Saturday, July 01, 2006

The Rule in Saunders v. Vautier and Pension Plans

I have never thought of law as a bunch of isolated rules. It is more of a web. Principles articulated in one context may be applicable in another. Sometimes a rule developed in one situation can be applied in a very different situation, but sometimes the rule doesn’t quite fit.

I wrote a post here about the rule in Saunders v. Vautier, which in British Columbia allows all of the beneficiaries of a trust to terminate the trust and require the trustee to distribute the trust fund to the beneficiaries, provided that all of the beneficiaries including contingent beneficiaries are adults with legal capacity. This is a rule that was developed, and is usually applied, in the context of personal and family trusts. For example, if in my will I say that my estate is to be held in trust for my children until the youngest has reached the age of 45--and there are no gifts to others if a child dies before 45--after my death they can terminate the trust upon the youngest attaining the age of 19 (the age of majority in British Columbia).

What if, instead of a modest family trust for children, we apply the rule in Sanders v. Vautier to a trust set up to hold the assets of a pension fund for the benefit of the employees of a large corporation? The employer made all of the contributions, and in addition to the funds required to pay the retired employees their pension benefits, the fund now has a significant surplus. Can the pension plan members get together to terminate the trust, and demand that the trustee distribute the trust funds to them?

This is one of the questions that the courts have considered in litigation that has been ongoing for ten years between Rogers Communications Incorporated, and 112 members of one of its pension plans. Rogers acquired the plan when they took over another company. The plan has had surplus funds, and Rogers has not made contributions to the plan in many years. In 1984, the plan was closed to future employees. By 2002, the plan had a surplus at about $11 million. A trustee appointed under a trust set up pursuant to the pension plan held these funds.

The pension plan members asked the courts to terminate the trust and get the trustee to distribute the funds to them.

The British Columbia Court of Appeal, in Buschau v. Rogers Communications Inc. (No. 3), 2004 BCCA 282, held that the rule in Saunders v. Vautier applied. The pension plan members could terminate the trust, as long as every beneficiary consented, including those, such as members’ spouses, who would be entitled to survivor benefits under the pension plan on the death of the members. But the Court of Appeal also held that the Trust and Settlement Variation Act, RSBC 1996, c. 463, did not authorize the court to consent to the termination of the trust on behalf of adult beneficiaries who could not be located. Accordingly, the members had to locate and get every beneficiary to agree.

The Supreme Court of Canada in Buschau v. Rogers Communications Inc., 2006 SCC 28, overruled the B.C. Court of Appeal’s decision that the court could apply the rule in Saunders v. Vautier to terminate the trust set up pursuant to this pension plan. The Supreme Court of Canada said that the trust could not be considered in isolation; but that the courts had to look at the trust in the context of the contractual framework of the pension plan agreements, the regulatory framework of pension legislation, and the broad social and economic goals pensions are designed to implement.

Deschamps J. writing the majority judgment said at paragraphs 27 – 32:

27 There are many reasons why the rule is not easily incorporated into the context of employment pension plans.

28 First, pension plans are heavily regulated. The P.B.S.A. [Pension Benefits Standards Act, 1985] regulates the termination of a plan and the distribution of the fund and the trust assets. I accept the following comment of the Court of Appeal (Buschau #2, at para. 47):

It must be acknowledged that the application of the rule in Saunders v. Vautier to pension trusts does involve different and more complicated factors, financial and legal, than an ordinary legacy or gift in trust. As already noted, pension trusts are part of the complex of rights and obligations (not only equitable, but also contractual and statutory) between employers and employees, and obviously serve broad societal and economic purposes.

However, the Court of Appeal’s order (Buschau #3) defies the application of the P.B.S.A. because it allows for the operation of the rule in Saunders v. Vautier without regard to the obligations to report to the Superintendent and to provide for the payment of pension benefits before distribution of the trust fund. The P.B.S.A. deals extensively with the termination of plans and the distribution of assets. It is clear from this explicit legislation that Parliament intended its provisions to displace the common law rule. To the extent that it provides a means to reach the distribution stage, the P.B.S.A. prevails over the traditional rule in Saunders v. Vautier.

29 Second, a family or testamentary trust is generally a stand-alone instrument. It does not usually depend on any other instrument for its operation. No indirect effect results from the application of the rule in Saunders v. Vautier in such cases. In contrast, a pension trust serves only as a vehicle for holding and managing the funds required by the pension plan. In the instant case, the Trust agreement is expressly “made a part of the Plan” (art. I(1)) and the Plan is attached to that agreement (preamble to the Trust agreement). The Trust agreement is therefore dependent on the Plan for which it was created. The Premier Trust cannot be collapsed without regard to the Plan itself. The two instruments are therefore indissociable. This particular situation was not dealt with in Schmidt, which focussed on the distribution of trust assets, not the termination of a trust agreement that had been expressly made part of a Plan. In the case at bar, despite the link between the Plan and the Trust agreement, the judgment of the Court of Appeal purports to authorize the members to resort to the rule in Saunders v. Vautier, but does not provide for termination of the Plan. And yet, termination of the Plan in accordance with the prevailing P.B.S.A. is a condition precedent to distribution. This awkward juridical status illustrates why the common law rule is not an easy fit in the pension law context.

30 Third, employers establish plans because it is in their interest to do so. Under normal circumstances, they have the right not to have their management decisions disturbed. In contrast, the common law trust allows no room for the settlor’s interest. Although the particular circumstances of this case may lead to the conclusion that the employer no longer has a legitimate interest in the continuation of the Plan, a blanket statement that the employer has no interest conflicts with the usual expectations of parties to a pension plan.

31 Fourth, gift or legacy trusts are gratuitous, and accelerating the date of the beneficiaries’ entitlement has no broad social consequences. Pension trusts funds, however, are no longer generally viewed as being gratuitous: either employees contribute directly or their entitlement is regarded as remuneration deferred until the date of their retirement. The capital of the pension trust fund cannot be distributed without defeating the social purpose of preserving the financial security of employees in their retirement by allowing them to receive periodic payments until they die.

The court did leave open the possiblity that the rule in Saunders v. Vautier might apply to some pension plans.

Rogers won this battle, but I doubt that the war is over.

Deschamps J. also wrote that the pension plan members could apply to the Superintendent of of Financial Institutions to wind up the plan and terminate the trust. The pension plan members might still win, but their claims will have to be considered within the pension plan regulatory framework, rather than under purely trust law principles.

The Supreme Court of Canada did not overrule nor discuss the Court of Appeal’s holding that the Trust and Settlement Variation Act did not give the court jurisdiction to consent to a variation or termination of a trust on behalf of capacitated adult beneficiaries.

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