Article by Kathryn Bush, ©2005 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Pensions - February 2005
While it is true that, depending on the language of the governing plan documents, only certain pension plan expenses may be charged, a more fundamental difficulty has arisen as a result of recent court decisions. Can any expenses be charged against a pension fund?
Provisions of the PBA Dealing with the Charging of Pension Plan Expenses
The 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."
Accordingly, disputes can arise regarding whether a particular expense, which the administrator wishes to be charged to a pension plan, is "usual and reasonable".
What The Canadian Courts Have Said About The Charging of Expenses to a Pension Fund
In 1990, the British Columbia Court of Appeal ruled against the Bank of British Columbia’s right to remove surplus from its pension plan in Hockin v. Bank of British Columbia (leave to appeal to the Supreme Court of Canada was refused). In an action that followed the surplus dispute known as Hockin No. 2, Hockin v. Bank of British Columbia, the B.C. Court of Appeal also found against the Bank’s right to charge expenses against the pension fund. The terms of the original pension plan had required the bank to pay all administrative costs of the plan. However, the bank subsequently amended the plan to provide that all such costs were to be borne by the plan itself. Applying the principles in Schmidt v. Air Products of Canada Ltd. to this action, the Court of Appeal found this amendment to have been improper.
The Court found that the alteration of the provisions relating to payment of administrative costs was a partial revocation of the trust. The court found that by using surplus to pay administrative costs which the original plan had specifically stated would be paid by the employer, the bank was "improperly treating the pension fund surplus moneys, which in equity belongs to the employees, as if they were the bank’s. This the bank could not do."
Given the finding of the B.C. Court of Appeal that the withdrawal of surplus was improper, and in the Court’s analysis regarding the use of surplus to pay expenses, there was some uncertainty about what the Court was actually saying about the right to charge pension plan expenses in the larger context.
Unfortunately for plan sponsors, the uncertainty in this area would appear to have been resolved in the Ontario Court of Appeal decision in Markle v. The City of Toronto (application for leave to appeal to Supreme Court of Canada refused), and resolved in a manner which may make it difficult, in certain situations, for pension plan expenses to be charged against the pension fund.
The Facts in Markle
In Markle, the Ontario Superior Court had ruled that By-law 186, which purported to amend the Plan by directing that the City provide certain services providing that the City was entitled to recover the costs, was not lawful. The Court found, among other things, that the pension plan created a trust in favour of employees, that the pension plan did not contain a power of revocation and that By-law 186 constituted a partial revocation and breach of trust. The City of Toronto appealed that decision.
The Ontario Court of Appeal agreed with the lower court finding that there was a trust and that the trust did not permit a revocation to allow the employer to deduct the expenses. By-law 426 had created a trust in favour of the employees. And, while it was a by-law, and not a trust agreement, there was a three-member board of trustees. From this, the Court found that a trust existed. Having found that there was a trust, the Court went on to consider whether the City had retained the right to amend or revoke that trust.
The Court found that section 45 of the relevant by-law provided a wide amendment clause, but the language was not a sufficient power of revocation.
It is difficult for plan sponsors to imagine a broader amendment power. Many would have expected, prior to the Markle decision, that the amendment language contained in that plan would have been sufficient to permit an amendment to change the expense language.
The Court went out of its way, likely in light of the importance of this decision, to explain the irrevocable nature of the trust. In this regard, the Court quoted extensively from the Supreme Court of Canada decision in Schmidt. Then, having established that an express power to revoke a trust is necessary in order to amend a pension plan, where the plan had required the employer to pay the plan expenses, the Court found that the plan expenses could not properly be charged against the pension fund irrespective of the excess surplus and small number of plan members.
As a result of the Markle decision, it may be difficult to conclude that a valid right to amend many pension plans to permit the charging of pension plan expenses will exist where the plan originally provided that the company would be responsible for expenses, or even where the plan was silent with respect to the charging of expenses.
What Should Plan Sponsors Do With Respect to the Charging Of Expenses Against a Pension Fund?
Given the Markle decision, it is clearly best to first consider whether trust law principles apply when considering whether the pension plan expenses can be charged against the pension fund.
Secondly, it is clear that the best scenario for pension plan sponsors would be a situation where the plan has always expressly provided for the charging of pension plan expenses against the pension fund. While this is the optimum situation, it will not exist in many circumstances.
There may also be situations where the pension plan permits the charging of only certain types of expenses. For example, trust agreements would typically have a clear provision permitting the charging of trustee costs and expenses. However, a plan could otherwise be silent on plan expenses.
Further, if plan expense provisions are narrowly drawn, i.e., they attempt to exhaustively list the expenses which can be charged, there may be difficulties, as the types of expenses incurred by a pension plan have clearly evolved over time.
As found by the Court in Markle, there may be difficulties in charging pension plan expenses where the plan does not contain an express right to take such expenses and a broadly drafted amendment power will not be sufficient where a trust exists and a power of revocation was not retained.
Experience would suggest that broad powers of revocation are not common, and it is not even clear that they would have been accepted, or currently would be accepted, by the taxing authorities. Accordingly, plan sponsors are likely to need clear language in the original pension plan documentation to ensure a right to charge expenses against the pension fund.
Unfortunately, the charging of plan expenses against the pension fund is likely to be an area of significant attack in class actions. We can expect such challenges in the future, and the economic effect can be significant where plan expenses have been charged for many years.
Plan sponsors without surplus assets might even consider whether it would make sense to discontinue a pension plan governed by trust law principles, and with unclear pension expense language. (It would be necessary to not provide a pension plan for a couple of years, for example, by providing a group registered retirement savings plan, to avoid the plan being at risk to be governed by the old language.) A new pension plan with clear pension expenses, among other things, could then be established. In addition, if it is unclear that pension expenses can be charged against the pension plan, more limited funding may be undertaken.
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.