No Slice of the Pie for Former HBC Workers: Transferred Employees not Entitled to Share of Pension Surplus in Burke v Hudson’s Bay Co.

On October 7, the Supreme Court of Canada (“SCC”) released its unanimous decision in Burke v Hudson’s Bay Co, [2010] 2 SCR 273. The decision pertains to the fallout from the North West Company’s (“NWC”) purchase of one of the Hudson Bay Company’s (“HBC”) retail divisions in 1987. About twelve hundred HBC employees were transferred to NWC. The two companies agreed that HBC would transfer assets from its defined benefit pension plan to a new defined pension plan created by NWC. A defined benefit pension plan guarantees a specified benefit to an employee upon retirement.

At the time of the transfer, HBC’s pension plan had an actuarial surplus of about $94 million. HBC was willing to transfer part of the surplus, but at an increased purchase price for the division. Ultimately, the parties agreed that HBC would only transfer enough funds to cover only the defined pension benefits.  Specifically, their agreement stated that the new plan would provide the transferred employees (“the employees”) with benefits “at least equal to those presently provided under [the HBC plan].”

The main issue in contention was whether the employees were entitled to a pro rata share of the surplus. This issue was novel because the sale of the HBC division occurred in the context of an ongoing pension plan, as opposed to a terminated or wound-up plan. A secondary issue was whether HBC was allowed to charge plan administration expenses to the fund. Since 1982, HBC has been being using fund money to pay for plan administrative expenses without eating into the employees’ defined benefits.

The Employees’ Position

The employees’ position was relatively straightforward but ultimately untenable. In essence, they argued that HBC, as the administrator of the fund, was a fiduciary, and thus had an “obligation to treat the beneficiaries of the fund with an even hand.” Since HBC did not transfer a portion of the surplus, HBC breached its “fiduciary duty of even-handedness.” Based on the test in Hodgkinson v Simms, [1994] 3 SCR 377, Rothstein J. agreed with the employees that HBC was a fiduciary. HBC met the test for a fiduciary because the pension plan documentation expressly gave it discretionary power that could be exercised in a matter that would affect the employees’ interests. Further, the employees were vulnerable to its exercise of discretion. In agreement with Gillese J.A. from the Ontario Court of Appeal, the SCC stated that if HBC had the legal obligation to transfer part of the surplus, then HBC’s failure to fulfill that obligation would constitute a breach of fiduciary duty.

In the end, however, the SCC held that no such legal obligation existed. Rothstein J.’s analysis of the applicable statue, the Pensions Benefits Act, 1987, SO 1987, c 35 (as it was then), yielded no express obligation. Unsatisfied with the answer provided by the statute, he turned to common law and equitable principles. According to Schmidt v Air Products Canada Ltd, [1994] 2 SCR 611, “[w]here a pension plan created in a form of a trust, trust principles will apply. If there is no express or implied declaration of trust, the pension plan will be governed by the terms of the plan.”  Ultimately, the SCC determined that the plan documentation did not expressly impose such a legal obligation. On the contrary, it actually expressly limited the employees’ entitlements to defined retirement benefits.

For example, Articles 11.03 and 14.01 stated that the “original pension plan text provides that employees’ rights and interests are limited only to that which is expressly and specifically provided for in the plan.” Since the plan only provided that the employees receive defined benefits, the employees were not entitled to a pro rata share of the surplus. There was only one distribution of funds, which was expressly limited to defined retirement benefits.

No Obligation to Pay Plan Administration Expenses

Based on Nolan v Kerry (Canada) Inc, [2009] 2 SCR 678 [Kerry], the SCC held that HBC did not have any statutory or common law duty to pay for plan administrative expenses. In Kerry, the SCC determined that “absent a statutory or common law authority creating an obligation on the employer to pay for expenses, such an obligation must arise from the text and the context of the pension plan documents.” Since there was no statutory or common law duty to pay, the employees were forced to rely upon Article 21 of the original trust agreement between the parties to argue that the duty arose from the pension plan documents. Article 21 of the original agreement stated that “all other disbursements made and expenses incurred in the management of the Fund shall be paid by the Company,” though the SCC interpreted this provision as dealing with only expenses incurred by the trustee in the management of the Fund, and not administration expenses. Since subsequent trust agreements expressly stated that HBC could charge plan administration expenses to the fund, the employees’ second ground of appeal was  swiftly rejected.