In 2007 the Financial Services Tribunal (FST) applied a subset analysis to determine whether a significant number of pension plan members had been affected by a reorganization thereby requiring Hydro One to partially terminate the pension plan. First the Divisional Court and then the Court of Appeal agreed that a subset analysis can be used.

This Communiqué will be of interest to pension plan sponsors with Ontario plan members.

The FST decision in Hydro One was reported in our Communiqué of September 21, 2007. The Divisional Court decision was reported in our Communiqué of April 24, 2008.

The issue before the Court of Appeal was the interpretation of paragraph 69(1)(d) of the Pension Benefits Act (PBA) which enables the Superintendent to require the wind-up of a pension plan if “a significant number of members of the pension plan” are terminated because of a business reorganization or discontinuance.

The reorganization in question was a merger of two Hydro One affiliates resulting in the termination of employment of 126 out of 3,913 active plan members. 73 of those terminated were management employees among a total of 379. The management employees were recognized as a subset for several reasons, including the fact that they did not have the same opportunity to bargain termination benefits as the unionized plan members. Since the terminated management employees represented around 18 per cent of the management subset, the FST determined that a significant number of plan members had been terminated and, therefore, a partial wind-up of the plan for the terminated management employees was warranted. The FST stated that the subset analysis was permitted under paragraph 69(1)(d), although the situations where it is appropriate “may be rare”.

The Divisional Court ruled that the FST correctly interpreted paragraph 69(1)(d) such that a significance inquiry could include a subset analysis. Furthermore, the FST was reasonable in applying the subset analysis to the facts in this case.

The Court of Appeal agreed, concluding that use of the imprecise term “significant” shows an intention by the drafters of the PBA to allow a flexible analysis that depends on the particular facts. The Court of Appeal said that given the variability of pension plans and of the types of business reorganizations, the importance of terminations caused by a reorganization cannot be uniformly evaluated and, therefore, paragraph 69(1)(d) is designed to give the Superintendent the ability to assess each situation on its own merits. The Court of Appeal did not comment on the FST’s statement that a subset analysis would rarely be used.

Comment

The threshold for determining whether a partial wind-up might be required is now very low. The possibility of a subset analysis being used makes it very difficult to predict which events have no partial wind-up potential. A suggestion that a subset analysis should be used in a given case will require the Superintendent to undertake a complex factual analysis, including an examination of the reasons for the reorganization, whether or not a subset of members was targeted and whether there are reasons to isolate the subset.

This decision may be relevant only for a short period. If the amendments to the PBA set out in Bill 236 are passed, the Superintendent will eventually no longer have the ability to order a partial wind-up. However, the Hydro One decision will remain relevant for employers who are reorganizing their workplaces before the law changes.