BUSINESS

Battle of the surplus

MICHAEL SALTER September 1 1986
BUSINESS

Battle of the surplus

MICHAEL SALTER September 1 1986

Battle of the surplus

The decision was a stunning setback for wealthy financier Conrad Black and an ailing corporate giant which he controls. Last week the Supreme Court of Ontario ordered Dominion Stores Ltd. to return $37.9 million that it withdrew last January, 1985, from its unionized employees’ pension plan. In his 46-page decision, Justice Robert Reid said that Dominion, which is controlled by Black’s Hollinger Inc., “had no right, under the

plan documents, to apply to remove the surplus.” Reid also criticized the Pension Commission of Ontario (PCO), the government regulator that authorized the withdrawal, for failing to order Dominion to inform its employees and the Retail Wholesale and Department Store Union (RWDSU) of its request to take out the money. The PCO, said Raymond Koskie, one of the lawyers who represented the RWDSU, “seems to have forgotten why it is there—to protect the interests of the workers.”

Last week’s court action pleased labor leaders and other experts who have traditionally argued that pension fund surpluses should be used to improve employee benefits. Robert Rae, leader of the Ontario NDP, has said that the removal of pension fund sur-

pluses—the amount in excess of what is needed to cover the costs of pensions for plan members—constitutes “legalized theft from pension plan members.” But the decision favoring the RWDSU and a group of six employees who launched the action concerned many experts in the pension fund industry who said that, if companies eventually lose their right to withdraw surpluses from ongoing pension plans, they may cut back on corporate contri-

butions that help produce those surpluses. Said Ian Markham, a partner who heads the pension consulting practice for Toronto-based Peat Marwick and Partners: “Some companies wonder what is the point in putting in more than the minimum if you have no choice in the use of the surplus?”

Still, the Ontario court order did not settle the contentious issue of whether Dominion or its employees own the pension fund surplus. Conrad Black, contacted in London, refused to comment on last week’s development. But, in March Dominion launched its own action to answer that question, saying that it was entitled to surplus funds.

Following last week’s decision, Peter White, president of Domgroup Ltd.— Dominion changed its name on April 29—said that it would return the $37.9

million. But then an employee group threatened another court action if Domgroup did not also return $16.5 million in surpluses that it withdrew in early 1983. Domgroup refused the request and announced that it would appeal last week’s decision. Said White: “To defend ourselves against this new demand, our lawyers have advised us that we must appeal.”

The issue of pension fund surpluses has gained attention in the past several years as the number of requests for withdrawals have increased. In 1980 the PCO allowed 22 companies to withdraw a total of $2.7 million in surpluses. But for the year ended March 31, 1986, the PCO permitted 50 companies to withdraw a total of $187.2 million.

Companies are requesting withdrawals because surpluses are growing—the result of the four-year old bull market that has dramatically improved returns on pension fund investments. In the late 1970s pension funds were averaging annual returns of nine and 10 per cent. In the past four years pension funds have averaged a return of 23 per cent per year.

^ Pension experts note 2 that a company must I have enough in the ^plan to meet its liabil§ ities—the cash it needs oto provide future penÖ sion benefits. If the s plan falls short, the 1 firm must make up the amount, typically within five years. In every province except Quebec, companies have the right to withdraw a surplus. But they may not remove the surplus that is earned on employee contributions. The firm must also withhold another portion of the surplus as protection against shortfalls.

Some firms need the remaining surplus because they are in financial trouble. Others use it for expanding operations or for acquisitions. To deny a company the right to decide how it uses the remaining surplus, said Nicholas Simmons, a principal with Toronto-based benefits consultants William M. Mercer Ltd., “takes away freedom of choice.” It will be up to the courts now to decide who owns Canada’s massive pension surpluses.

—MICHAEL SALTER in Toronto