This article was originally published in Blakes Bulletin on Pension & Employee Benefits-August 2004
As most employers will know, administering a pension plan can be a costly undertaking. Costs arise as a result of many activities undertaken in connection with the operation of a pension plan, such as in respect of actuarial, trustee, auditor, legal and investment management services.
Recently, the treatment of pension plan and pension fund administrative costs has been the subject of controversy between plan members and plan administrators. This article will begin with an overview of the relevant legislative provisions and will then examine the recent cases which have considered this issue.
In terms of statutory requirements, the Ontario Pension Benefits Act (PBA) requires that pension plans contain a provision regarding the payment of administrative expenses. The relevant provision of the PBA in this regard is section 10 which states:
10.The documents that create and support a pension plan shall set out the following information:…
(9) The mechanism for payment of the cost of administration of the pension plan and pension fund.
In view of this wording, all pension plans should clearly state how the costs of plan and fund administration are to be handled. However, despite the statutory requirement, pension plans differ in their treatment of this issue. While some plans are very specific regarding the treatment of expenses, others are less clear. This gives rise to legal issues of interpretation on a number of levels such as, for example, whether expenses can be charged to the plan or whether they must be paid directly by the sponsoring employer(s). Legal issues may arise as well when an employer who has previously paid administrative expenses directly purports to amend the plan so as to permit such expenses to be paid from the related pension fund. In such a case, the issue will be whether such an amendment is permitted under the terms of the plan and applicable legal principles.
The PBA also requires any administrative expenses charged to the pension fund to be "reasonable". Specifically, subsection 22(11) of the PBA provides as follows:
s.22(11) An agent of the administrator of a pension plan is not entitled to payment from the pension fund other than the usual and reasonable fees and expenses for the services provided by the agent in respect of the pension plan.
Disputes can arise as well regarding whether a particular expense which the administrator wishes to be charged to a pension plan is "usual and reasonable". In other words, even though a plan may be drafted so as to permit an administrator to charge administrative costs to the pension fund, the administrator will be limited in this regard to charging those expenses which can be said to be both "usual and reasonable".
Recently, there have been some cases which have tackled some of these issues. For example, the case of Markle v. City of Toronto concerned the recovery of pension plan administrative expenses from a pension fund. The case involved an appeal from a decision of the Ontario Superior Court of Justice to the Ontario Court of Appeal. Late last year, the Supreme Court of Canada dismissed the City of Toronto’s application for leave to appeal the decision of the Ontario Court of Appeal without reasons.
The pension plan at issue in the case was created for City of Toronto employees by a 1956 by-law ("By-law 426"). Under the terms of By-law 426, the City was required to pay the administrative expenses of the pension plan. Section 26 of Bylaw 426 stated that the employer was to "bear all expenses incurred by the Trustees and the Retirement Committee". The Trustees of the pension plan were responsible for the receipt of all contributions and for custody of the pension fund. The Retirement Committee was responsible for collecting employee contributions, paying benefits and for keeping records with respect to plan members. In 2001, the City passed By-law 186 that required the Trustees to pay the City’s administrative costs from the pension fund. The lower court ruled that By-law 186 was unlawful, holding that the pension plan created a trust in favour of the beneficiaries and that By-law 186 constituted a partial revocation of trust and a breach of trust.
The Ontario Court of Appeal, in a unanimous decision, upheld the decision of the lower court, noting that under the terms of the pension plan, the City did not reserve for itself a power of revocation. The court held that trust principles are not altered by the fact that the pension plan was established by a municipal by-law. By-law 186 was seen to be an improper attempt to limit the discretion of the Trustees and an unlawful attempt by the City to withdraw assets from the pension fund, to which it was not entitled. As was noted above, leave to appeal the Ontario Court of Appeal’s decision to the Supreme Court of Canada has been denied.
The decision in Kerry (Canada) Inc. v. Ontario (Superintendent of Financial Services), released on March 4, 2004 by the Ontario Financial Services Tribunal also involved the payment of expenses from a pension fund. The defined benefit pension plan in question was established in 1954 and was funded through company and employee contributions to a pension trust. From the establishment of the plan to December 1984, the company paid all of the expenses relating to the plan and the fund. However, beginning in 1985, the company began charging expenses to the trust.
In 2002, the Ontario Superintendent of Financial Services issued a Notice of Proposal to make Orders requiring Kerry (Canada) to repay all amounts paid out of the fund since January 1, 1985 for administrative expenses that were not incurred for the exclusive benefit of the members and beneficiaries of the plan (including income thereon).The Notice of Proposal also required that Kerry (Canada) amend the plan and the trust so that expenses chargeable to the fund were expressly limited to those expenses that were for the exclusive benefit of the members of the plan in accordance with the terms of the original trust agreement. The company requested a hearing before the Financial Services Tribunal.
The Tribunal ordered Kerry (Canada) to reimburse the fund for all amounts paid out of the fund after January 1, 1985 for expenses that were not incurred for the "primary benefit" of members of the plan. This included all income that would have been earned by the fund if those expenses had not been paid out from the fund. The Tribunal held that the term "exclusive benefit" must logically mean expenses that are for the "primary benefit" of members as few expenses could be said to be exclusively for the employees’ benefit on a strict, literal interpretation of that expression. Accordingly, the Tribunal held that many of the expenses were for the primary benefit of employees and could be paid from the plan assets. The Tribunal rejected the second proposal in the Notice of Proposal holding that the Superintendent did not have the authority to order Kerry (Canada) to amend the plan and the terms of trust. This case is on appeal to the Divisional Court and it will be interesting to monitor its progress at the judicial level.
A case dealing with the charging of plan expenses to a pension fund, Syndicat des Employes de Celanese Canada Inc. v. Celanese Canada Inc., is currently ongoing in Québec. The case is still at the preliminary stages and a decision on the merits is not expected for some time.
It will be seen, therefore, that a number of issues arise for administrators to consider when deciding whether a particular expense is properly chargeable to the pension fund. Recent administrative and judicial activity in this area illustrates that plan members are beginning to pursue a more active role on this issue. The relevant legal principles can be expected to continue to evolve and administrators will want to monitor their evolution and carefully examine their internal practices on an ongoing basis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.