A Walk Down Memory Lane: Navigating Employer Access to Pension Plan Surpluses
For much of the past two decades defined benefit (“DB”) pension plans in Canada faced large funding deficits. Many defined benefit registered pension plans are now in a strong funded status position despite recent economic uncertainty. Employers are increasingly interested in exploring ways of accessing available surplus. This Sidebar outlines the avenues for employers seeking access to surplus in Ontario registered pension plans and provides guidance on navigating the Ontario surplus application process effectively.
If a plan includes members governed by pension minimum standards legislation other than the Ontario Pension Benefits Act (“PBA”), additional considerations may apply, and BMKP Law is well-equipped to provide advice on these matters separately.
Overview
The PBA defines “surplus” as the excess of a defined benefit pension plan’s pension fund assets over its liabilities. The prevalence of surplus held in pension plans tends to fluctuate with market trends. In recent years, due to strong market performance and increases in long-term interest rates (which has positively affected the valuation of plan liabilities), the number of Ontario DB pension plans enjoying substantial surpluses has increased significantly.
When surplus arises in a DB plan, an employer may consider deploying surplus in various ways, including by implementing benefit improvements, taking contribution holidays (in respect of DB or DC components) or withdrawing surplus. In assessing the employer’s options, a key question is whether employer(s) or members and other beneficiaries are entitled to the surplus assets, both during the plan’s operation and upon plan wind-up. Every pension plan must specify how surplus will be treated during the plan’s operation and upon wind-up. If a plan is silent on these matters, the PBA will prohibit surplus withdrawals while the plan is ongoing and will require that, upon wind-up, surplus be distributed proportionately among members, former members, retired members, and other individuals entitled to benefits as of the wind-up date.
However, even where plan documents appear to entitle the employer to the surplus during the plan’s operation or upon wind up, employer entitlement to surplus is subject to specific regulatory and common law conditions, and access to such assets ultimately requires consent from the Chief Executive Officer (“CEO”) of the Financial Services Regulatory Authority of Ontario (“FSRA”) through a rigorous application process demonstrating compliance with the necessary regulatory and common law requirements.
Avenues for Payments of Surplus to Employers
As noted above, in Ontario, an employer may receive a payment of surplus – whether during the plan’s operation or upon wind-up – only after obtaining the consent of FSRA’s CEO through a surplus withdrawal application. While surplus withdrawal applications typically are pursued in conjunction with the wind-up of a pension plan, there is no requirement that a plan should be wound up before an employer can apply for a payment of surplus. This application typically takes one of two primary routes, depending on the relevant facts.[1]
1. Proving Entitlement Based on Plan Documents
Employers may apply for surplus entitlement by successfully demonstrating that the plan’s governing documents explicitly grant it the right to surplus – i.e., proving employer entitlement. This requires a thorough legal review of both current and historical documents and the consideration of complex contract and trust law principles.
As part of a surplus application to the CEO based on employer entitlement, employers must submit a comprehensive analysis supporting their claim, based on a full review of the plan’s relevant documentation back to the inception of the plan and, in certain cases, including a review of language of predecessor plans.
Given that one of FSRA’s statutory objectives is to protect and safeguard the pension benefits and rights of pension plan beneficiaries, employers should expect close scrutiny of an employer’s analysis that it is entitled to surplus under a plan. BMKP Law has extensive recent experience in successfully navigating employers through this process, including responding to FSRA inquiries, making supplemental submissions, and where necessary challenging CEO denial of consent before the Financial Services Tribunal.
2. Entering into a Surplus Sharing Agreement
An alternative method of securing the CEO’s consent for the payment of plan surplus to the employer is to enter into a surplus sharing agreement with plan members that meets the PBA requirements and then make an application for CEO consent based on the surplus sharing agreement. A surplus sharing agreement that satisfies the PBA and its regulations effectively overrides surplus entitlement language in the plan documents. Sharing agreements are often deployed where the historical record is incomplete (making a comprehensive review of historical plan terms impossible) or the employer cannot demonstrate clear entitlement to surplus.
At least two-thirds of active members, along with an “appropriate” percentage of former members and retirees, must consent to the agreement. The CEO has advised that the “appropriate” consent threshold for former members and retirees is generally two-thirds.
The PBA and its regulations do not prescribe a split formula or methodology. While surplus sharing agreements can include an even or near-even split between the employer and members, the ultimate allocation is a matter of negotiation between the employer and plan members. Employers are well served to consider the specific facts before formulating a surplus sharing split proposal with members/retirees. FSRA generally approves surplus applications made on this basis, provided all consent and notice requirements are met, without applying undue scrutiny to the negotiated surplus split in the agreement (i.e., FSRA is focused on the procedural elements of the agreement and does not cast judgement on the allocation).
While surplus sharing agreements can be an effective way for an employer to access part of the plan’s surplus and may avoid the extensive analysis of historical plan and pension fund documents referenced above, they do require careful negotiation and communication with members, and careful adherence to formal notification requirements. BMKP has extensive experience assisting with all aspects of surplus-sharing agreements and resulting withdrawal application
The Application for Consent to a Payment of Surplus to an Employer
Regardless of whether an employer seeks a refund surplus via an entitlement argument or surplus sharing agreement, as noted above, CEO consent is required, as the PBA mandates CEO approval whenever all or part of the surplus is to be paid to the employer. The formal steps involved with a surplus application to the CEO are generally the same whether seeking to withdraw surplus from an ongoing plan or upon plan wind-up:
- The employer must prepare and distribute to members and other beneficiaries a notice of the surplus application, in accordance with the PBA.
- After sending the notice to the required recipients, the employer submits a formal surplus application to FSRA (based on r the surplus-sharing agreement or comprehensive analysis of historical plan documentation ).
- FSRA will review the application and issue a Notice of Intended Decision to either grant or deny CEO consent. If consent is granted, a final order will be issued within 30 days. If FSRA denies the application, the employer may appeal the decision within 30 days to the Ontario Financial Services Tribunal. Regardless of the approach, FSRA’s review process is thorough and may take over a year to complete.
- Once consent is granted, the surplus can be distributed.
How BMKP Law Can Assist
We regularly assist employers with all aspects of the use of pension plan surplus, including providing comprehensive legal opinions on entitlement under plan documentation, drafting and negotiating surplus-sharing agreements, and navigating FSRA’s surplus withdrawal application process.
If you are considering a surplus application or simply assessing its prospects, we can guide you with understanding your options, evaluate the likelihood of success, and ultimately maximize your chances of approval.
[1] A sparingly-used third method exists, by way of a Court Order (Section 79(1)(b), 79(3)(b) of the PBA). If you require information about this third option, please contact us.
This Sidebar client update provides general information and should not be relied upon as legal advice. This publication is copyrighted by Brown Mills Klinck Prezioso LLP and may not be reproduced in whole or in part in any form without the express written consent of Brown Mills Klinck Prezioso LLP. ©
