In the recent Burke v. Hudson’s Bay Co. decision, the Supreme Court of Canada (SCC) held that plan members who were transferred to a successor pension plan as part of a sale of business were not entitled to a pro-rata share of the surplus that existed at the time of the transfer.
The Hudson’s Bay Company (HBC) maintained a defined benefit pension plan for its employees.
As a result of a sale of its assets in 1987, 1,200 former HBC employees became employees of the purchaser and began participating in a newly created plan. HBC transferred pension assets to the purchaser’s plan in an amount equalling plan liabilities for transferred employees’ benefits. At the time, HBC’s plan had a surplus, but none of the surplus was transferred.
The transferred members challenged this decision, claiming that:
• HBC breached its fiduciary obligations as plan administrator by not transferring a pro-rata share of the surplus;
• HBC breached its fiduciary duty of even-handedness by effectively treating transferred employees differently than members remaining in the HBC plan; and
• HBC had improperly charged plan expenses to the pension fund for years prior to the transfer.
The Supreme Court’s Decisions
With respect to plan expenses, the SCC followed its reasoning in the 2009 Kerry decision and held that, with no common law or statutory obligation for employers to pay plan expenses, any such obligation would have to arise from the terms of the plan documents. Since the HBC plan documents did not prohibit the payment of expenses from the pension fund, the SCC took a liberal view of HBC’s authority to charge expenses to the fund.
On the surplus transfer issue, the SCC concluded that the employees did not have a proprietary right (granted only by the language of the plan documents) to the surplus; their entitlement was limited only to the benefits promised by HBC under the plan. With no such language in the documents, the SCC held that the employees did not have any right to the surplus or to have it transferred.
The SCC also distinguished between HBC’s legal duties. As plan sponsor, HBC was limited to providing employees with their defined benefits; no fiduciary duty of even-handedness applied. As administrator, HBC’s fiduciary duties did not extend to the use of surplus for those employees not entitled to surplus under the terms of the plan. Since HBC was under no obligation to transfer surplus under the plan, no fiduciary duty could exist in relation to the exercise of this discretion by HBC.
The SCC also rejected the employees’ claim that HBC’s use of surplus to improve the pensions of remaining plan members caused them to breach their fiduciary duty of even-handedness. That an employer may voluntarily choose to increase pension benefits out of surplus does not, the SCC held, extend fiduciary duties to those actions.
The SCC made it clear that its decision was specific to the wording and context of the HBC pension plan documents, which did not grant a specific right to surplus to plan members. It also noted that the issue of whether a transfer of surplus is required when the plan language entitles employees to surplus is “best left to another case where that issue arises.”
Employer Impact
This decision should provide further comfort to employers that have paid administration expenses from the pension fund, since it affirms that an employer’s obligation to pay plan expenses is specific to the plan language and, unless prohibited, employers may pay expenses from the fund.
It may also provide some support for employers that did not transfer surplus in past asset transfers. However, since the SCC stopped short of discussing whether surplus must be transferred in cases where plan documents confer surplus entitlement, this issue remains unresolved.
The effect of the Burke decision may be only temporary in Ontario, since the new asset transfer provisions of the province’s Pension Benefits Act appear to require employers to transfer a pro-rata share of surplus on a sale of business. However, the decision will still have relevance in provinces that do not require surplus to be transferred.
Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP. plitner@osler.com