CIA Annual MeetingAssemblée annuelle de l’ICA

June 29 & 30, 2006 Ÿ Les 29 et 30 juin 2006Ottawa, Ontario

PEN-4 Monsanto Status Report

CIA Annual MeetingAssemblée annuelle de l’ICA

Hrvoje LakotaMercer Human Resource Consulting

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• Monsanto – Two years later– In July of 2004 the Supreme Court of Canada

dismissed the appeal in the Monsanto case. This:• Brought (some) closure to the longstanding

Monsanto pension dispute, at least for Monsanto

• Confirmed the requirement under Ontario law to distribute surplus on the partial wind-up of a pension plan.

– What has happened since then?

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• Surplus distributions for many small, and simple, partial wind-ups have been settled

• Complicated situations with significant amounts of surplus are still largely unresolved

• Numerous questions remain unanswered, with the resulting litigation risk for plan sponsors

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• What the Supreme Court said:– Members affected by a partial wind-up are entitled

to same benefits as on a full wind-up– Surplus assets related to the partial wind-up group

have to be distributed from the plan

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• What the Supreme Court did not say:– How should the assets attributable to the partial

wind-up group be determined? – If the surplus is distributed to employees, how

should it be divided among individuals? – What happens in provinces other than Ontario or

with multi-jurisdictional plans?– How should old partial wind-ups (some from 10-

15 years ago) or newly declared historical partial wind-ups be dealt with?

– …PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• What does this mean for plan sponsors?– Potentially unlimited liability with limited ways of

mitigating risk• Definition of a “partial wind-up” under the PBA not

clear

• No statute of limitations for Superintendent forcing a declaration of a partial wind-up (potentially back to 1960s)

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• What are plan sponsors doing?– Some companies are trying to mitigate the risk of

having their decisions challenged in the future by seeking negotiated settlements and/or guidance from courts

– Companies are also reconsidering:• Ad-hoc benefit improvements

• DB promise

• Funding policy and targets (i.e. geared to be <100% funded on solvency basis)

• Segregation of assets for PWU group

PEN-4 Monsanto Status Report

Unresolved Issues / Questions

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• To which jurisdictions does the Monsanto decision apply?– Ontario – Federal ?– Other provinces ?

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• How should the surplus at the partial wind-up date be determined? and Should past partial wind-up balance sheets be re-determined?– The purpose is no longer simply to show that the

plan has sufficient assets for payment of basic benefits

– Difficult (in some cases impossible) to accurately estimate the cost of purchasing annuities, especially for large indexed pension plans

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• What happens if the partial wind-up covers a lengthy period of time (e.g. 2 years)– What date should be used as the “partial wind-up

date”?– What date should the surplus be determined at?– What if the surplus level changes (materially)

during the partial wind-up period?

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• How should the plan assets be divided for partial wind-up purposes in a multi-jurisdiction plan?– Pro-rata on:

• Going concern liabilities?

• Solvency liabilities without grow-in?

• Solvency liabilities with grow-in?

– Other approaches?

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• If there was surplus at the time of the partial wind-up, how much surplus exists today?– Interest method– Balance sheet method

• What if there was no surplus at the time of the partial wind-up but there is surplus today?

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• How should surplus be allocated among the affected members?– FSCO has indicated a preference for distribution in

proportion to liabilities– Other methods may be possible, especially if all

affected members have accepted the method

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• How should plan improvements be treated?– Should improvements made coincidental with a

past partial wind-up be considered a distribution of surplus? Are they considered use of surplus?

– What about subsequent improvements, such as ad hoc pension increases?

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• Do annuities have to be purchased or can the benefits remain in the plan?

PEN-4 Monsanto Status Report

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA

• Other legal issues / questions: – Who does the surplus belong to?– What if the surplus belongs to the employer?– Risk of undeclared partial wind-ups?– How far back do the companies have to go?– How to mitigate the risks that the plan sponsors /

administrators are facing?– …

PEN-4 Monsanto Status Report