The Ontario Court of Appeal has rendered its decision in Nolan v Superintendent of Financial Services (otherwise known as Kerry). The decision contains important legal considerations that pension plan sponsors need to be aware of when charging expenses to their pension plan, making changes to their pension plan and when communicating with plan members generally.
The Kerry case involved a defined benefit (DB) pension plan that was established in the 1950s and funded through a trust. The plan was amended in the 1970s to permit plan expenses to be paid from the plan fund and was amended again in 2000 to introduce a defined contribution (DC) component. In 1985, the employer began taking contribution holidays from plan surplus. After the DC component was implemented, the surplus in the DB component was also used to take employer contribution holidays under the DC component.
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 only some of the member 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 then appealed to the Ontario Court of Appeal.
Court of Appeal Findings
The Court of Appeal’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 Court of Appeal’s findings on the substantive issues of the case:
- 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 pay current service costs of the DC part of the plan?
- What constitutes proper notice of an adverse amendment?
On these issues, the Court of Appeal held:
- Pension plan administration expenses generally could be paid from the plan fund in this case. This was because, after examining the historical plan documents, amendments to prior plan documents enabling such payment were found not to be inconsistent with prior plan and trust documentation.
- The employer could take contribution holidays with respect to the DB component of the plan as there was nothing in the original plan text and trust which prohibited contribution holidays. Furthermore, for similar reasons, the surplus in the DB portion of the plan could be used to meet the employer’s contribution obligations under the DC component of the plan, provided the plan was properly structured so as to make the members of the DC component beneficiaries of the plan’s DB fund.
- The conversion of a pension plan from a DB plan to a DC plan creates uncertainty and risk for the plan members. As such, it is an “adverse amendment” within the meaning of Ontario’s Pension Benefits Act and notice of the amendment must be given in accordance with Ontario’s pension legislation. Moreover, the Court of Appeal found that the notice provided in this case was not sufficient as it was misleading and incorrect. However, the consequences of such improper notice were not clear in this case.
Important Considerations for Pension Administration
This case will generally be viewed as positive for plan sponsors; but, as described below, employers and plan administrators need to be aware of and seek legal guidance about many potential trouble spots that remain.
Plan Documents Still Determinative
The Court of Appeal made it clear that the historic wording of plan and trust documents continues to be the key determinant when considering the ability of employers to pay plan administration expenses from the plan fund and take contribution holidays. If plan expenses are being charged to the plan fund or if contribution holidays are being taken, plan sponsors should consider having their prior plan texts and trust agreements reviewed to ensure that such activities are not inconsistent with such historic plan documents.
Not All Expenses Can Be Charged to the Fund
Even where plan language permits the payment of expenses from the plan fund, the Court of Appeal’s reasoning suggests that only those expenses incurred by the sponsor in its role as administrator (as opposed to its role as employer) can be charged to the plan fund. Thus, plan sponsors seeking to have expenses paid from the plan should be reviewing plan expenses to determine whether such expenses were incurred by the plan sponsor as employer or as administrator.
This is not always an easy task, given the “two hats” that plan sponsors wear in respect of pension plans. For example, in Kerry, it was found that the costs incurred by the plan sponsor in considering whether to implement the conversion were incurred as employer; thus, such costs could not be paid from the fund. On the other hand, the implementation of those conversion changes were incurred as administrator and could be paid from the fund.
The Court of Appeal has also suggested that the payment of a plan sponsor’s internal expenses may also be problematic, depending on the historical plan and trust language.
Plan Structure & Design
The Court of Appeal made it clear that when changes are made to a plan, how those changes are structured and documented will have a direct impact on whether the changes will achieve the intended result from a legal perspective. Not only does this apply to plan conversions, as was the situation in Kerry, but this consideration would also apply to other events such as plan mergers and asset transfers. Plan sponsors need to be cognizant of this and ensure that proper advice is received both when considering such events and when implementing any related changes to pension plan documentation. Further, plan sponsors should also consider reviewing their existing plan terms and structure to confirm that they have achieved the intended result and, if not, take corrective action.
Communications with Plan Members
In its reasoning in Kerry, the Court of Appeal was highly critical of the communications provided to plan members about the plan conversion. These communications did not properly describe the legal effects of the conversion. The Court of Appeal appears to have set a high standard for communications with plan members, placing an onus on plan sponsors to communicate clearly and accurately with plan beneficiaries. Communications that do not meet this standard could impair the effectiveness of changes to a pension plan, or otherwise expose the plan sponsor to risks associated with miscommunicating the terms of a pension plan or benefits thereunder. Such risks could be even greater where members are being asked to consent to a change in, or make an election affecting, their benefits or rights under the plan. Accordingly, plan sponsors should take the time and make the effort to ensure that communications are fully reviewed and vetted to ensure that they are consistent with pension legislation and the plan documents, and that they properly describe the legal effect of any changes or rights concerning the pension plan.