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Canadian pension plan sponsors receive and await court guidance

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Canadian employers are seeing the impact of two high-profile Supreme Court of Canada rulings in pension disputes.

Plan sponsors and pension experts, though, are anxiously awaiting a decision from the Ontario Court of Appeal in a case that will decide several critical issues related to pension plan management, including the validity of charging administrative expenses to the plan fund.

Several recent court and administrative decisions have factored in the high court's analysis in the two pension cases, Monsanto Canada Inc. vs. Ontario (Superintendent of Financial Services) and Rogers Communications Inc. vs. Buschau, said Ian McSweeney, cochair of the pensions and benefits practice with Osler Hoskin & Harcourt L.L.P. in Toronto.

On a related front, a Federal Court of Canada judge ruled May 1 in Cousins vs. Canada (Attorney General) that federal pension legislation requires a proportional distribution of a surplus attributable to a partially wound-up pension plan. A partial wind-up refers to the termination and distribution of pension fund assets related to that part of the plan.

The federal judge in the Cousins case referred to the Supreme Court analysis in the Monsanto decision in which the high court upheld a regulatory determination that the Ontario Pension Benefits Act requires distributing a proportional share of actuarial surplus when a defined benefit pension plan is partially wound up (BI, Aug. 9, 2004).

Although the Supreme Court analyzed Ontario's pension statute in the Monsanto case, the federal judge ruled that the high court's reasoning applies to the federal statute as well, meaning that surplus must be distributed upon partial plan wind-ups of federally regulated plans, Mr. McSweeney said at the 2007 Pensions Summit: Striking the Right Balance, presented May 10-11 by the Conference Board of Canada in Toronto.

"The result is that, subject to appeal, federal plan sponsors join their provincial brethren in partial wind-up surplus misery," except in British Columbia and Alberta, which give plan sponsors an extension on mandatory distribution of surplus for partial wind-ups, he said.

Decisions such as Monsanto and Cousins feed plan sponsors' reluctance to make larger-than-required contributions to their pension plans, Mr. McSweeney said, citing a Conference Board of Canada/Watson Wyatt Worldwide survey that showed fewer employers (16%) are funding their plan deficits at levels higher than the regulatory requirements this year than last year (24%).

"Employers are loath to put more money in the plans than they need to because circumstances can change: Surplus pops up, and downsizing and other events cause a partial wind up, and they end up paying (the surplus) out," Mr. McSweeney said.

On April 27, the Office of the Superintendent of Financial Institutions denied a request by former members of a pension plan operated by Rogers Communications Inc. to terminate the plan and distribute surplus assets.

The OSFI decision followed a June 2006 ruling by the Supreme Court in the Buschau case that overturned a lower court ruling that would have allowed the plan members to invoke a common law rule to force termination of the trust that held the pension's assets and access the plan's surplus (BI, July 10, 2006).

The Supreme Court returned the case to OSFI, Canada's federal pension regulator, which has jurisdiction over pension plans in major financial sectors, such as banking, insurance, transportation and telecommunications. In its decision, the regulator ruled that the company's actions, which included closing and then reopening the plan to new members, complied with Ontario's pension statute. It also ruled that plan terms gave the sponsor--not the members--the right to amend and terminate the plan.

The OSFI decision was "very, very positive for employers," Mr. McSweeney said.

Meanwhile, the Ontario Court of Appeal is expected to rule shortly in the appeal of a lower court ruling in Nolan vs. Superintendent of Financial Institutions and Kerry (Canada) Inc.

In March 2006, a judge in the Ontario Superior Court of Justice Divisional Court ruled that an employer was not entitled to pay administrative expenses out of the pension fund because historical plan documents and trust agreement language prohibited it from doing so. The court also ruled that the plan sponsor could not use the surplus in its defined benefit plan to fund contributions to its defined contribution plan (BI, July 10, 2006).

The appellate court's view on these issues is critical for plan sponsors because the lower court ruling challenged common pension management practices, namely paying administrative expenses directly from the pension plan.

"We're all hoping that the Ontario Court of Appeal will shed some light on the proper way to analyze these expense cases from a legal perspective," Mr. McSweeney said.