The defined benefit plan in this decision was established in 1954 and the assets of the plan were held in a trust. In 1994, following an asset purchase transaction, Kerry Canada Inc. ("Kerry") became the administrator and sponsor for the pension plan. Kerry continued the practice of paying various plan administration expenses from the pension fund relating to the plan and taking into account actuarial surplus in determining the employer's contribution obligations. In January 2000, the plan was amended to add a new defined contribution provision. The amended plan text provided that defined benefit surplus could be applied towards Kerry's contribution obligations under the defined contribution provision. A number of former employees who were members of the plan objected to the 2000 amendments and requested the Ontario Superintendent of Financial Services (the "Superintendent") to: (i) order Kerry to reimburse the plan for various expenses previously paid from the pension fund, (ii) order Kerry to reimburse the pension fund for various previous contribution holidays, and (iii) deny registration of the 2000 amendment to the plan. The issues were considered by the Financial Services Tribunal and subsequently by the Divisional Court on appeal. The Court of Appeal for Ontario issued its decision in relation to the matter on June 5, 2007.

Plan Expenses are Properly Payable from the Pension Fund

The Court held that Kerry was able to pay most of the administrative expenses from the pension fund. Since there are no provisions in the Ontario Pension Benefits Act (the "PBA") governing the payment of pension plan expenses, the Court held that the terms of the plan documentation (the plan text and the trust agreement taken together) must govern. The Court also acknowledged that a properly administered pension plan requires a number of services in addition to those of a trustee, including actuarial, accounting and investment functions. In this case, neither the plan text nor the trust agreement obligated Kerry to pay the plan expenses. Any payments that Kerry did make imposed no duty on Kerry to pay subsequent payments. Because Kerry was under no obligation to pay the plan expenses, it was implicit that such expenses were the responsibility of the fund. Kerry was accordingly justified in paying expenses from the fund so long as those expenses were consistent with the proper administration of the pension fund. The Court did decide that money paid for advice about the addition of the defined contribution provision was advice for the company's own benefit and that these expenses should not be paid from the fund.

Contribution Holidays and Cross-Subsidization of the Defined Contribution Provision

A number of issues arose regarding the taking of contribution holidays through the use of pension fund surplus. The Court reiterated the Supreme Court's decision in Schmidt v. Air Products of Canada Ltd. that pension plan members have no entitlement to the actuarial surplus in an ongoing pension plan. Rather, the wording of the plan documentation in its entirety must govern surplus and contribution holiday issues. Crucially, the Court held that the pension surplus originating with the defined benefit component of the pension plan could be used to fund employer contributions to the defined contribution provision of the same plan. The fact that overall plan membership was expanded through inclusion of a new category of member would not alter the company's right to take contribution holidays as long as the members in the defined contribution provision were beneficiaries of the entire fund. In other words, the members in the defined contribution provisions would have to have the same rights as the members in the defined benefit provision to make a claim to any surplus in the fund on plan termination.

Notice Requirements Relating to the 2000 Amendment

The Court held that the registration of the 2000 amendment should not be denied. However, the Court did find that the amendment was one that would adversely affect the rights of a member or former member within the meaning of the PBA. Thus, the PBA places a statutory duty on plan sponsors like Kerry to provide adequate notice to any plan members whom the Superintendent designates. The Court ruled that Kerry did not give plan members adequate notice of their option to convert to the defined contribution component of the plan, and, in particular, did not fully apprise them of the risks and uncertainties that could be inherent in leaving a defined benefit arrangement for a defined contribution one. Nonetheless, the Court held that the PBA gives the Superintendent the discretion to register an amendment even when inadequate notice has been given.

This decision is based on an in-depth analysis and interpretation of Kerry's pension plan and trust documents. It is important that a plan sponsor undertake a similar analysis of its own pension plan and trust documents to ensure that the principles set out in this decision are applicable before paying expenses from a plan fund or using surplus.

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.