Toronto-based company said. "We're still working out all the details," she said.

All employers affected by the decision are still struggling to determine the impact of the decision because the question of ownership of the surpluses remains unanswered. "The Supreme Court handed down a principle, but didn't hand down any implementation guidelines," said Paul Purcell, retirement leader for Mercer Human Resource Consulting in Toronto.

If a plan's documentation shows members own the surplus, employers simply have to determine the amount of the surplus and the method for distributing it, pension experts say.

The issue becomes more complicated if an employer is deemed to own the surplus, they say. Due to statutory requirements in Ontario, plan sponsors must gain the consent of members to distribute any surplus, even if the sponsor owns the surplus. This effectively forces employers to reach a surplus sharing agreement with members to gain their consent for the distribution, pension experts say.

"No employer can expect to get 100% of the surplus," said Barry Gros, a partner at Toronto-based consulting firm Morneau Sobeco.

Pension plan member groups are expecting an equal share of any surpluses and employers appear to be giving in to that demand, said Douglas Rienzo, a partner in the pensions and benefits department at Osler, Hoskin & Harcourt L.L.P.

"For many plans, we're seeing it cluster around this 50-50," he said. "That has the advantage of intuitively seeming fair to people."

Another issue arising out of the Monsanto decision involves the funding position of the plan. The plans directly impacted by the ruling all had surpluses at the time of the partial wind-ups, but many may now be in deficit positions, consultants say.

Regulators have indicated that they will not force a distribution if the plan sponsor can prove that the reason for a diminished surplus is valid, such as the downturn of the financial markets that has forced many Canadian defined benefit plans into deficit positions, lawyers say.

"There could be a legitimate reason why the surplus is not there," Mr. Rienzo said. "If the reason for the disappearance of the surplus is legitimate, it's our understanding that will be the end of the story."

If an employer, though, used the surplus to take a contribution holiday or to provide benefits to members who are not part of the partial wind-up group, authorities could consider that an invalid use of the surplus and order funds be put back into the pension plan. "I think it's a very real possibility," Mr. Gros said.

The Monsanto decision has already had an impact on the way employers manage their pension plans. Several plan sponsors have decided to minimize the risk of creating future surpluses that they cannot control and are funding pension deficits at minimum required levels, Mr. Purcell said.

But speculation that the decision would lead to an exodus from defined benefit pension plans has not been borne out. A January study by Morneau Sobeco showed that only 9% of plan sponsors indicated they were considering converting to a defined contribution plan or terminating their defined benefit plan in response to the ruling.

The decision, though, provides an additional incentive for defined benefit plan sponsors to consider converting to defined contribution plans, consultants say. "Monsanto is part of the discussion, not the main issue," Mr. Gros said.

The full impact of the ruling will not be felt for many years with pension experts believing that the ruling will lead to future litigation. For example, member groups who believe they own the surplus will likely file lawsuits challenging any determination that the surplus is owned by employers.

In addition, member groups may also file lawsuits related to plans previously in surplus that are now in deficit positions, asking the courts to force the employers to divert more funds into the pension plans.

Another potential area of litigation comes from current members of the pension plan who feel the distribution of plan assets to former members adversely impacts their own pensions. "This is fertile ground for pension lawyers," Mr. Purcell said.