Canada: Plan Beneficiaries Cannot Unilaterally Terminate Pension Trust

The Supreme Court of Canada ("SCC") held on June 22 in Buschau¹ that the members and former members of a defined benefit pension plan cannot unilaterally compel termination of the plan’s trust for the purpose of accessing accumulated actuarial surplus.

A pension trust is integrally connected to the plan terms and founded upon detailed statutory regulation. Accordingly, the common law rule in Saunders v. Vautier² to the effect that a trust can be terminated, if all beneficiaries consent, was held not to apply. The plan’s sponsor and future beneficiaries have statutory and equitable interests in the plan that cannot be overridden. The SCC unanimously set aside an appellate ruling that a plan, previously closed to new members, could not be re-opened by the sponsor.

In a non-binding discussion about the potential consequences of their unanimous decision, however, the SCC split (4-3) on the extent of powers apparently held by the Superintendent under the Pension Benefits Standards Act, 1985 ("PBSA"). Three judges were of the view that the Superintendent did not have the discretionary statutory power to order a termination of the fully funded plan, on the facts. In their view, the plan could be re-opened to new members. Four judges opined that, while the decision belonged to the Superintendent, the PBSA language might be construed in such a way as to permit the Superintendent to order a wind-up, on the unusual facts of the case. Accordingly, the SCC’s reasons leave open a number of questions regarding the ability of plan sponsors to amend pension plans and about the appropriate interpretation of PBSA termination provisions, ones not previously viewed as being in serious doubt.

In 1974, a non-contributory defined benefit pension plan was established. The plan funds were held under a trust agreement that was formally made part of the plan. The plan provided that, in the event of termination, any surplus was to be distributed amongst the plan beneficiaries. In 1981, the plan was amended so that surplus remaining on termination would revert to the sponsor. In 1984, the sponsor "closed" the plan to new members. The sponsor thereafter began taking contribution holidays from the accumulated actuarial surplus. In 1992, the sponsor merged the plan with other of the sponsor’s plans.

The British Columbia Court of Appeal ("BCCA") held, in an earlier appeal, that the plan merger was valid but did not affect the existence of a separate trust, an awkward separation of plan from trust. In the earlier appeal, the BCCA also held that the plan members retained a contingent right to distribution of any surplus upon termination of the plan.

On a second appeal to the BCCA, the Court concluded that the rule in Saunders v. Vautier meant that the members had the power to conclude the trust (and the plan) and take the monies. The sponsor could not re-open the plan to add new members. Each of these two rulings was set aside by all of the SCC judges.

In particular, the SCC unanimously held that the plan members did not have a unilateral power to bring the trust (and that portion of the plan) to a conclusion.

The common law rule in Saunders v. Vautier does not permit plan beneficiaries to terminate a pension plan trust. The detailed PBSA plan termination and fund distribution provisions displaced the common law rule. The SCC held that the rust, a part of the plan, cannot be simply terminated without taking into account the contractual context within which it was created and the specific legislation governing the plan. The SCC judges were in agreement that any termination of the trust had to comply with the PBSA provisions.

In a concurring judgment, three of the SCC judges ruled that an ongoing plan sponsor’s contribution holiday in a fully funded plan was not a .suspension or cessation of employer contributions., one of the stated PBSA statutory grounds for termination by the Superintendent of a pension plan. Four of the SCC judges felt that, on the unusual facts of the case, the Superintendent might have a statutory jurisdiction to order a termination of the plan.

The SCC ruling means that the plan’s terms as well as the applicable legislation cannot be simply ignored by virtue of a common law rule applicable to trusts designed for a completely different purpose. If Saunders v. Vautier had applied, as the BCCA held, the sponsor’s power over plan amendments would be significantly eroded. The main ruling is a decisive step away from the oft-misinterpreted statement in an earlier SCC decision that classic trust principles apply to pension trusts. Rather, it has always been clear that only "applicable trust law principles" apply. The SCC has now held that the rule in Saunders v. Vautier is not an applicable rule.

The SCC ruling clarifies that the plan sponsor has powers analogous to beneficial ownership. The sponsor’s opposition to plan termination precludes implementation of trust termination on the basis of the Saunders v. Vautier rule.

An SCC decision implying that employers did not have such a beneficial interest in ongoing plans would have had serious adverse repercussions for defined benefit plans in Canada. The notion that an employer has no beneficial interest in the pension fund from which defined benefits are paid defied logic in view of the various duties and powers of the employer, in its own right and in its separate capacity as plan administrator. The effect of the SCC ruling in Buschau is that the sponsor does have a beneficial interest in the fund.

The binding portion of the SCC.s decision reflects a significant first step towards realigning the balance between sponsor and member interests.

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