Canada: Merger Update Regarding The ING Case

Pension plan mergers are clearly an area where both the law and the regulatory environment are in a state of flux. Just as we were printing the latest issue of Blakes Bulletin on Pension & Benefits, which features an article on the ING case, the Financial Services Commission of Ontario ("FSCO") issued a new position on asset transfers.

Under the new policy, the Superintendent will only consider consenting to an asset transfer on sale or merger if:

• none of the pension plans involved is subject to a trust (with or without a written trust agreement);

• all of the pension plans involved are defined contribution plans with no defined benefit liabilities of any kind; or

• the applicant can demonstrate that the ING decision does not otherwise apply to the application.

The Superintendent is seeking to intervene in the leave to appeal application to the Supreme Court of Canada in the ING case. The materials that the Superintendent has filed in this regard indicate that the regulator anticipates that very few transactions will fall into the above exceptions.

FSCO appears to be taking an extremely broad view of the possible implications of the ING case. While we strongly disagree with FSCO’s view as to the potential broad interpretation of the ING case and its application to mergers and asset transfers, in general, plan sponsors need to recognize that there is a risk that the Superintendent will refuse to approve mergers and asset transfers. This should be considered in planning for future plan restructuring, acquisitions and divestitures.

It appears that the new policy will be in effect at least until the Supreme Court of Canada has disposed of the ING case (i.e., refused leave to appeal or rendered a final decision).

A recent ruling of Ontario’s Court of Appeal appears to have cast a dark shadow over the feasibility of merging two or more pension plans of the same or related employers and their corresponding trust funds. A closer reading of the decision, however, reveals a more optimistic conclusion.

Aegon Canada Inc. v. ING Canada Inc. (the "ING case") started with an application to the Ontario Court of Appeal for damages arising from alleged breaches of specific representations and warranties in a corporate share purchase agreement. The primary pension issue to be determined by the courts was whether contribution holidays could be taken in the specific circumstances.

The case arose after Transamerica purchased the shares of NN Life Insurance Company from ING in 2000, but the root cause of the dispute reaches back many years.

NN Life was the product of a 1989 amalgamation between itself and Halifax Life Insurance Company of Canada. Before the amalgamation, NN Life had its own pension plan and Halifax Life was one of two participating employers in the Halifax Plan. The Halifax Plan’s assets were held under a 1969 Trust Agreement which provided, in part, that no amendment could "permit any part of the capital or income of the Fund to be used for or diverted to purposes other than for the exclusive benefit of the Members… ".

It also provided that, on termination of the trust, "the Fund shall be distributed by the Trustees, subject to the provisions of the Plan, amongst the Members in such equitable manner as the Trustees determine."

After January 1st, 1990, the Halifax Life employees became members of the NN Life Plan and certain Halifax Plan assets and liabilities were transferred to the NN Life Plan. The Superintendent of Pensions agreed to approve the transfer of assets provided NN Life undertook to maintain and administer both the assets and transferred liabilities of the Halifax trust separate from the other NN Life Plan assets and liabilities, due to the wording of the 1969 Trust Agreement. Both the Halifax Plan and the NN Life Plan authorized contribution holidays.

From the date the assets were transferred, NN Life maintained the Halifax Life assets and liabilities in segregated funds and in a separate account. Despite this arrangement, the value of the Halifax Life assets was included in determining funding requirements and future current service costs for the entire NN Life Plan.

Between 1989 and 2000, NN Life made no contributions to the NN Life Plan even though, during most of this period, the Halifax assets constituted the entire surplus of the NN Life Plan. Further, actuarial reports disclosed an unfunded deficit in respect of the other members of the NN Life Plan (that is, the members who were not transferred Halifax employees).

In these circumstances, the first court to hear the matter ruled that the assets transferred from the Halifax Plan to the NN Life Plan remained "impressed" with the obligations of the 1969 Trust Agreement. The court said that the assets could not be used for the benefit of persons who were not beneficiaries of the trust governed by that agreement.

The court also found the partial asset transfer from the Halifax Plan to the NN Life Plan did not constitute a merger of the respective trust funds and that NN Life had expressly undertaken not to merge the trust funds. The court held that, in the circumstances, NN Life could not rely on merger case law to establish that it was permitted to use the Halifax Plan assets to take contribution holidays in the NN Life Plan.

Since the assets transferred from the Halifax Plan could not be used to satisfy other NN Life Plan liabilities, they could not be taken into account when determining contribution obligations. The court found that both the provisions of the 1969 Trust Agreement and the undertaking to The Superintendent of Pensions protected the rights of transferred Halifax Life employees to have the assets of the 1969 Trust Agreement applied exclusively for their benefit.

The trial judge wrote: " … However, the facts recited above make it clear that the effect of the transfer of assets in this case was not to merge the two funds. On the contrary, NN Life undertook expressly not to do so. The keeping of the assets and the liabilities separate and apart from any other pension plan is no mere accounting detail, particularly when the terms of the 1969 Trust are considered. A merger of the 1969 Trust with any other plan would not only breach the undertaking, but would also amount to a prohibited amendment. What actually happened, as correspondence from the PCO cited above indicated, was in practice the maintenance of two plans, with some joint documentary filings. The merger cases do not assist the respondent for in law there was no merger and calling it a single plan does not make it so."

The transferred Halifax Life employees were maintained as a distinct and separate group within the NN Life Plan. Other NN Life Plan members did not become beneficiaries of the 1969 Trust because they were not transferred Halifax Life employees nor were they made members of the Halifax Plan. As a result, based on the terms of the 1969 Trust, NN Life Plan members were not beneficiaries of the 1969 Trust. The case did not end there, however.

The Ontario Court of Appeal agreed with the lower court’s decision and reasoning. The court agreed the terms of the 1969 Trust Agreement precluded the use of the assets for any purpose other than the exclusive benefit of the beneficiaries of the 1969 Trust and that such terms were not altered by the transfer of assets to the NN Life Plan in 1989. The surplus, it said, may only be used in accordance with the terms of the trust.

The appeal court made a point of distinguishing its own 1989 decision in Heilig v. Dominion Securities Pitfield Ltd. on the basis that "it posed a very different issue." That case involved a merger of two plans, one of which had exclusive benefit language that was similar to that contained in the 1969 Trust Agreement in the ING case. The funds of both plans were pooled and "each fund was at risk for the liabilities of the other corporation."

In that case, the court wrote: "I see no reason why the two pension plans of merging companies cannot be merged into one continuing plan just as the two companies amalgamate into one continuing company…It makes no difference that one plan may be in surplus and the other not. There is no obligation for an employer contribution until actuarial figures require it. The merger is not unlike the situation resulting from an expansion of the company staff and a large influx of new members to the plan."

The appeal court also distinguished the recent decision of the Financial Services Tribunal in Baxter v. Ontario (Superintendent of Financial Services), in part, on the basis that "the provisions of the surplus plan at issue were significantly different from the case at bar as they allowed the employer to use funds amassed prior to a merger if all liabilities have been fully met."

In our view, the better interpretation of the ING case is that it does not prevent all plan mergers, even in circumstances where exclusive benefit language exists in one of the relevant plan or trust documents.

Instead, it suggests that how a plan merger is structured and documented is very important. The court may well have reached a different decision if no undertaking had been given and either:

• there had been amendments to merge both plans into one continuing plan (instead of a transfer of assets from the Halifax Plan to the NN Life Plan); or

• the Halifax Plan had been amended to expand the class of members to include the NN Life employees and there had been a transfer of assets from the NN Life Plan to the Halifax Plan.

In both these circumstances, the NN Life Plan members would have become members of the Halifax Plan and, therefore, the provisions of the 1969 Trust Agreement would not have precluded the use of the assets for their benefit. This issue was not before the court in the ING case.

In the ING case, there was essentially a separate group of transferred Halifax Plan beneficiaries who (together with surplus pension assets) were being taken out of the 1969 Trust (which was never amended) and transferred into the NN Life Plan. The other NN Life members were never made part of this transferred group.

The fact that the appeal court made a point of distinguishing the Dominion Securities case as "a very different issue", despite the similarity in the exclusive benefit language in the two cases, strongly supports the view that exclusive benefit language, in and of itself, does not preclude the merger of two plans or corresponding funds, if properly structured. The difference in the two cases is the way in which the "merger" was accomplished.

The references to Baxter in the Court of Appeal’s decision also illustrate how fact-specific the ING case (and other cases in this area) are. The particular wording of the amendment power in each case has a bearing on whether funds may be merged, even where the plan contains "exclusive benefit" language.

The ING case can also be distinguished from most plan consolidations on the basis that NN Life gave an undertaking to the Pension Commission of Ontario to segregate the assets and liabilities. Then, it did, in fact, hold and account for the assets separately for most purposes, but breached its undertaking by treating the Halifax Life assets as being available to fund the benefits of other NN Life Plan members. In this situation, the funds were held to have never been merged and the merger case law was held to be inapplicable. It follows that, in other situations, previous case law, such as Dominion Securities, continues to be relevant.

In our view, the ING case does not prevent the merger of two or more pension plans of the same or related employers and their corresponding funds if, first, no undertaking has been given to the regulators or the plan members to hold and account for the funds separately and, second, any of the following circumstances is true:

• neither plan is funded by way of a trust; or

• where any of the plans are funded by trusts, such trusts do not contain "exclusive benefit language"; or

• the plans and trusts have broad amendment powers which permit their merger – whether or not there is "exclusive benefit language" in either or both of the trusts (as, for example, in Baxter); or

• the plans have always provided for the participation of affiliates or subsidiaries who elect or are designated to participate in the plan or one of the plans so provides and the members, assets and liabilities of the other plans are transferred to such plan; or

• the plan with exclusive benefit language (with or without a surplus) has a broad enough amendment power to amend the plan to expand the class of members to include the members of the other plans and there is a transfer of assets from those other plans to the plan with "exclusive benefit language"; or

• both plans permit amendments to merge them into one continuing plan.

The result in the ING case merely follows from the numerous previous court cases which have said that the determination of trust issues depends on the language of the trust agreements and how the language applies to the facts of the particular case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.