On August 7, the Supreme Court of Canada (SCC) released its highly anticipated decision in the Kerry case.1 The decision provides certainty and direction on a number of issues relevant to nearly every pension plan sponsor in Canada. The decision sets out the following principles:
- Where the plan documents do not forbid it, defined benefit (DB) surplus may be used to fund (i.e. to "cross-subsidize") defined contribution (DC) contributions;
- Where the plan documents do not forbid it, reasonable and appropriate plan expenses may be paid out of the pension fund;
- Where expenses may be paid out of the pension fund, employers that perform some of their pension plan administration in-house may charge reasonable expenses associated with such administration to the fund;
- Retroactive amendments to pension plans are valid if authorized by statute;
- Costs associated with pension litigation will not be automatically paid out of the pension fund; and
- The Ontario Financial Services Tribunal will receive considerable deference in its decisions concerning the interpretation of a pension plan text or the interplay between the Pension Benefits Act and a plan text.
More generally, Kerry sounds a retreat from the rote application of trust-law principles to the resolution of pension plan disputes, an approach that has held sway in the courts for much of the past two decades in Canada.
Before reaching the SCC, Kerry originated from two decisions of Ontario's Superintendent of Financial Services (the Superintendent), which were then appealed successively to the Financial Services Tribunal (the Tribunal), the Divisional Court, and the Ontario Court of Appeal.
Kerry (Canada) Inc. (the Company) sponsored a defined-benefit pension plan (the Plan) established by a predecessor corporation in 1954. The original Plan trust provided that contributions to the Plan were to be used for the "exclusive benefit" of Plan members and, other than to specify that trustee fees must be paid by the employer, was silent on the payment of plan expenses. In 1975, the Plan text was amended to allow for third-party plan expenses to be paid from the pension fund, although it was not until 1985 that the Company actually started paying such expenses out of the fund. In 1985, the Company also began taking contribution holidays as the Plan had accumulated a substantial surplus.
In 2000, the Company amended the Plan, introducing a DC provision. When the DC provision was introduced, existing members were given the option of converting their defined benefits to the DC provision or remaining in the DB provision of the Plan. The DB component was closed off to new members, all of whom were steered into the DC component. The 2000 amendment to the Plan creating the DC provision established a new funding vehicle for the latter, which was seemingly separate from the DB trust.
Following the amendment in 2000, a group of former employees and current plan members asked the Superintendent to invalidate the contribution holidays that the Company had taken since 1985, the Company's use of pension fund assets to pay plan expenses, and its use of the surplus from the DB provision to fund the DC provision.
The case then went to the Tribunal, which delivered decisions on the expenses and cross-subsidization issues, and also addressed whether the members' litigation costs were payable out of the Plan's assets. On the expenses issue, the Tribunal essentially said that the "exclusive benefit" language in the Plan's original 1954 trust permitted expenses incurred for the primary benefit of members to be payable from the Plan's assets and that a pension plan's administrative expenses are incurred for the primary benefit of its members. On the cross-subsidization issue, the Tribunal blessed the practice of using DB surplus to fund DC contributions in principle, but required the Company either to retroactively amend the Plan to make DC members beneficiaries of the DB trust or to repay the contribution holiday it had enjoyed through cross-subsidization. The Company chose the retroactive-amendment approach. On costs, the Tribunal ruled that it did not have the authority to order costs be paid from the Plan fund.
At the Divisional Court, where the hearing took place immediately following the SCC's 2004 decision in the Monsanto case,2 the Court determined that the Tribunal's decisions were to be reviewed on a correctness standard (i.e. the Tribunal had to be correct in law in its analysis and not just reasonable as to its decisions) and that the Tribunal was wrong on the cross-subsidization and expenses issues. The Company was ordered to repay an amount equal to all the expenses it had paid out of the fund since 1985, and the 2000 amendment adding the DC provision was held to be invalid. The Divisional Court did hold, however, that the parties' legal costs were not payable from the Plan.
In 2007, at the Ontario Court of Appeal, the Company won on all material points. In what was heralded as an employer-friendly decision by Justice Eileen Gillese, the Court distinguished Monsanto and determined that the Tribunal's original decisions needed only to be reasonable and not, as the SCC had suggested only three years prior, correct. It endorsed the Tribunal's decisions on the payment of expenses and cross-subsidization. Laying down very broad principles that could be made applicable to many pension plans, Justice Gillese determined that there is nothing inherently wrong with using DB surplus to fund DC contributions where the plan text and trust agreement in question do not prohibit it. On the expenses issue, she also concluded that unless explicitly prohibited by a pension plan text, expenses that are reasonable and appropriate in the administration of a plan may be paid out of the Plan fund to third-party service providers, though not to the employer/administrator itself.
The SCC granted the members leave to appeal.
Supreme Court of Canada decision
The most contentious issue in Kerry, as evidenced by the dissent on this issue of Justices LeBel and Fish,3 was whether surplus accumulated in the DB provision of the Plan could be used to satisfy employer contributions to the DC provision of the Plan; that is, to cross-subsidize. The majority decision of the Court authored by Justice Rothstein held confidently and succinctly that it could be so used, provided that DC members were also beneficiaries of the original DB trust.
On this latter requirement, the initial 2000 Plan amendment that added the DC provision was, to be kind, unclear. Not to be deterred on its path, however, the majority of the Court upheld the Tribunal's decision that a retroactive amendment to the Plan clarifying that DC members were beneficiaries of the DB trust, thus enabling the cross-subsidization, was not prohibited by the Pension Benefits Act.
The SCC's endorsement of this aspect of the Tribunal's decision may signal a new willingness to hold employers to a less rigorous standard with respect to plan drafting and to allow the employer's intent to rule the day in pension disputes. Although it is certainly preferable to have all plan documents precisely reflect the employer's intent, if some scope for stylistic flexibility is henceforth to be afforded employers and their professional advisers, that would be most welcome.
Ultimately, the majority found that, with the retroactive amendments, there was one plan and one trust fund and that the use of the trust funds for the benefit of the DC members did not infringe the exclusive benefit provisions. The majority did not examine the hypothetical question of whether treating DC members as beneficiaries of the same trust might potentially expose any of the assets in their DC plan accounts to a deficit that could subsequently arise in the DB portion of the pension fund.
On the issue of whether administrative expenses are properly payable from the Plan fund, the SCC agreed with the Court of Appeal and the Tribunal that reasonable plan expenses are payable out of a pension plan's assets unless the plan documents explicitly prohibit the practice. The SCC reasoned that the legitimacy and reasonableness of the costs incurred are the key issues when determining whether plan expenses can be paid from a pension fund and thus, where plan expenses are bona fide expenses necessary for the administration of the pension plan, such expenses can be paid out of the fund.
The SCC, however, went further than the Tribunal or Court of Appeal, and was more generous to employers. At paragraphs 60 and 65, Justice Rothstein delivered the following "gift" to plan sponsors:
"...in my view whether services are provided by third parties or the employer itself is immaterial as long as the expenses charged are reasonable and the services necessary."
"Where trust funds may be used for the payment of plan expenses for services required by the plan, the distinction between whether the services are provided by the settler or a third party is artificial. The only consideration is whether funds can be used to pay expenses and the legitimacy and reasonableness of the costs incurred. To the extent that the expenses at issue are bona fide expenses necessary to the administration of the pension plan, it should not matter whether the expenses are owed to a third party or to the employer itself. There is no reason in principle why the employer should be obliged to contract out such services."
The significance of the above passages will not be lost on any plan sponsor that devotes HR employees and long hours towards the administration of its plan and may be looking for some pecuniary reimbursement for such devotion.
Costs in pension litigation
While often referenced merely as a footnote or not at all in discussions on Kerry, the decision reached by all levels of court is also significant on the question of whether the pension plan at issue should fund the legal battles it spawns. The SCC laid down some broad principles as to when legal costs might be payable from a pension fund and, in the end, determined that the members' costs in relation to the present litigation were not payable from the Plan. The SCC agreed with the Court of Appeal in finding that where litigation is not solely about determining how to properly administer a pension fund, but is adversarial in nature, no costs are payable from the fund.
Further, it was recognized that consideration must be given to the significant economic fact that when an employer settles a pension trust it will often continue to have contribution obligations to the trust fund. In that case, awarding costs out of the pension fund could detrimentally impact the employer, as such a cost award would reduce the surplus and thereby accelerate the recommencement of employer contributions. Time will tell, but it would not be a surprising result if fewer pension cases make it to court when members face the prospect of paying their own expensive legal bill.
Standard of review
In what was effectively a bit of an about-face on the issue of the deference to be afforded the Tribunal, the SCC distinguished Monsanto and ruled that the Tribunal's decision on the issue of plan interpretation needed only be reasonable and not correct. This should be welcome news to the true experts who sit on and devote countless hours to the Tribunal, and whose decisions may therefore turn out to prove more frequently the last word on the pension cases they hear.
While this final chapter of the Kerry saga will, undoubtedly, be fiercely debated in the coming weeks and months, if not years, employers can finally breathe a collective sigh of relief on certain issues. Essentially, so long as plan documentation permits it, plan sponsors no longer have to question the permissibility of cross-subsidization or the payment of plan expenses from the plan's assets. In fact, if expenses may be paid from the plan, plan sponsors should henceforth be able to recoup from the pension fund the cost of reasonable and necessary administrative services provided to administer the pension plan in-house. Finally, plan sponsors may even be able to breathe a bit easier now, knowing that less-than-perfect drafting of plan documents will not always be catastrophic.
Some commentators will no doubt argue that Kerry will further erode the security net for employees participating in pension plans with both DB and DC components. But in the end, the Kerry case may actually prove to encourage the continuation of more DB and/or DC pension plans since, with this decision, they may have just become more feasible for many plan sponsors.