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SCC rules in HBC’s favour in pension surplus transfer case

|Written By Andi Balla
SCC rules in HBC’s favour in pension surplus transfer case

The Supreme Court of Canada ruled Thursday in favour of Hudson’s Bay Co., saying it did not have to transfer a portion of the defined-benefit pension plan surplus with the employees when it sold one of its divisions to another company. HBC was also allowed to charge administration expenses into the plan. 

However, the much-anticipated decision failed to set a blanket precedent because the court said future transactions of this kind should be treated on a case-by-case basis by the courts, depending on the wording of the pension plan terms.

The decision came in Burke v. Hudson’s Bay Co., which stemmed from the 1987 sale of HBC’s Northern Stores Division to the North West Co. It resulted in the transfer of 1,200 employees. The employees claimed when the two companies agreed to transfer the pension plan, any surplus it had accumulated should have been transferred too, and HBC should not have charged administrative fees to the plan.

All prior courts had given HBC the right to charge the administrative fees, but the lower courts had ruled HBC might have to pay some of the surplus accumulated. The Supreme Court disagreed.

“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,” said the SCC decision.

“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.”

Christopher Naudie, a member of the legal team that argued the case for HBC, tells InHouse the wording of the HBC plan terms was plain and clear, and that led to the ruling in the company’s favour.

“HBC is very pleased with the unanimous decision of the court, and it is happy that this long litigation has reached a successful conclusion,” says Naudie, a litigator at Osler Hoskin & Harcourt LLP. “The wording was plain and clear, and under the terms of the plan, the employees in question did not enjoy entitlement to the plan’s surplus.”

So what does this mean for legal departments that might be facing the same situation?

First of all, this transfer arrangement it is not happening much currently. Due to the difficult economy, most pension plans are not running any surpluses, says Kathryn Bush, an expert on pension reforms and partner at Blake Cassels & Graydon LLP. The obvious choice is to close one plan, pay its benefits at retirement, and enrol the employees into a new plan.

Pension plans are almost never in balance, there is either less money than they require to pay the beneficiaries or more in the form of a surplus. And transferring a pension plan is a more desirable option for employees. The question of surplus transfers has been a big point of contention, and the Supreme Court took it on for the first time with the Burke case. But because the court’s ruling was case-specific, it doesn’t clear the issue.

“It’s a novel situation,” says Bush. “What the court is saying here is that you don’t have to transfer the surplus, and that’s fine for HBC, but as a practical matter doing transactions going forward it will be very difficult for the purpose of is this is still going to mean no transfer of a portion of the surplus.”

Since this had been a legislative limbo, Ontario decided to address it in Bill 236, which was recently approved, and mandates that some of the surplus must be transferred too. However, Bush says, regulations that define this specifically might take up to two years to come into force, so the limbo will continue for a while longer.