With the recent cascade of solvency deficits, funding relief measures, and bankruptcy protection filings by pension plan sponsors, it is becoming difficult to remember the era not too long ago when defined benefit plan stakeholders’ principal obsession was surplus, not shortfalls.
Believe it or not, there are still a few pension surpluses out there, and hopefully a new confluence of economic and regulatory developments will eventually cause today’s deficits to morph back into tomorrow’s surpluses. So any changes to the legal environment in regard to pension surplus continue to deserve attention.
In this connection, the recent Ontario Financial Services Tribunal decision in the Montreal Trust case is a welcome development for all those interested in fostering employer access to surplus assets in terminated plans. Here’s why.
Ever since the pension surplus withdrawal phenomenon emerged in the mid-1980s, there has been legal uncertainty in Ontario as to who has jurisdiction over approving employer withdrawals of surplus assets, i.e. the courts, the pension regulator, or both. Another open question has been the extent to which historical plan documentation is relevant in determining entitlement.
At one point in the 1990s, the Pension Commission of Ontario (predecessor to today’s Financial Services Commission of Ontario) adopted a pragmatic “limited scrutiny” approach to historical plan documentation when there was evidence of substantial member support for cutting the employer in on the allocation of surplus. Essentially, this approach allowed employers to ignore wording in any prior plan texts or funding agreements which suggested that they did not have legal entitlement to surplus.
However, in 2000 the Ontario Divisional Court held in Kent v. TecSyn International that this approach contravened the Pension Benefits Act. Hence, plan sponsors were again faced with the need to confront the documentary past of their pension plans, in all its dubious glory.
To sidestep this legally correct but practically troublesome decision, and to circumvent the cumbersome positive unanimity requirements of the Variation of Trusts Act as a means for overriding the historical documentation, pension lawyers then began to use the “orchestrated class action” as an alternative technique for overriding such documentation without actually obtaining signatures from each and every potential beneficiary. That is, the affected plan members would launch a class proceeding with regard to surplus entitlement, and the lawsuit would quickly be “settled” and ratified by the court as part of the settlement process.
However, the legal question remained as to whether Ontario’s class proceedings legislation could actually be utilized to effect such a substantive change in legal rights, or whether the proper ambit of such legislation was in fact restricted only to procedural matters.
With its January 2009 decision in the Montreal Trust case, the Financial Services Tribunal has now asserted that a class action can indeed be utilized to vary substantive legal entitlements. The result of this decision, which the Superintendent of Financial Services was quick to announce he would not appeal, is effectively to undo the damage to consensual surplus-sharing resolutions caused by the TecSyn decision, at the cost of requiring a certain number of court proceedings and the accompanying legal paperwork. Such cost likely means that the amount of surplus involved will have to be sufficiently material for the parties in any particular situation to go to the necessary trouble.
From a practical perspective, one cannot help but be pleased at this result. Nonetheless, as this is a decision only of the Tribunal and not a civil court, it is by no means the highest authority on the matter. And one cannot help but notice that the Tribunal did not really explore all the possible legal implications of the fact that one member of the Montreal Trust class had opted out of the settlement. That is to say, if the basis of the variation of trusts notion is unanimity of the affected beneficiaries, could class action opt-outs turn out to be problematic in any future surplus-sharing arrangements which the parties attempt to implement by way of class proceedings?
But that is an issue for another day, if ever. In the meantime, let us hope that pension reform will soon lead to a revision of the applicable legislation, so that historical plan documentation can be returned to the dustbin of history in which it belongs.
A more concise version of this commentary appeared as an annotation to the Montreal Trust decision reported in Canadian Cases on Pensions & Benefits, the Thomson Carswell law report edited by the author.