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Benefits and Pensions MonitorThe Best Of BuschauBy: Mark Newton The Supreme Court of Canadaʼs decision in Buschau v. Rogers Communications Inc. overturned a ruling based on a 165-year-old precedent from another country, under another regime. Mark Newton, of Heenan Blaikie LLP, explains what it means to plan sponsors. In claiming victory over the Romans in 279 B.C., Pyrrhus, the king of Epirus, incurred such heavy losses that his name has since been used to describe any victory in which the losses outweigh the apparent gains – a Pyrrhic victory. Based on the Supreme Court of Canadaʼs June 22, 2006, decision in Buschau v. Rogers Communications Inc. (2006 SCC 28), the plan sponsor may empathize with Pyrrhusʼ plight. Although the company won its appeal, the majority of the court expressly noted that “…Rogersʼ arguments have not prevailed.” Nonetheless, the courtʼs decision is welcome news for pension plan sponsors.
10-Year Saga The Buschau decision was the culmination of a 10-year legal saga that included three decisions of the British Columbia Court of Appeal. The critical finding of the Supreme Court was to disallow members of a pension plan from invoking a seemingly obscure common law trust principle to terminate the pension planʼs trust. Successfully invoking the trust law principle in question, known as “the rule in Saunders v. Vautier,” would have allowed the plan members to access the planʼs significant surplus assets. Rogersʼ predecessor, Premier Communications Inc., established a Defined Benefit pension plan in 1974. The plan was funded by the company only. Employees were not required to contribute. Nevertheless, the plan provided that on termination of the plan, surplus assets would be distributed to the plan members. The pension plan fund was held in accordance with the terms of a trust agreement. Under that agreement, the company could not amend the plan or the trust agreement such that any part of the fund could be used for purposes other than the exclusive benefit of plan members, beneficiaries, and their estates. As often happened in those days, the pension fund developed a surplus. The plan was conveniently amended in 1981 to allow surplus assets to be paid to the company on plan termination. Then, in 1984, the plan was closed to new members, which created an ideal scenario for surplus assets to grow. The company started taking contribution holidays in 1985. It also requested the trustee to refund surplus assets amounting to $968,000 to the company. This request was granted by the trustee, a predecessor of National Trust, and approved by the Superintendent of the federal Department of Insurance (now the Office of the Superintendent of Financial Institutions, or OSFI). In 1992, Rogers amended the plan to merge it with four other plans, retroactive to 1987, the date of a corporate amalgamation. The objectives behind the merger, as stated in an internal memo, were to access the surplus assets and to minimize administration. This makes perfect sense in a business context. If one asset is producing excess cash and another is not, then by merging the assets, the gains in one can offset the other. However, the rules of the game are a little more complex in the world of pensions, especially when plan assets are held in trust and where the terms of the trust do not give the right to the plan sponsor to access the surplus. Legal Action As a result of these events, the members of the plan commenced legal proceedings against Rogers Cable T.V. Ltd. (successor to Premier Communications Inc.), Rogers Communications Inc. (sponsor of the merged plan), and National Trust. The allegations in the claim were that:
The members requested an order requiring Rogers to pay the $968,000 back into the fund for an accounting of the assets in the plan following the merger and for damages for breach of fiduciary duties and breach of trust. With regard to these various issues, the contribution holidays were held to be valid. There is extensive legal authority supporting the right of plan sponsors to take contribution holidays since the Supreme Courtʼs decision in Schmidt v. Air Products Canada Ltd. in 1994. Rogers, however, decided that its withdrawal of surplus assets was invalid. It refunded the $968,000 with interest to the plan, prior to the first trial judgment. The members then sought a declaration that these funds should be refunded to them rather than to the pension fund. The merger of the plans was held to be valid. However, the merger did not affect the existence of the trust as a separate trust. In other words, any rights the members had under the terms of the trust could not be abrogated by the merger. The members, having maintained their rights under the trust agreement, then commenced an action to terminate the trust and have the surplus assets distributed to them. They framed the action based on a common law trust rule emanating from a court decision in England in 1841 called Saunders v. Vautier. It will help to put Saunders v. Vautier into context to illustrate the kind of legal quagmire plan sponsors can get unwittingly caught in when dealing with pension trusts. Saunders v. Vautier was a case involving a trust under a will. A man died in 1832 and, under the terms of his will, left a certain amount of stock in trust for his greatnephew for when he turned 25. The gift was absolute, such that it would not be given to anyone else if the great-nephew died before reaching age 25. When he reached age 21, the age of majority at that time in England, the great-nephew petitioned the court for immediate possession of the property. His petition was granted on the grounds that there was a clear intention on the part of the deceased to make an absolute gift, that the gift vested in the great-nephew when the uncle died, that the great-nephew was the only beneficiary, and that at age 21 he was of the age at which he could make decisions about his welfare. How, might one ask, could this rule possibly apply to modern pension plans and trusts? Well, the British Columbia Court of Appeal decided that the plan members could indeed invoke the rule in Saunders v. Vautier to terminate the trust. In the Court of Appealʼs view, a broad interpretation of this rule is that beneficiaries (read pension plan members and other beneficiaries) of any kind of trust (read pension plan) may terminate the trust (read plan) if they are all of one mind (sometimes even if the plan sponsor cannot determine who all the plan members are), and they are all of full mental capacity and age (even beneficiaries who have a future right to survivor benefits). It is a pretty tenuous extension of a narrow decision from 165 years ago from another country, under another regime, involving completely different facts, and decided for different legal and policy reasons. Rogers appealed, asking the Supreme Court of Canada to grapple with the applicability of the Saunders v. Vautier rule to pension plan trusts. Saunders v. Vautier Not Applicable Fortunately, the Supreme Court of Canada overturned the Court of Appealʼs decision. It held that Saunders v. Vautier is not applicable to pension plans for the following reasons: ◆ Pension legislation, in this case the federal Pension Benefits Standards Act, sets out a comprehensive regime including procedures applicable to pension plan wind-ups. The court held that where there is clear legislative intent in an area of law in which there is a statutory regime, those rules should override the common law ◆ The trust could not be terminated without regard to the pension plan text. Under the terms of the plan, only the plan sponsor had the authority to amend the plan or to wind it up. A trust agreement or insurance contract is simply a vehicle used for carrying out the purposes of the plan, namely custody of the assets. The Supreme Courtʼs decision creates a more appropriate balance between plan texts and trust agreements than the Court of Appealʼs decision. In the writerʼs view, previous court decisions have placed too much emphasis on trust agreements, with little regard to plan texts. The decision also gives prominence to pension standards legislation, pursuant to which the pension plan was established and owed its continued existence. The trust in this case could not be collapsed and assets distributed without adherence to, and compliance with, the Pension Benefits Standards Act and the policies and procedures of the OSFI. Unfortunately, four of the seven member panel of the Supreme Court that heard the case left open the possibility that the Saunders v. Vautier rule might still apply to very small pension plans! This was an unnecessary statement. Superintendent’s Authority Another aspect of the judgment worth noting concerns the scope of the superintendent ʼs authority under the federal Pension Benefits Standards Act to order a windup of a pension plan. The superintendent has the authority to order the wind-up of a pension plan where employer contributions have ceased. The three-member minority on the court interpreted this authority in light of the superintendentʼs supervisory focus on pension plan solvency. According to the minority, without a threat to the solvency of the pension plan, the superintendent did not have authority to wind-up the plan, even where contributions have ceased. The majority of the court interpreted the superintendentʼs authority more broadly, holding that it was not restricted to solvency issues. The majority went even further by stating that where employer contributions have ceased and members of a pension plan request the superintendent to wind-up the plan, the superintendentʼs exercise of discretion “… becomes almost a duty.” The majority provided the superintendent with a very significant signal to terminate the Rogersʼ plan. The majority then made the statement referenced at the beginning of this article that “although the appeal is allowed, Rogersʼ arguments have not prevailed.” Rogers won the battle against Saunders v. Vautier, but it might lose the war against surplus distribution if the superintendent orders a wind-up of the plan.
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Mark Newton is in the pension and benefits practice at Heenan Blaikie LLP.