Supreme Court rejects attempt to windup pension trust
It will take more than just a vote — even a unanimous one — for a group of 112 former cable company workers in Vancouver to force the windup of a pension trust and distribute its $11-million surplus among themselves, the Supreme Court of Canada ruled last month.
What they could do instead is request approval from the Superintendent of Financial Institutions, said the court. John Laxton, lawyer for the plan members, said the group is approaching the superintendent to do just that.
At issue is a defined benefit pension plan established in 1974 for employees of Premier Communications. Though the company said it planned to maintain the plan indefinitely, if the plan was ever terminated, the surplus would be distributed among remaining members.
In 1984, four years after what was then Rogers Cablesystems Inc. bought Premier, the plan had an estimated surplus of $800,000. An actuary recommended increased benefits for members but was replaced about a month after making the recommendation.
Then Rogers closed the plan to future employees and convinced the plan trustee to refund $968,000 in employer contributions, which it later returned. The company also took contribution holidays evaluated at $842,000. In 1992, Rogers merged the plan with four others, some of which were in deficit.
In 1995, members of the Premier plan launched a lawsuit against Rogers. Alleging breach of trust, they wanted to recoup the trust funds paid to Rogers. They then applied to terminate the plan using a rule established in an 1841 trust case which allows for a trust to be changed or terminated if all beneficiaries of the trust agree to it.
The Supreme Court agreed with plan members that Rogers’ actions were attempts to appropriate the surplus.
“Its resistance to the actuary’s recommendation to improve employee benefits, its replacement of the less malleable actuary and trustee, the internal notes and the improper amendments to the plan amply demonstrate that Rogers did what it could to get at the surplus,” it said.
However the court said the 1841 trust rule cannot be applied to a pension trust because there are already extensive regulations on pension termination.
At one level, the ruling does not have broad implications, said pensions lawyer Murray Campbell at the Vancouver office of Lawson Lundell, as rarely will there be a group of pension plan members that can achieve unanimity to try to force the termination in the first place, he said. In this case, Rogers’ decision to close off the pension plan to new members may have helped make such unanimity possible.
Indeed, as the case made its way through the court system, Campbell saw this practice being severely curtailed. If sponsors suspend entry into a plan, they will clearly reserve the right to reopen membership, he said.
At another level, however, the Supreme Court ruling is surprising because it’s a departure from what the courts have said for years, which is “a trust is a trust is a trust.” As a result of this decision, in which the judges said only applicable parts of trust law apply, “there’s no reason why you wouldn’t go back and look at all the trust law rules that we’ve been applying unquestioningly to pension disputes,” said Campbell.
“Look at all the rules about surplus ownership or the rules relating to the revoking of trusts. Those are trust law principles that we’ve adopted and, arguably, we’re now invited to discuss whether they ought to apply,” he said.
Mark Newton, a Toronto lawyer with Heenan Blaikie and chair of the pension section of the Canadian Bar Association, said employers can breathe a sigh of relief. Courts have been giving too much prominence to trust documents, which set out the terms and conditions of each trust, and not enough to what pension legislation or pension plan texts say.
Had the group of 112 plan members succeeded, it would have spelled trouble for employers who set up the older pension trusts, many of which had language that said the funds put into the trust were irrevocable. A tax rule in place until 1981 offered employers tax relief on funds going into a pension trust but only if the trust was irrevocable — meaning the employer would not have access to surplus funds. Pension plans established since that date usually don’t have this type of wording in the trust documents and, as a result, employers have more flexibility in the use of surplus and in their ability to amend trust agreements and plan texts.
The courts’ tendency to rely on common law instead of what’s set out in pension legislation is also what’s behind a lot of litigation over fiduciary duties, Newton said.
“In every pension claim, members allege breach of fiduciary duties and courts focus more on common law fiduciary duties concepts instead of fiduciary duties under pension legislation. That really makes plan sponsors unsure what they’re doing as well.”
What they could do instead is request approval from the Superintendent of Financial Institutions, said the court. John Laxton, lawyer for the plan members, said the group is approaching the superintendent to do just that.
At issue is a defined benefit pension plan established in 1974 for employees of Premier Communications. Though the company said it planned to maintain the plan indefinitely, if the plan was ever terminated, the surplus would be distributed among remaining members.
In 1984, four years after what was then Rogers Cablesystems Inc. bought Premier, the plan had an estimated surplus of $800,000. An actuary recommended increased benefits for members but was replaced about a month after making the recommendation.
Then Rogers closed the plan to future employees and convinced the plan trustee to refund $968,000 in employer contributions, which it later returned. The company also took contribution holidays evaluated at $842,000. In 1992, Rogers merged the plan with four others, some of which were in deficit.
In 1995, members of the Premier plan launched a lawsuit against Rogers. Alleging breach of trust, they wanted to recoup the trust funds paid to Rogers. They then applied to terminate the plan using a rule established in an 1841 trust case which allows for a trust to be changed or terminated if all beneficiaries of the trust agree to it.
The Supreme Court agreed with plan members that Rogers’ actions were attempts to appropriate the surplus.
“Its resistance to the actuary’s recommendation to improve employee benefits, its replacement of the less malleable actuary and trustee, the internal notes and the improper amendments to the plan amply demonstrate that Rogers did what it could to get at the surplus,” it said.
However the court said the 1841 trust rule cannot be applied to a pension trust because there are already extensive regulations on pension termination.
At one level, the ruling does not have broad implications, said pensions lawyer Murray Campbell at the Vancouver office of Lawson Lundell, as rarely will there be a group of pension plan members that can achieve unanimity to try to force the termination in the first place, he said. In this case, Rogers’ decision to close off the pension plan to new members may have helped make such unanimity possible.
Indeed, as the case made its way through the court system, Campbell saw this practice being severely curtailed. If sponsors suspend entry into a plan, they will clearly reserve the right to reopen membership, he said.
At another level, however, the Supreme Court ruling is surprising because it’s a departure from what the courts have said for years, which is “a trust is a trust is a trust.” As a result of this decision, in which the judges said only applicable parts of trust law apply, “there’s no reason why you wouldn’t go back and look at all the trust law rules that we’ve been applying unquestioningly to pension disputes,” said Campbell.
“Look at all the rules about surplus ownership or the rules relating to the revoking of trusts. Those are trust law principles that we’ve adopted and, arguably, we’re now invited to discuss whether they ought to apply,” he said.
Mark Newton, a Toronto lawyer with Heenan Blaikie and chair of the pension section of the Canadian Bar Association, said employers can breathe a sigh of relief. Courts have been giving too much prominence to trust documents, which set out the terms and conditions of each trust, and not enough to what pension legislation or pension plan texts say.
Had the group of 112 plan members succeeded, it would have spelled trouble for employers who set up the older pension trusts, many of which had language that said the funds put into the trust were irrevocable. A tax rule in place until 1981 offered employers tax relief on funds going into a pension trust but only if the trust was irrevocable — meaning the employer would not have access to surplus funds. Pension plans established since that date usually don’t have this type of wording in the trust documents and, as a result, employers have more flexibility in the use of surplus and in their ability to amend trust agreements and plan texts.
The courts’ tendency to rely on common law instead of what’s set out in pension legislation is also what’s behind a lot of litigation over fiduciary duties, Newton said.
“In every pension claim, members allege breach of fiduciary duties and courts focus more on common law fiduciary duties concepts instead of fiduciary duties under pension legislation. That really makes plan sponsors unsure what they’re doing as well.”
