The Supreme Court of Canada brought closure to the longstanding Monsanto pension dispute in July 2004 by confirming the requirement under Ontario law to distribute surplus on the partial wind-up of a pension plan. What has happened since then?

More issues than answers

The decision affected hundreds of partial wind-ups from the past. So what have the affected plan administrators done so far? In short, not much. Not because they don’t want to — most want to put the painful settlement exercise behind them as soon as possible — but because they can’t. The Supreme Court of Canada told them to distribute surplus but gave them no guidance on how to do it. Here are some of the many issues that need to be resolved:

• For pension plans with members in more than one province, should Ontario (and possibly Nova Scotia) members get a larger than proportionate asset share because of the legislated grow-in benefits in these provinces?
• Should past partial wind-up balance sheets be re-determined with greater accuracy for the purpose of the division of assets between groups of members, given that the original purpose was (merely) demonstration of adequacy of assets?
• Should the cost of plan improvements made coincidental with a past partial wind-up be considered (in or for?) a distribution of surplus? What about subsequent improvements, such as ad hoc pension increases?

Plan sponsors are faced with rewriting history without instructions. In addition, there is the equally daunting, if somewhat more mundane, concern of finding the information to do the necessary calculations and analysis. They need appropriate data for affected members, as well as for members not affected, in order to properly divide the assets. They need to review the pension fund records since the time of the partial wind-up to isolate payments made to affected members and expenses charged against the assets for the affected group. And they’ll need to do all of this looking back over spans of 10 to 15 years or maybe even more.

In the end, plan administrators will be forced to make some judgment calls — there will never be a complete roadmap for implementing the decision. But faced with competing interests of different employee groups in a litigious environment, each judgment call comes burdened with financial and legal exposures.

What has the Ontario regulator done? 

It’s fair to say that the Financial Services Commission of Ontario (FSCO), like the rest of us, is learning too. Its first reaction was a request for a financial update within a two-month deadline. This was unworkable for the majority of cases. Extensions were sought. It became evident that there were several supportable ways to determine the surplus amount to be paid — and that competing interests might demand different results. When the complexity of the issues became undeniable, FSCO began to grant extensions more freely. 

Unfortunately, FSCO has sent mixed messages. For example, on the one hand it has indicated that a partial wind-up should be just like a full wind-up. FSCO has directed plan administrators to isolate the partial wind-up assets and liabilities as of the original wind-up date and bring them forward to the present as if they are in separate plans to determine the amount of surplus available for distribution. On the other hand, FSCO has already agreed to one distribution in which the original surplus amount was simply credited with the fund rate of interest net of expenses. 

Another mixed message is FSCO’s varying levels of flexibility. For example, it consented to a surplus calculation that departs from the separate plan approach. Contrast that with its steadfast demand in requiring annuity purchases. 

The path to FSCO approval is challenging, but it may not be the end. What happens if a subsequent court decision provides guidance on implementation that produces a different answer? Plan administrators should be on notice that even a FSCO approval may not prevent the whole process from being reopened in the future.

We appreciate that without a roadmap in the legislation, it is not clear what compliance is. It is unrealistic to look for leadership from FSCO because it is in no better position to determine compliance than plan administrators, members, lawyers or actuaries. However, we would like to see FSCO take an active role in seeking regulations that would clear a path through the arbitrary and loaded decisions now facing plan administrators. So far there is no sign of this.

Outside of Ontario

Parallel wording in the legislation of other jurisdictions means that decisions about Ontario partial wind-ups could affect partial wind-ups across the country. But so far, we haven’t heard anything from the other pension regulators. Perhaps it is best to let sleeping dogs lie, but it is unlikely that they’ll be able to sleep much longer.

The dire predictions

Dire predictions were made that the Monsanto decision would lead to fewer and weaker pension plans. How is that forecast playing out? On the prediction of fewer pension plans, it’s too early to tell. While we can’t point to a single plan that has been wound up as a result of the decision, it’s likely that the issue won’t really register on the radar of senior management and boards of directors until surplus distribution cheques are being written — especially from pension plans now in a deficit position. 

As for weaker pension plans, that call was right on target. While the fact that more than 70 percent of Canadian pension plans are less than fully funded on a wind-up basis owes more to stubbornly low long-term interest rates and mediocre stock market returns, the Monsanto decision is front and centre in the minds of those deciding how fast to pay off those deficits. We see it every day — plan sponsors deciding that they need to minimize the risk, however small, of creating future surpluses and future distributions. The response is logical; the public policy is badly flawed.

A final prediction: for many plan sponsors, the resolution of Monsanto will be measured in years, not months.

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About the authors

Leigh Ann Bastien is a principal and senior lawyer in Mercer’s Canadian Law and Tax unit. She advises clients on the design and operation of pension plans, including regulatory compliance, administration, and trust law. Leigh Ann is a member of the Society of Trust and Estate Practitioners.

Paul Purcell is a principal, the leader of the Canadian Retirement Business, and a member of the Global Retirement Leadership Group. Paul specializes in the financial, design, and operational aspects of all types of retirement plans. Paul is a frequent author and speaker on the topic of pension reform.