Originally published in Pensions International, February 2007.
The issue of who pays pension plan expenses has been a hot topic of Canadian pension law over the past few years, with much uncertainty over which expenses can be charged to a pension fund. The increasing cost of pension plan administration has led employers that both sponsor and administer registered pension plans to increasingly use fund assets to pay for the expenses incurred in maintaining the plan. Unfortunately, a detailed list of permissible chargeable expenses applicable to all registered pension plans does not exist.
The confusion surrounding the source of payment for plan expenses leads many employers to question exactly which rules govern the payment of plan expenses from plan assets. The use of plan assets is governed by the applicable pension legislation and by equitable legal principles. This article refers to the provisions of the Ontario Pension Benefits Act (PBA), since its provisions are representative of plan expenses provisions across Canada and since it governs the majority of pension funds in Canada.
The PBA requires pension plans to contain a provision regarding the mechanism for the payment of the administrative expenses of the pension plan and fund. It also requires any administrative expenses charged to the pension fund to be ‘reasonable’. The employer, in its capacity as plan administrator, is also a fiduciary with respect to plan members and thus must hold itself to a fiduciary standard when determining whether expenses may be paid from the plan’s assets. Therefore, depending on the language of the governing plan documents, only certain expenses can be paid from the pension fund, and even when a plan has been drafted to permit an administrator to charge administrative expenses to the pension fund, the administrator can charge only reasonable expenses to the pension fund. The recent decision in Nolan v Ontario (Superintendent of Financial Services)  OJ No 960 (Ont Div Ct) (referred to as ‘Kerry’), outlined below, has made it questionable whether any expenses can be charged against the pension fund.
In Kerry, a defined benefit pension plan (the plan) was established in 1954 under a trust. Under the original trust agreement, the pension fund could be used only for the exclusive benefit of plan members and their beneficiaries. In addition, the employer was required to pay the majority of the plan expenses. Between 1 January 1985 and the end of 1994, the employer changed its practice and authorised the payment of various administration expenses from the fund. In 1994 Kerry (Canada) Inc assumed the plan as part of an asset purchase transaction, becoming the plan sponsor and administrator. In its role as administrator, Kerry (Canada) Inc continued the practice of paying administrative expenses from the fund and in 2000 amended the plan to give the employer the discretion to direct certain plan expenses to be paid from the fund. A group of former employees requested that the regulator, the Ontario Superintendent of Financial Services, order Kerry (Canada) Inc to reimburse the plan for certain expenses paid out of the fund, including trustee fees and investment management fees. The matter was eventually appealed to the Ontario Divisional Court.
Divisional Court Ruling
The Ontario Divisional Court examined the original plan and trust documents and found that the language of the historical plan and trust documents prohibited even routine administrative expenses from being paid from the fund. The Divisional Court also concluded that having the administrative fees paid out of the pension fund was not for the ‘exclusive benefit’ of the employees. Furthermore, amendments made to permit the payment of administrative expenses from the fund were invalid because the employer had not initially reserved a power to revoke the trust, and the amendments constituted a revocation of that trust. The result was that Kerry (Canada) Inc had to reimburse the fund, with interest equal to the plan’s normal rate of return, for all administrative expenses paid out of the fund after 1 January 1985.
The decision is being appealed to the Ontario Court of Appeal. However, if the decision is upheld, plan sponsors will have to review their current practices regarding plan expenses to ensure that they comply with both applicable pension legislation and common law. This will require reviewing all historical pension plan and trust documents as well as all past procedures. Plan sponsors currently paying plan expenses from their pension fund may find that they have limited ability to pay even routine administrative expenses from the pension fund where historical pension plan and trust documents contain restrictive language. The decision also creates the potential for expanded litigation in this area.
The decision may have implications for those considering acquiring businesses with pension plans. A surprising aspect of the Divisional Court decision was that Kerry (Canada) Inc was required to reimburse the plan for expenses paid from the fund not only for the period that Kerry (Canada) Inc was the plan administrator, but also for the 10-year period before it had assumed responsibility for the plan. Thus, Kerry (Canada) Inc was made financially responsible for improper expense payments authorized by a completely separate and independent legal entity. Companies buying pension plans may need to be more cautious and investigate more thoroughly the past treatment of plan expenses to avoid having unexpected liabilities.
Kerry will have significant implications for the payment of plan expenses from pension funds; however, the impact of this decision on pension plans registered outside Ontario is unclear because it is an Ontario Divisional Court decision, so it is not biinding outside Ontario. Nonetheless, as one of the few cases to comment on an administrator’s ability to pay plan expenses out of the pension fund, the Kerry decision may have some persuasive impact outside Ontario.
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.