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SCC Upholds OCA in Burke v. Hudson’s Bay Company

Posted by on Oct 7, 2010 in Legal, Retirement | 0 comments

In 1961, the Hudson’s Bay Company (“HBC”) provided a contributory, defined benefits pension plan for its employees.  Under this defined benefit pension plan members of the plan were guaranteed a specified benefit upon retirement.  For the first twenty years of existence, the plan was in deficit  and HBC made additional payments to keep the plan solvent.  In 1982, the plan generated its first actuarial surplus and HBC began paying plan administration expenses out of the fund.

In 1987, HBC sold its Northern Stores Division to the North West Company (“NWC”) and approximately 1,200 employees were transferred from HBC to NWC.  The companies entered into an agreement to protect the pensions of the transferred employees.  The agreement provided that NWC would establish a new pension plan and would provide the transferred employees with benefits at least equal to those provided under the HBC plan. HBC agreed to transfer assets sufficient to cover the defined benefits of the transferred employees.  At the time of the transfer, HBC’s pension plan had an actuarial surplus of about $94 million.  The companies discussed whether a portion of the actuarial surplus should be transferred; however, HBC suggested that transferring part of the surplus would increase the purchase price and the matter went no further.

The transferred employees allege that HBC, as plan administrator, breached its fiduciary duty to treat all pension plan members with an even hand.  They argue that HBC was required to transfer a portion of the actuarial surplus to the successor plan and that HBC improperly charged pension plan administration expenses to the pension fund for approximately six years prior to their transfer.

The trial judge found in favour of HBC on the issue of administration expenses, but held that the surplus was subject to trust principles, and that the transferred employees, as beneficiaries of the trust, had an equitable interest in the actuarial surplus.  The disparate treatment of the beneficiaries was found to be a breach of an equitable trust which required the transfer of a portion of the actuarial surplus to remedy the breach.  HBC appealed the issue of surplus and the transferred employees cross‑appealed on the issue of administration expenses.

The Court of Appeal allowed the appeal and dismissed the cross‑appeal.

Held:  The appeal should be dismissed.

An employer is obligated to pay for administration expenses when such an obligation is imposed by statute or common law.  In this case, there were no statutory or common law obligations on HBC to pay administration  expenses.  The original trust agreement as well as the plan text do not expressly address plan administrative expenses.  Subsequent trust agreements included a provision which expressly allowed HBC to charge plan administration expenses to the fund.  The new trust agreements merely confirmed what was already implicitly provided for in the original trust agreement. HBC was therefore permitted to charge plan administration expenses to the pension fund.

The issue as to whether HBC was required to transfer a portion of the actuarial surplus when it sold its Northern Stores Division to NWC raises a novel question in pension law as the sale occurred in the context of an ongoing pension plan, rather than a terminated or wound‑up plan.  In all cases the interests in the surplus of a pension plan have to be determined according to the words of the relevant documents and applicable contract and trust principles and statutory provisions.  Each situation must be evaluated on a case‑by‑case basis.

Here, subject to the text of the plan, the terms of the trust agreement, and relevant statutes, HBC, as plan administrator, had wide discretion with respect to the pension plan, which it could exercise unilaterally and which could affect the interests of the employees and to which exercise of discretion the employees were vulnerable. Therefore, a fiduciary relationship existed between HBC as administrator and the employees/beneficiaries under the pension plan.

Pensions legislation is not a complete code but rather it establishes minimum standards and regulatory supervision in order to protect and safeguard the pension benefits and rights of those entitled to receive them under private pension plans.  Here, HBC complied with the 1987 Pension Benefits Act when it transferred the pension assets to NWC.  The terms of the relevant plan and trust documentation may impose a higher standard.  Thus HBC’s compliance with the 1987 Pension Benefits Act is not a complete answer to the transferred employees’ claim.  It is necessary to examine the common law and equitable principles that govern interpretation of the plan and trust documentation.

In a defined benefit pension governed by trust principles, as in this case, legal ownership of the defined benefits lies with the trustee.  The funds needed to pay the employees’ defined benefits are held in trust on their behalf.  As beneficiaries, the employees have an equitable interest in the funds needed to cover their defined benefits.  A review of the original and subsequent pension plan documentation indicates that the only employee benefits that are provided for under the terms of the plan are the employees’ defined retirement benefits.  Additionally, the pension plan documents (the pension plan text and trust agreement), having regard to the operative language of the plan as a whole, do not contain any of the language that would typically give employees an entitlement to surplus.  Based on the provisions of the pension plan documentation, it cannot be said that the transferred employees had an equitable interest in the surplus on termination, and therefore no floating equity in the actuarial surplus during continuation of the plan.

The fact that HBC may have voluntarily chosen to increase pension benefits out of surplus funds or otherwise, does not change the nature of the employees’ interest in the pension fund or extend fiduciary obligations to voluntary actions of the employer.  Moreover, employees have no right to compel surplus funding to provide a cushion against insolvency. As a defined benefit plan, HBC’s duty was to ensure that funds at all times meet the fixed benefits promised by the employer.  The right of the employees  is that their defined benefits be adequately funded, not that an actuarial surplus be funded.  Just because HBC had fiduciary duties as plan administrator does not obligate it under any purported duty of evenhandedness to confer benefits upon one class of employees to which they have no right under the plan.  Neither the retained nor the transferred employees had an equitable interest in the plan surplus.  Thus there was no duty of evenhandedness applicable to the surplus.

Finally, a beneficiary of a trust has the right to compel its due administration even if it does not have an equitable interest in all of the assets of the trust.  In this case, because the transferred employees had an equitable interest in their defined benefits, they have the right to compel the due administration of the trust and to ensure that the employer, trustee and plan administrator are complying with their legal obligations in the pension plan documents.  The circumstances of this case do not suggest that the actuarial surplus was abused by HBC or used for an improper purpose.

What occurred between HBC and NWC was a legitimate commercial transaction.  HBC and NWC negotiated over the purchase price of the assets, including the pension plan.  HBC was agreeable to transferring a portion of the surplus so long as NWC was willing to pay for the benefit of acquiring a plan in surplus.  NWC was not willing to pay.  Both companies complied with the legislative requirements, lending further support to the legitimacy of the transaction.  In executing the transfer, HBC was entitled to rely on the terms of the plan.  Under the plan documentation, the employees’ rights and interests were limited to their defined benefits.  HBC’s legal obligations with respect to its employees, including the fiduciary duties that it owed to the transferred employees, were satisfied in this case by protecting their defined benefits.  Based on the plan documentation, HBC did not have a fiduciary obligation to transfer a portion of the actuarial surplus.

Present:  McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ. The decision was written by Rothstein, J. on behalf of the court.

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