On August 7, 2009, the Supreme Court of Canada released its long-awaited decision in Kerry (Canada) Inc. v. Nolan et al. The decision will be welcomed by sponsors of private pension plans.
The Supreme Court of Canada has brought welcome clarity to a number of the “difficult questions” that remained to be decided in the area of pension law. In particular, the Court held that: (i) courts should apply a reasonableness standard of review on appeals from Ontario’s Financial Services Tribunal (the “Tribunal”) that involve the interpretation of pension plans and related texts; (ii) where the plan documents are silent on the issue, reasonable pension plan expenses may be paid out of a pension trust; (iii) if permitted by the plan documents, an employer may use actuarial surplus in a defined benefit plan to meet its funding obligations with respect to a defined contribution component that has been added to the same plan; and (iv) the legal costs of unsuccessful employee / pensioner litigants should not be paid out of the pension fund where the litigation was adversarial and was not for the benefit of all plan beneficiaries.
The plan at issue was established in 1954. The litigation arose following amendments that introduced a defined contribution component in 2000, at a time when the plan had been in surplus for several years. Existing plan members were given the option of remaining in the defined benefit component or converting to the defined contribution component. All new employees were required to participate in the defined contribution component. The appellants, former employees of Kerry referred to as the Committee, asked the Superintendent of Financial Services to investigate alleged irregularities, including the payment of plan expenses from the fund and the employer’s contribution holidays. This led to a hearing before the Financial Services Tribunal, at which the employer was successful on most issues, to an initial appeal before the Divisional Court, at which the Committee was largely successful, and to a further appeal to the Ontario Court of Appeal, which reinstated most of the Tribunal decision.
The majority of the Supreme Court of Canada, in a decision written by Rothstein J. on behalf of five judges, upheld the Court of Appeal’s decision. Its findings are summarized below:
- Standard of Review: While a correctness standard of review applies to appeals from the Financial Services Tribunal that focus on interpretation of Ontario’s Pension Benefits Act, decisions that involve the interpretation of pension plans and related texts should be reviewed on a reasonableness standard, in light of the Tribunal’s expertise in the interpretation of such texts. All of the issues in this appeal were subject to a reasonableness standard of review, with the exception of the question of whether the Tribunal could order costs of the proceeding before it to be paid out of the pension fund. That issue involved the interpretation of the Financial Services Commission of Ontario Act, the statute that created the Tribunal. Since the Tribunal in dealing with this issue was interpreting its constating statute, the Court was required to adopt a deferential standard of review on this issue as well.
- Payment of Plan Expenses: The Court held that there is no statutory or common law authority that would oblige employers to pay pension plan expenses. As a result, the obligations of an employer are determined by the text and the context of the Plan documents. In this case, the original trust documents required the company to pay trustee fees and expenses but were silent with respect to the payment of other administrative expenses. As a result, the company could charge reasonable administrative expenses to the pension fund. The fact that the company had for a number of years paid plan expenses did not create an obligation for it to continue to do so. The requirement in the plan documents that the trust fund be used for the “exclusive benefit” of the plan members did not prohibit an amendment permitting plan expenses to be paid from the fund. The Court went on to hold that “The payment of Plan expenses is necessary to ensure the Plan’s continued integrity and existence. It is therefore to the exclusive benefit of the employees … that expenses for the continued existence of the Plan are paid out of the Fund.” The court noted that the same principles would apply regardless of whether the expenses at issue were for services provided by third parties or by the employer itself, provided that the expenses charged were reasonable and the services necessary.
- Contribution Holidays: In an important ruling, the Court held that the employer could use actuarial surplus accumulated in the defined benefit component of the plan to meet its funding obligations with respect to the defined contribution component. The Court upheld the principle that when plan documents provide that funding requirements will be determined by actuarial practice, the employer may take a contribution holiday unless other wording or legislation prohibits it. In this case, the company was permitted to take contribution holidays with respect to the defined benefit component of the plan. Furthermore, on the basis of the plan documentation, it was reasonable for the Tribunal to have concluded that the defined contribution portion was part of the same pension plan and trust as the defined benefit component. As a result, the plan could be retroactively amended to permit contribution holidays with respect to either or both components without violating the requirement that the fund be used for the exclusive benefit of plan members or constituting a partial revocation of trust. The Court held that there was no statute or regulation prohibiting the combining of defined benefit and defined contribution components into a single plan, or prohibiting the taking of contribution holidays in respect of either component of the plan. As a result, such actions are permitted unless expressly prohibited by the plan documents or principles of contract and trust law. In the present case, the Court found that it was not unreasonable for the Tribunal to have concluded that the plan documents allowed for the designation of defined contribution component participants as beneficiaries of the trust.
- Legal Costs: The Court deferred to the Tribunal’s finding that it had no statutory authority to order payment of litigation costs from the pension fund, given that the fund was not a party to the proceeding. On the issue of the costs of the appeal proceedings, the Court held that the legal costs of employees or pensioners who have litigated a pension issue unsuccessfully should be paid out of the pension fund only in cases in which there was legitimate uncertainty as to how to properly administer the pension trust and where the dispute was not adversarial. Examples of such cases would include litigation that was primarily about the construction of plan documents, clarified problematic areas of the law, was the only means of clarifying the parties’ rights, alleged maladministration of the trust or had no effect on other beneficiaries of the trust. By contrast, costs should not be paid out of the fund in litigation that was adversarial. This includes cases in which the unsuccessful party alleges breaches of fiduciary duty, or where the litigation benefits only a class of members and imposes costs on the other members. In these cases, the ordinary principle that the unsuccessful party should pay the successful party’s costs applies, as payment of costs out of the pension fund would “penalize” the employer by reducing the fund surplus and thereby reducing its opportunity for contribution holidays. In the present case, the litigation was adversarial in nature as it was about the propriety of the company’s actions and because the Committee sought to have funds paid into the fund to the benefit of the defined benefit members only. The Court noted that several of the Committee members had played a part in the decisions that the Committee then challenged in the litigation and that the Committee had not demonstrated its level of support from other plan members.
LeBel and Fish JJ. dissented only with respect to the right of the employer to use defined benefit surplus to fund its obligations under the defined contribution component of the plan. The dissenting Justices found that the defined contribution component was a separate plan and a separate trust. As a result, the company’s use of defined benefit surplus to eliminate its contribution obligations to the defined contribution component violated the provisions of the plan and trust agreement, which prohibited the use of trust funds other than for the exclusive benefit of the beneficiaries.
The majority’s decision brings welcome clarity to these areas of pension law. It also reflects a growing implicit recognition on the part of Canadian courts, that employers need increased flexibility in dealing with private pension plans if defined benefit plans are to survive the economic climate prevailing in recent years, and if balance is to be achieved between employee and employer entitlements.
The decision is available on the Court’s website at: http://scc.lexum.umontreal.ca/en/2009/2009scc39/2009scc39.html