Pension plan sponsors received some welcome news on August 7, 2009, with the Supreme Court of Canada’s highly anticipated decision in Nolan v. Kerry (Canada) Inc.
The Supreme Court of Canada upheld the Ontario Court of Appeal’s 2007 decision and found that certain reasonable plan expenses may be properly paid out of a pension fund and that surplus of a defined benefit portion of a plan fund can be used to pay employer contributions required under a defined contribution component of the plan. Costs of the litigation were awarded against the former employees and members of the plan who pursued the litigation against the plan sponsor. This employer-friendly outcome clarifies the law regarding many complex and important pension issues.
As always, the entitlement to charge expenses or take contribution holidays will depend on the wording of a particular pension plan’s current and historical documentation. The outcome of the Kerry decision will not apply to all pension plans.
If you have questions about the payment of expenses out of a pension plan fund, or the use of defined benefit surplus to meet defined contribution employer funding obligations, please contact one of FMC's pension experts.
The Kerry Plan (the Plan) was established in 1954 as a defined benefit registered plan. The Plan was funded by way of a pension fund constituted as a trust.
For the first 30 years, the Plan sponsor paid the Plan’s expenses. In 1985, there were two significant changes. Based on a 1975 amendment, Kerry (Canada) Inc. (Kerry) began to pay Plan expenses from the pension fund and began taking contribution holidays by applying surplus from the pension fund to offset funding obligations. By 2001, the Plan expenses paid by the pension fund came to $850,000, and the value of the contribution holiday amounted to $1.5 million.
Kerry amended the Plan again in 2000 to add a defined contribution component to the Plan. Current members were able to choose between defined benefit (DB) and defined contribution (DC) entitlements. New members were entitled to participate only in the defined contribution component of the Plan. The 2000 amendments also clarified surplus rights and reiterated Kerry’s right to pay expenses from the pension fund. At the time of this 2000 amendment, the employees’ pension committee (the Committee) raised concerns regarding the payment of Plan expenses and the contribution holidays with the Superintendent of Financial Services. In 2002, the Superintendent proposed that Kerry repay the Plan expenses to the pension fund, but did not require reimbursement for the contribution holidays. The Committee appealed the contribution holiday aspect of the Superintendent’s proposal, and Kerry appealed the issue relating to the payment of Plan expenses to the Financial Services Tribunal. Separate hearings were sought before the Tribunal. For the most part, Kerry was successful at the Tribunal level. In separate decisions, the Tribunal held that Kerry was neither required to repay the pension fund for the majority of the Plan expenses, nor reimburse the pension fund for the contribution holidays.
The Committee appealed to the Ontario Divisional Court which overturned both of the Tribunal decisions. Kerry appealed the Ontario Divisional Court ruling, and the Committee cross-appealed. The Ontario Court of Appeal upheld the Tribunal’s ruling, allowing Kerry’s appeal, and dismissing the Committee’s cross-appeal.
The Court of Appeal applied principles of trust law to support its finding that plan expenses can be paid from the pension fund. It stated that the Kerry Plan documents did not prohibit Kerry from amending the Plan to allow expenses to be paid from the pension fund. In respect of contribution holidays, the Court of Appeal held that Kerry was entitled to take a contribution holiday regardless of "exclusive benefit" language in the Plan documents.
The Committee further appealed to the Supreme Court of Canada. The case was heard on November 18, 2008.
Supreme Court of Canada’s Decision
Perhaps of greatest importance to plan sponsors, the Court found that, based on the wording of the Plan documents, Kerry did not have an obligation to pay Plan expenses. The Court found nothing in the Ontario Pension Benefits Act or the common law rules that would place an obligation on an employer to pay the costs of administering a plan. The Court also affirmed the lower court’s finding that "silence [in the plan documents regarding expenses] does not create an obligation on the employer to pay Plan expenses." In addition, notwithstanding that Kerry had paid expenses in the past, there was no ongoing obligation created by Kerry’s prior conduct to continue to pay Plan expenses.
Although the old trust agreement for the Plan required that all assets of the trust be used for the "exclusive benefit" of the Plan members, the Court stated that the "continued integrity and existence" of the Plan is a benefit to employees. Since the continued integrity and existence of the Plan is an "exclusive benefit" of the members, Kerry was entitled to pay reasonable expenses related to the administration of the plan from the pension fund. The Court also rejected the Committee’s contention that payment of Plan expenses from the pension fund would constitute a revocation or partial revocation of the pension trust.
The Court found that contribution holidays are permitted regardless of the "exclusive benefit" language found in the Plan documents. The Court relied on its decision in Schmidt v. Air Products ("Schmidt") to conclude that, based on the Plan documentation, and because Kerry has the right to use the actuarial surplus while the Plan is ongoing, Kerry may take contribution holidays. As set out in Schmidt, "unless the terms of the plan specifically preclude it, an employer is entitled to take a contribution holiday." The Court further reasoned that the contribution holiday rule from Schmidt applies even if documentation provides that the pension fund is only for the "exclusive benefit" of plan members.
Cross-Subsidization of DB and DC Obligations
According to the Court, there is no reason why a pension plan could not have both a defined benefit and defined contribution component, whose members are beneficiaries of the same trust. Consequently, the Court found that there is nothing that would preclude a plan sponsor from introducing a new category of plan members (the defined contribution members), who would also be beneficiaries of the pension fund. Once an addition or amendment is made, the use of the surplus in the defined benefit portion of a plan to fund the defined contribution component would be appropriate, as it meets the requirement that the fund be used exclusively for the benefit of its members, even if some of the members are a new class of member. It should be noted that Kerry’s right to amend the Plan to make all members, or new members, beneficiaries of the pension fund is derived from its explicit, unilateral amendment power found in the Plan documentation.
Issues regarding the costs of the litigation were also examined in detail. The Court deferred to the Tribunal’s ruling that, since the pension fund was not a party to the proceedings, it could not order costs be paid from it. The Court also agreed with the Court of Appeal’s finding that the litigation was ultimately adversarial, and therefore no costs should be awarded from the pension fund to the Committee.
This ends the seven-year saga of Kerry, and affirms the actions of many plan sponsors hoping to get relief from paying certain plan expenses and contributions. For a copy of the reasons of the Supreme Court of Canada in Nolan v. Kerry (Canada) Inc., please see http://csc.lexum.umontreal.ca/en/2009/2009scc39/2009scc39.html.