On August 7, 2009, the Supreme Court of Canada (“SCC”) released its decision in Nolan v. Kerry (Canada) Inc. (“Kerry”). The case addresses a number of issues relevant to pension plan sponsors including the circumstances in which expenses can be paid from a plan fund and the validity of using defined benefit (“DB”) surplus to fund DB and defined contribution (“DC”) obligations.
The SCC decision is welcome news for plan sponsors and confirms the decision of the Ontario Court of Appeal in June 2007. See Use of Pension Plan Assets to Fund Expenses and Issues on Introducing a Defined Contribution Component Still in Legal Limbo - October 2007 Client Bulletin for a discussion of the Court of Appeal decision.
In 1954, the Canadian Doughnut Company (now Kerry Canada Inc.) (the “Company”) established a DB plan for its employees (the “Plan”). The Plan was funded through a trust. Up until the end of 1984, the Company paid all Planrelated expenses directly; no expenses were paid from the Plan fund. In 1985, the Company began to pay third party expenses such as actuarial, investment management and audit services directly from the Plan fund. Also starting in 1985, the Company began to take contribution holidays in respect of its DB obligations under the Plan.
In 2000, the Company amended the Plan to add a DC component. As a result of the amendment, the DB component was closed to new hires and new hires were eligible to join only the DC component. The Plan was then funded through two separate vehicles with two separate custodians. The Company used the surplus under the DB component to fund its contribution obligations under the DB and DC components.
Shortly after the introduction of the 2000 amendments, the DCA Employees Pension Committee (the “Committee”) asked the Ontario Superintendent of Financial Services (the “Superintendent”) to investigate several issues relating to the administration of the Plan. The Superintendent subsequently issued two Notices of Proposal (“NOPs”) under which he: (i) proposed to make an order requiring the Company to reimburse the fund for expenses not incurred for the exclusive benefit of members; and (ii) proposed to refuse to order the Company to reimburse the fund for the contribution holidays. The Company and the Committee each requested a hearing before the Financial Services Tribunal (the “Tribunal”) in respect of the NOPs. The Company was largely successful at the hearings and the Committee appealed both decisions to the Divisional Court. After several years, the case made its way to the SCC.
In November 2008, the SCC considered the following issues: (i) whether the Company was responsible for paying Plan expenses or whether such expenses could be paid from the Plan fund and (ii) whether the Company could use the DB surplus to satisfy its DB and DC contribution obligations under the Plan. The SCC also considered whether costs of the action should be paid to the Committee from the Plan fund.
payment of plan expenses
In a unanimous decision, the SCC found that, based on the terms of the Plan documents, the Company was entitled to pay Plan expenses from the Plan fund. In its analysis of the issue, the SCC noted the following:
- An employer is not required under common law or statute to pay the expenses of a pension plan. The obligations of the employer will be determined by the text and context of the plan documents. Each case will turn on its facts and the terms of the plan and trust at issue.
- Other than Trustee fees (which the Company had previously accepted it was responsible for paying directly), the original Plan documents were silent on the obligation of the Company to pay Plan expenses. Silence does not create an obligation on an employer to pay expenses.
- A provision in a trust agreement prohibiting funds from being used other than for the “exclusive benefit” of the employees did not impose an obligation on the Company to pay expenses. It is for the exclusive benefit of employees, within the meaning of the trust agreement, that expenses for the continued existence of the Plan are paid from the fund.
- Payment of expenses from the fund does not constitute a partial revocation of the trust. Provided that nothing in the plan text requires the payment of expenses by the employer, funds in a pension trust can be used to pay the reasonable and bona fide expenses of a third party or the employer that are necessary to the administration of the plan.
DB contribution holidays
In a unanimous decision, the SCC confirmed its earlier decision in Schmidt v. Air Products Ltd. that unless the terms of a plan expressly preclude contribution holidays, an employer is entitled to take contribution holidays.
Under the original terms of the Plan, the Company was required to contribute “such amounts as will provide” for the employees’ retirement income. The SCC found that the intent of this provision was to require the employer to contribute to the Plan in the amounts determined in accordance with actuarial discretion and not in accordance with a defined formula. As a result, the SCC found that the Company was entitled to take DB contribution holidays under the Plan.
DC contributions holidays
In a 5-2 decision, the SCC found that, based on the terms of the Plan and applicable law, the Company was entitled to use DB surplus to fund its DC obligations under the Plan. In its analysis of the issue, the SCC noted the following:
- The creation of two differently funded pension arrangements (i.e., a DB and a DC component held by different custodians) does not necessarily result in two distinct pension plans and trusts. The terms of the Plan suggested that the Company intended to create only a single plan.
- Nothing in the common law, the Pension Benefits Act (Ontario) or the Plan documents prohibits the creation of a combined DB / DC plan or the taking of contribution holidays in respect of either component.
- When DB surplus is used to fund DC contributions under the same trust, there is no violation of the “exclusive benefit” provision and there is no partial revocation of the trust. In such circumstances, provided it is not prohibited under the terms of the plan, members of both components are beneficiaries of the trust and use of the trust funds to benefit either component is permissible.
- Although contribution holidays reduced the actuarial surplus in the Plan, nothing in the Plan or trust law gave DB members a vested interest in actuarial surplus. Absent legislation otherwise, DB members have no right to require surplus funding to increase their security.
costs of the action
The SCC agreed with the decision of the Ontario Court of Appeal and ruled that costs should not be payable to the Committee from the Plan fund. It noted that courts generally award costs out of a fund where: (i) there is legitimate uncertainty as to how to administer the trust; and (ii) the dispute is not adversarial. The SCC found that this action was adversarial and that to award costs from the fund would penalize the Company, the successful litigant, by reducing the surplus and, thereby, its opportunity to take future contribution holidays.
what this means for plan sponsors
In Kerry, the SCC has confirmed that: (i) a plan sponsor may be able to pay reasonable expenses from the plan fund and (ii) a plan sponsor may be able to use DB surplus to fund both DB and DC contribution obligations under a plan. In both cases, the question of whether a plan sponsor can take such action depends on the terms of the plan documents. As a result, plan sponsors should review historical documents to determine whether such practices are permitted under the terms of the plan or whether amendments can and should be made.