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Canadian pension rulings favor employers

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Canadian pension rulings favor employers

Two recent Supreme Court of Canada rulings in pension cases have been seen as generally favorable to employers although they leave room for future pension litigation.

Pension experts and plan sponsors, though, are more concerned about an Ontario lower court ruling in March that has challenged two long-standing practices in managing pensions in Canada.

In Rogers Communications Inc. vs. Buschau, the Supreme Court of Canada on June 22 overturned a ruling by the British Columbia Court of Appeal that said members of one of the company's pension plans could invoke a common law rule that would have allowed them to force a termination of the trust that held the pension's assets and access the plan's surplus.

In its decision, the Supreme Court held that the context and purpose of pension plans do not generally lend themselves to the common law rule-law evolved from decisions of English Courts-cited by members in attempting to force a termination of the trust, according to a bulletin on the case issued by Blake, Cassels & Graydon L.L.P. in Toronto.

The highlight of the case is the Supreme Court's recognition that courts have to be careful in applying common-law principles governing trusts to pension plans, said Paul Litner, chair of the funding issues task force of the Toronto-based Assn. of Canadian Pension Management, which represents plan sponsors in Canada.

In the past, courts have generally taken strict trust law principles and applied them to modern pension plans, which may not be conducive to defined benefit plans, said Mr. Litner, who is a partner with Osler, Hoskin & Harcourt L.L.P. in Toronto. For example, trust law creates barriers to merging pension plans, which many plan sponsors-including Rogers Communications in this case-attempt to do. When courts apply these strict principles and tell employers they cannot merge their plans, employers respond by saying they will terminate the plans, Mr. Litner said.

A potentially problematic aspect of the case is that the Supreme Court left open the possibility that the common law rule might apply to very small pension plans, but failed to elaborate on why small plans would be vulnerable and what it considered to be a small plan. Under this reasoning, plaintiff members of small plans could still use common law rule as the basis for a lawsuit, said Mark Newton, a partner in the pensions and benefits group with Heenan Blaikie L.L.P. in Toronto. "To me, that was intellectually inconsistent," Mr. Newton said.

Class action

In a separate case, the Supreme Court decided on May 18 in Bisaillon vs. Concordia University that a unionized member of a pension plan could not institute a class action to challenge amendments to the pension plan. The university wrongfully used the pension surplus to take contribution holidays, cover administrative expenses and finance early retirement packages, according to the lawsuit.

The Ontario Superior Court found that only a grievance arbitrator would have jurisdiction to hear the case since the pension plan was a benefit provided for in the collective bargaining agreement and since the dispute resulted from the application of that agreement. The Ontario Court of Appeal set aside this decision, holding that the lawsuit had nothing to do with the collective bargaining agreement because the pension plan existed independently of the agreement. The Supreme Court in overturning the decision sided with the Superior Court's ruling that these matters should be contested via the grievance arbitration system, not the courts.

Plan sponsors with unionized workforces would benefit from the Supreme Court's decision because the timeframe for filing a grievance is much shorter than the one applicable to civil procedures such as class actions, said Natalie Bussiere, a Montreal-based attorney with the pensions and benefits practice of Blake, Cassels & Graydon. In Quebec, for example, the timeframe for filing a grievance is generally 15 to 30 days, while the timeframe for filing a class action is three years. So requiring these disputes to go through the grievance process lowers the risk that a legal action will be instigated a long time after a decision is implemented, she said.

"For employers, I think it's very good news," Ms. Bussiere said. "It creates more stability."

The impact, though, on companies with both unionized and non-unionized employees remains to be seen, because the decision only applies to unionized employees, meaning non-union employees retain the right to sue. If non-union members institute a class action, any decisions in their favor would benefit all eligible members of the pension plan, regardless of whether they are in a union or not, Ms. Bussiere said. Union members "could benefit from it at the end of the day," she said.

Nolan vs. Kerry

Despite mostly favorable rulings from the Supreme Court on these pension cases, the case that has plan sponsors bewildered and concerned is a March decision by the Ontario Divisional Court involving Woodstock, Ontario-based Kerry (Canada) Inc.

In administering its defined benefit pension plan, the company paid administrative expenses from the pension fund and also took contribution holidays after taking into account the actuarial surplus of the plan. In 2000, the plan was amended to add a defined contribution component for new hires and existing members who took the option of converting their past service entitlements to the DC plan. Part of this amendment allowed the company to use funds from the DB plan to fund its contributions to the DC plan.

Former employees who were members of the plan objected to the change and asked the Ontario Superintendent of Financial Services to order the company to reimburse the plan for the administrative expenses and contribution holidays and to deny registration of the amendment.

These issues were debated by regulatory officials and eventually by the divisional court, which ruled that Kerry was not allowed to pay administrative expenses out of the fund because the historical plan documents and trust agreement language prohibited it from doing so. The divisional court also ruled that Kerry could not use the surplus in the defined benefit plan to fund its defined contribution plan contributions because the amendment created two pension funds and the DC members had no connection to the DB plan and could not be legitimately given a beneficial interest in the funds from the DB side.

The court's decision in Nolan vs. Superintendent of Financial Institutions and Kerry (Canada) Inc. on the payment of expenses is the most troublesome for plan sponsors because the vast majority of them pay administrative expenses directly from the pension plan, said Stephen Pibworth, legal consultant for Hewitt Associates Canada in Toronto. The ruling on Kerry's use of the surplus to fund DC contributions is also problematic because many plan sponsors have converted from DB to DC plans and have used DB surplus to fund DC contributions, he said.

A small number of employers are already looking at their historical documents to assess potential liability, but the majority of plan sponsors are taking a wait and see attitude, Mr. Pibworth said. The Kerry decision is being appealed to the Ontario Court of Appeal and plan sponsors are hopeful that the higher court will hear and overturn the decision, he said. "I think it's fair to say that plan sponsors are very aware of this case and very concerned about the implications for their own plans," he said.

Viewing the Kerry decision in light of the Supreme Court's decision in Buschau, ACPM's Mr. Litner wondered if the Ontario divisional court would have reached the same decision. Kerry has similarities to Buschau in that it tackles how classic trust law principles apply, he noted.

"I don't think a judge would be inclined to take as harsh or strict a view in light of Buschau or would be careful to say the facts are limited to this case," Mr. Litner said. The Buschau decision could impact an appeal of the Kerry case "because I think the Supreme Court is signaling that courts have to take a less strict view on how to apply classic trust law to pension plans," he added.