Canada: Kerry Case Provides Welcome Guidance On Payment Of Plan Expenses And Contribution Holidays

The Supreme Court of Canada's decision in Nolan v. Kerry (Canada) Inc. is welcome news for pension plan sponsors. The Supreme Court found that pension plan administration expenses could generally be paid from the plan fund and that surplus in the defined benefit portion of the plan could be used to meet the employer's contribution obligations under the defined contribution component of the same plan. Nonetheless, this decision contains important legal considerations that sponsors need to be aware of when charging expenses to their pension plan or when making use of surplus pension assets. For example, the Supreme Court made it clear that the historic wording of plan and trust documents continues to be a key factor when considering the ability of employers to pay plan administration expenses from the plan fund and take contribution holidays.

On Thursday, August 13, 2009, members of Osler's Pensions and Benefits Department held an interactive webinar to review the impact of this decision. A podcast of that webinar will be posted on osler.com in the next couple of days.

Background

In 1954, the employer established a defined benefit (DB) pension plan. In 1985, the plan was amended to permit plan expenses to be paid from the plan fund, and the employer began taking contribution holidays. The plan was again amended in 2000 to introduce a defined contribution (DC) component. After the DC component was implemented, the surplus in the DB component was also used by the employer to meet its DC funding obligations.

Plan members subsequently objected to the payment of plan expenses from the plan fund and the taking of DB and DC contribution holidays on the basis that such activities constituted a breach of trust. The Ontario Superintendent of Financial Services investigated the matter and took action on some of the members' complaints. A series of appeals followed. The Financial Services Tribunal (FST) rendered a decision that was generally favourable to the employer; however, the Ontario Divisional Court largely overturned that decision in favour of the plan members. The matter was eventually heard by the Ontario Court of Appeal which found that subject to the terms of the historical plan documents and certain other requirements, plan administration expenses could generally be paid from the plan fund, and the employer could use surplus to take contribution holidays with respect to the DB and DC components of the plan. The plan members appealed the Court of Appeal's decision to the Supreme Court of Canada.

Supreme Court of Canada Findings

The Supreme Court's decision, in part, focused on the proper standard of legal review to be applied to the FST's decision and the ability of the FST to award costs. However, of particular interest to plan sponsors are the Supreme Court's findings on the substantive issues of the case as follows:

  • When is it acceptable for pension plan expenses to be paid from the pension fund?
  • Is it permissible to use surplus assets in the DB part of the pension plan to take a contribution holiday with respect to: (i) the DB component and (ii) the DC component?

On these issues, the Supreme Court held as follows:

  • There is no statutory or common law authority that obliges an employer to pay the expenses of a pension plan and, as such, the obligations of the employer will be determined by the plan text and the trust documents. Where original plan documents are silent on the issue of plan expenses, such silence does not create an obligation requiring the employer to pay such expenses. Rather, as long as there is no provision in the plan documents specifying that an employer must pay plan expenses, "reasonable and bona fide expenses" may be paid from the plan fund. Further, there is no difference, in principle, between "internal" and "external" expenses – in other words, whether the services are provided by third parties or by the plan sponsor itself is immaterial, provided that such expenses are reasonable and legitimate (i.e., incurred for the administration of the plan).
  • The historic wording of the plan and trust documents is a key factor when considering the ability of employers to use surplus funds for contribution holidays. Surplus may be used by the employer to take contribution holidays under the DB portion of a plan as long as the employer's contribution formula provides for "actuarial discretion" – though there is no need to explicitly mention an "actuary."
  • Provided that the plan documents do not specifically prohibit it, a single plan can have DB and DC components whose members are beneficiaries of the same trust. In this case, the plan language, as amended, indicated that the plan was intended to apply to "all employees," making it permissible to designate the DC members as beneficiaries of the existing trust. Further, the DB members had no vested interest in the surplus of this ongoing plan. Thus, the employer was also entitled to apply the surplus in the DB component to its DC contribution obligations – once the required retroactive amendments were made.

Important Considerations for Pension Administration

This case will generally be viewed as positive for plan sponsors; however, as described below, employers and plan administrators need to be aware of the potential trouble spots that remain.

Plan Documents & Structure Are Key Factors

The Supreme Court made it clear that the historic wording of plan and trust documents (along with the resulting plan structure) continue to be a key determinant when considering the ability of employers to pay plan administration expenses from the plan fund and take contribution holidays. Further, when making changes to a plan, how those changes are structured and documented can impact whether the changes will have the intended result from a legal perspective. Plan sponsors need to be cognizant of this and ensure that proper advice is received when considering or implementing changes to their pension plans. Further, plan sponsors should also consider reviewing their plan terms and structure to confirm that prior changes have achieved the intended result and, if not, take corrective action, if possible.

Ability to Amend Plan that Requires Employer to Pay Plan Expenses Remains Unclear

The Supreme Court did not consider what happens when a pension plan provides that the employer is obligated to pay the plan expenses. For example, can the plan be amended to permit the expenses to be paid from the plan fund? If so, what is required (i.e., is a broad power of amendment sufficient or must the employer have reserved the power to revoke the trust)? However, the Supreme Court's broad interpretation of the "exclusive benefit"-type language found in many trust agreements may suggest that such a change would not be a revocation of trust.

Not All Expenses Can Be Charged to the Fund

Although the Supreme Court (unlike the Court of Appeal) made it clear that any distinction between internal and external expenses is "artificial," it did uphold the FST's finding that expenses that are incurred by the employer as "employer" (as opposed to being incurred by the employer as "plan administrator") should not be charged to the fund. As a result, it is still necessary to consider the type of expenses that may be charged to the fund on a case-by-case basis.

Communications with Plan Members

Unlike the Court of Appeal, the Supreme Court did not consider the manner in which the changes to the plan were communicated to plan members. The Court of Appeal was highly critical of the communications provided to plan members about the plan conversion, finding that the communications did not properly describe the legal effects of the conversion. Given that the Supreme Court did not comment on this issue, the Court of Appeal's high standard for communications with plan members appears to still apply and should be of concern to plan sponsors when sending any communications to plan members.

Evan Howard is a partner in the firm's Pensions & Benefits Department. Lesha Van Der Bij is a Knowledge Management lawyer in Osler's Pensions & Benefits and Employment & Labour Departments.

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.

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