Canadian ruling on Monsanto surplus seen as blow to pension sponsors

By Angela Marion Lee

OTTAWA — The long-awaited recent Supreme Court of Canada decision granting laid-off Ontario workers the right to share any surplus in their company's pension plan will discourage firms from sponsoring defined benefit plans and further supports the need for legislative reform, industry experts say.

In its ruling in Monsanto Canada Inc. vs. Ontario Superintendent of Financial Services, the court said that 146 employees terminated by a Monsanto Canada Inc. reorganization between 1997 and 1998 are entitled to a chunk of the C$19.1 million (US$14.3 million) actuarial surplus existing at the time of the plan's partial windup. The figure owed is estimated to be C$3.1 million.

"There's a perception that there's an asymmetry of risk in terms of DB plans, said Randy Bauslaugh, a lawyer with the Toronto office of Blake Cassels & Graydon, who represented the Association of Canadian Pension Management, which represents private and public pension plan sponsors and was a party to the appeal along with Monsanto.

"Employers feel they're responsible for making sure that there's enough money to fund the promised benefits. If they put too much in, they're at risk of losing it. They're looking at switching to a DC plan, where they have no downside risk," he said.

According to the Financial Services Commission of Ontario, there have been 281 partial windups in the province that involve 208 pension plans with a funding surplus since 1992. Partial windups are terminations of only a portion of a pension plan, often because of bankruptcy or corporate restructuring.

The ruling is "a very problematic decision because it will end up discouraging plan sponsors from funding the plan and will encourage a lot of them to run right at the margin," said Patrick Walsh, president of SEI Investments Canada, Toronto.

The Monsanto Canada case stems from 1997, when the company's request for a partial windup following a restructuring was rejected because it did not include the surplus distribution. A lower court ruled the Financial Services Commission was correct in requiring the distribution; Monsanto appealed.

"We are currently in the process of analyzing this ruling to see what has to be done in order to comply fully with the decision," said Don Sancton, director of corporate affairs at Pfizer Canada Inc. Pfizer Canada last year acquired the affected division.

Although the pension landscape is not expected to shift overnight, Mr. Walsh thinks the Monsanto ruling will accelerate Canada's creeping defined contribution crossover, which started 15 years ago.

He estimates there is about C$600 billion in Canadian defined benefit plans and C$60 billion in defined contribution plans.

"Plan sponsors in the U.S. moved aggressively toward 401(k) plans as their preferred retirement vehicle quite a while back. In Canada, these types of decisions will encourage everyone to go even further in that direction," Mr. Walsh said.

Similar to the United States, he expects to see retention of defined benefit plans in the public fund area and areas in which personnel costs don't amount to a large proportion of total expenses %BE; for example, the oil and gas sector.

However, it's a different story for industries with labor costs eating up a high portion of operating expenses.

"You just can't continue, whether it's steel companies or airlines, to pay people high, high wages and high benefit costs in industries that don't make money. There are large segments of the Canadian economy where plan sponsors would be under serious pressure to consider terminating their plans. There's always been a sense of paternalism among plan sponsors. They put up with stuff to a degree that might not have happened in the United States," said Mr. Walsh.

Adding to the stress on the pension system is the Canadian governmental system. The mounting costs and complexity of managing schemes under a framework of 10 different legislative bodies continues to discourage business from implementing defined benefit plans.

The Monsanto ruling is expected to affect plans in jurisdictions with similar pension regulations, including six provinces and the federal government. But experts predict that British Columbia, Alberta and Quebec, which have different rules, could also feel the impact.

Canada's work force is increasingly mobile. Close to 2,784 pension plans %BE; 23% of all those in the country %BE; are enterprises with workers in more than one province. Of those, 1,006 cover more than a million Canadians and operate in five or more provinces, according to Statistics Canada.

"A lot of plan sponsors are already thinking about whether they want to continue to offer a defined benefit and Monsanto, for some of them, will be the tipping coin," said Paul Purcell, the Canadian retirement practice leader at Mercer Human Resource Consulting in Toronto.

Mr. Purcell is a strident advocate for the creation of a national pension model. The Monsanto ruling solidifies this need for change.

"The 10 jurisdictions are negative for the system. The Monsanto decision is negative for the system. Pension plans are going to reduce in number and reduce in importance. A national pension model makes sense. And in that model, I wouldn't have the concept of partial windups. Getting rid of partial windups is a step in the right direction."