Following the e-Alert you received recently, please find below a more detailed analysis of the Kerry Case.1
The August 7, 2009 decision of the Supreme Court of Canada ("SCC") in the Kerry case2 essentially upholds the findings of the Ontario Court of Appeal ("OCA") from 2007. This case is a landmark case for employers and explored several important issues relating to modern pension plans in Canada.
- Provided that certain requirements are met, where there is a single, ongoing pension plan with both a defined benefit ("DB") and a defined contribution ("DC") component, the employer may lawfully take DC contribution holidays under the Pension Benefits Act (Ontario) ("PBA") and the common law.
- Vis-à-vis payment of pension plan expenses, unless an employer has clearly committed to paying a plan expense, it is not obliged to do so and it is not unlawful to charge reasonable and bona fide expenses to the pension trust fund (including bona fide expenses of the employer for "in-house" administration).
- The amendment of a pension plan to allow the employer to charge reasonable plan expenses to the plan trust fund is not prohibited merely because the trust agreement or pension plan (or both) contains an "exclusive benefit" clause.
While the decision deals with an Ontario plan, the principles of the SCC’s ruling should have application in respect of other pension standards laws outside of Québec, subject to specific prohibitions in those laws.
In 1954, the Canadian Doughnut Company Ltd., which later became DCA Canada Inc., established a defined benefit plan, the assets of which were held in trust. In 1994, DCA Canada Inc.’s parent sold all of its shares to the parent of Kerry (Canada) Inc. ("Kerry") and Kerry acquired all assets and liabilities of DCA Canada Inc.
Before 1975, the pension plan document had no provision for the payment of plan expenses. It provided that all contributions made by the employer "were irrevocable" and could only be used "exclusively for the benefit of" members. The trust agreement provided that "no part of the corpus or income of the fund shall revert to the Company or be used or diverted to purposes other than for the exclusive benefit" of the members. The expenses incurred by, and all other charges and disbursements of, the trustee were to be paid by the employer. It also provided that no amendment "shall authorize or permit any part of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit" of members unless approved by the Minister of National Revenue.
In 1975, the employer amended the plan to allow it to direct fees of the trustee, investment counsel and other fund manager to be paid from the plan fund as well as other expenses reasonably and properly incurred by the fund manager or the employer. In 1987, this provision was amended to allow for the payment of all normal and reasonable expenses incurred in the plan’s operation, including those for actuarial, consulting, administrative, investment management and auditing services, and government filing fees. In 2000, Kerry further expanded this provision to provide the payment of all costs and expenses incurred by the employer as administrator of the plan or by its agents and advisors, including actuarial, consulting, legal and accounting fees and disbursements, expenses relating to the addition of a defined contribution option and expenses incurred in the winding up of the plan.
From 1954 to 1985, the employer made all required employer contributions. In 1965 the terms of the pension plan were amended to specifically refer to actuarial discretion in determining the employer’s contribution obligations. However, it was not until 1985 when the employer commenced a lengthy contribution holiday.
From 1954 to 1984, all plan expenses were paid by the employer. After 1983, certain plan expenses were paid out of the plan fund. In 1994, DCA reimbursed the plan fund for trustee fees paid from the plan fund before 1994. After its assumption of the plan, Kerry continued to have plan expenses, other than trustee fees, paid from the plan fund.
In 2000 Kerry amended the pension plan to add a DC component. The plan was thus made up of Part 1 for DB plan members and Part 2 for DC members. Existing plan members were given a one-time option to convert their DB accruals to DC benefits and all new employees became DC members. The DC component featured employee accounts and these accounts were maintained pursuant to an insurance policy which presumably consisted of a contract between the insurer and Kerry. The plan provisions seem to have provided that DC members were not entitled to benefit under the original pension fund (which was restricted to DB members). The plan provisions also provided that the employer was permitted to take contribution holidays in respect of the DC members from the trust fund.
Certain plan members objected to a number of activities by Kerry in respect of the plan, including the implementation of the DC component and ultimately the proposed employer contribution holidays. They also took issue with certain plan expenses which Kerry had paid from the pension trust fund.
On April 22, 2002, the Superintendent of Financial Services issued two notices of proposal ("NOP") under section 87 of the PBA. In the first NOP, the Superintendent proposed to refuse to make certain orders requested of him relating to the 2000 pension plan amendments, including the refusing to register the plan amendments which added the DC component and to challenge Kerry’s ability to take a contribution holiday under the plan. The second NOP proposed an order requiring Kerry to reimburse the plan fund for all expenses paid out of the plan fund after January 1, 1985 and for all income that the plan fund would have earned had the expenses not been paid from it. With respect to the first NOP the employee group requested, and with respect to the second NOP Kerry requested, a hearing before the Financial Services Tribunal.
Summaries of pre-SCC Decisions
The following summary of the Tribunal and lower courts decisions are restricted to the issues of the DC contribution holiday and plan expenses. The issues of the standard of review of the Tribunal’s decision and orders on costs of the plan members from the pension fund are discussed only in the review of the SCC decision.
On the issue of the contribution holidays, the Tribunal noted that the contribution holidays were not taken until after the plan amendment in 1965 had been adopted. It identified salient case law, and ruled that the legislation was permissive with regard to DB contribution holidays and that the 1965 amendments were valid and effective to allow the employer to take a DB contribution holiday. Accordingly, the DB contribution holidays taken from 1985 were lawful. With respect to the DC contribution holidays, the Tribunal noted that the 2000 plan amendments were not effective to permit lawful contribution holidays since the structure of the amended plan was such that the DC members were not included as beneficiaries of the pre-existing trust fund. Allocating assets from the trust fund to the member accounts under the DC provisions would result in the allocation of assets from the trust fund in violation of the "exclusive benefit" provision in the trust agreement. The "exclusive benefit" provision forbids the use or diversion of assets in that trust fund:
to purposes other than for the exclusive benefit of such persons or their beneficiaries or personal representatives as from time to time may be designated in the Plan except as therein provided. [emphasis added]
The Tribunal also opined that the terms of the pension plan could be amended, with retroactive effect, to include the DC members as beneficiaries of the trust fund. Provided this was done, DC contribution holidays would be lawful because the terms of the trust agreement and the plan text contemplated that the class of beneficiaries could be amended to include other persons "designated in the Plan", and retroactive plan amendments are permitted under ss. 13(2) of the PBA. Accordingly, the Tribunal directed the Superintendent to deny registration of the 2000 plan amendments and, if the plan was not amended within 90 days of the order to make the DC members beneficiaries of the trust fund, Kerry would be required to re-imburse the pension fund for all DC contribution holidays taken since 2000.
On the issue of expenses, the Tribunal held that expenses relating to the plan were for the exclusive benefit of members in the sense of the terms of the trust. It reasoned that this term means expenses for the "primary benefit" of the members "since no such expense can fairly be said to be for the exclusive benefit of the members on a strict literal view of that expression." The only expenses that the Tribunal found not to be for the primary benefit of members were consulting fees relating to the addition of the DC option to the plan in 2000.
With respect to the DC contribution holidays, the Divisional Court took the view that the Tribunal erred in its conclusions, largely because it determined that there were two pension plans, not one, since 2000. It concluded that, because there were two pension plans the use of surplus in the DB component was an unlawful "cross-subsidization" of one plan from another and determined that the remedy of revising the 2000 plan amendments was not permitted as it resulted in an unlawful revocation of the 1954 trust by adding as beneficiaries of the trust persons who were not even members of the plan to which that trust related.
On the topic of expenses, the Divisional Court also disagreed with the Tribunal, holding that the power to amend was subject to the "exclusive benefit" proviso and that the plan amendments were therefore invalid because they purported to revoke the trust in whole or in part.
Ontario Court of Appeal
On the topic of the DC contribution holidays, the OCA disagreed with the Divisional Court and sided with the Tribunal. It held that there was only one pension plan and that there was no reason to disturb the Tribunal’s proposed remedy of amending the plan terms to make clear that the DC members are beneficiaries of the trust fund. The OCA gave five reasons for so concluding: (1) consistent with the approach outlined in the Schmidt case3 there was nothing in the plan terms which precluded employer contribution holidays, (2) section 9 of the regulations under the PBA contemplated DC contribution holidays on a full conversion from a DB plan to a DC plan and, while the Kerry plan was not the subject of a full conversion, this feature of the PBA signalled that the legislation did not preclude DC contribution holidays, (3) Kerry had authority under the plan documents to unilaterally amend the plan to add a new category of plan member, (4) if a new category of member was added, Schmidt allowed a contribution holiday, and (5) "cross-subsidization" was not precluded by the trust agreement, as what was precluded was using assets of the trust for other than the exclusive benefit of beneficiaries. Once the amendments outlined by the Tribunal were made, the DC members became beneficiaries of the trust.
On the topic of expenses, the OCA found that the PBA did not contain any provision governing the payment of pension plan expenses, and no principles of law require the employer to pay such expenses. It stated as a starting point that "if, in the documentation, the company undertook to pay the Plan Expenses, it must do so, unless that undertaking was validly amended." The OCA found that, although the employer had undertaken to pay the trustee’s fees and expenses in the trust agreement, it had not done so in respect of the other services such as actuarial, accounting and investment functions that a pension plan of this nature might require. As neither silence nor the employer’s voluntary assumption of plan expenses for a period of time created a legal obligation, the trust fund would bear the expenses in accordance with general trust law and principles.
Supreme Court of Canada
The SCC ruled on several issues, and the court’s rulings are discussed in the order of appearance in its decision.
Standard of Review
On this topic, the SCC reviewed recent administrative case law and determined that in the matter at issue, because it involved a review of pension plan documentation and, in respect of the costs issue, the Financial Services Commission of Ontario Act, the applicable standard of review was reasonableness. This is to be contrasted with the higher standard of review of "correctness" which the SCC ruled applicable in the Monsanto decision4 a few years ago. As a practical matter, this means that so long as the Tribunal’s decision is found to be reasonable the courts will not overturn it. This part of the decision is interesting since the SCC in Monsanto had concluded that the standard of review for the Tribunal in interpreting subsection 70(6) of the PBA, relating to surplus distribution on partial wind up was the higher standard of correctness. It is interesting, however, that one of the reasons given for the lawfulness of the DC contribution holidays is that the PBA does not prohibit it, which naturally involves the application of and, presumably, the interpretation of the PBA.
The SCC agreed with the OCA on the disposition of the expenses issue. It agreed that the trust agreement merely required the employer to pay for trust expenses but was silent on the issue of plan expenses. It also agreed that these are distinct types of expenses and concludes that, while the overall pension program consists of the plan and the pension trust fund, these are different elements of a whole. However, the SCC noted that the Tribunal was justified in looking at expenses individually rather than lumping everything to do with the pension plan in the same category and agreed that the consulting fees which the Tribunal had excluded from permitted expenses should not be payable from the pension fund. The SCC rejected the employee committee’s arguments that charging plan expenses to the trust fund violated an amendment made to the trust agreement made in 1958 (which added reference to the employer paying taxes, interest and penalties incurred by the trust), and constituted a benefit to the employer and so violated the "exclusive benefit" provision of the trust agreement. On the latter point, the SCC agreed with the OCA that the term "exclusive benefit" does not mean that the only persons who may benefit are the employees and noted that there is always some incidental benefit to an employer in having a pension plan (such as attracting and retaining employees) and to the employees’ families in the income security the plan provides. Ultimately, the existence of the plan is a benefit to the employees, the payment of expenses is necessary to continue the plan and so for the purposes of the "exclusive benefit" clause, the expenses may be said to be for the exclusive benefit of the plan participants.
In another important element of its decision, the SCC, like the OCA, rejected claims that the payment of plan expenses from the pension fund constituted a "revocation of trust" and concluded that payment of reasonable fees for services necessary in the administration of the plan "whether the services are provided by third parties or the employer itself" are not prohibited. The SCC found that payment of in-house administration expenses of an employer charged to the fund do not constitute an unlawful encroachment on the assets of a pension trust fund as long as the employer did not commit to bear these expenses itself and the expenses are bona fide, necessary and reasonable.
DB Contribution Holidays
The SCC found that while the 1965 plan amendments were valid and explicitly included actuarial discretion thus fitting within the tests for valid DB contribution holidays enunciated in Schmidt, even the 1954 plan provisions implied the notion of actuarial discretion since such discretion was called for to determine "such amounts [of employer contribution] as will provide" for the benefits. Accordingly, the SCC found DB contribution holidays were permitted under the plan terms.
DC Contribution Holidays
On the issue of the use of surplus by the employer to fulfill its DC contribution requirement, two justices would have ruled that such contribution holidays were unlawful. The main point of divergence consists of a disagreement over the nature of the plan. The majority agreed with the OCA that there was a single pension plan at issue, while the minority concluded that there were effectively two distinct pension plans.
The majority concluded that the DB and DC components were part of a single plan for the following reasons: (1) on the facts it found that there was an intention that there be a single plan, (2) nothing in the PBA or at common law prevents a plan with DB and DC components, (3) trusts may have different classes of beneficiaries, (4) the case law relating to plan mergers, which the employees argued provides that commingling of assets from two separate plans was not permitted, was not applicable since the addition of the DC component did not result from merger and there was a unified category of plan members — employees of Kerry or its predecessor.
The majority also concluded that the PBA regulations do not prohibit taking a DC contribution holiday. It found support for the proposition that DB surplus can be applied to DC contribution holiday in subsection 7(3) of the PBA regulations. The SCC also ruled that a retroactive plan amendment is permitted by subsection 13(2) of the PBA and so the remedy proposed by the Tribunal was lawful. The majority ruled that the proposed plan amendment could be distinguished from the "re-opening" of a closed pension plan which was criticized in the Buschau line of cases. Like the OCA, the SCC concluded that the pension trust in the instant case was not for a closed group of plan members and it was within Kerry’s power of amendment to add the DC plan members as beneficiaries of the pension trust fund.
One issue the majority does not seem to focus on in detail is how the DC funding vehicle is to be held. The court focuses on the plan amendments which are sufficient to allow the DC contribution holiday and does not prescribe how the DC funding vehicle is to be held.
The minority would have ruled against the DC contribution holiday and would have required Kerry to contribute to the trust fund an amount equal to the foregone contributions for the following reasons: (1) there were two distinct plans and two distinct trust funds, (2) the notion of surplus is foreign to a DC plan, (3) the only instance in which the PBA allows a contribution holiday is on a full plan conversion (pursuant to subsection 7(3) of the PBA regulations), (4) the DC contribution holiday violates the "exclusive benefit" provisions of the trust agreement as there is no discernible benefit to the DB members (which, the minority concluded, remain the sole beneficiaries of the DB trust fund), (5) the amendments which purported to effect the addition of the DC members as beneficiaries of the trust fund were invalid despite the PBA provisions allowing retroactive amendments because to allow this would violate the exclusive benefit clause, and (6) even if the amendments were valid, there would still be an impermissible transfer of assets out of the pension trust fund to the DC funding vehicle which would constitute an unlawful revocation of the trust.
The SCC upheld the Tribunal’s decision that it had no authority to order costs from the pension fund since it has only the power afforded by its constating statute and can only order costs payable by a "party" before it. As the pension trust fund was not a party before it, the Tribunal concluded it could not order costs payable from it.
On the issue of the cost award against the employee group, the SCC upheld the OCA’s order and rejected the employee group’s assertion that costs should be payable from the pension trust fund. The SCC based its ruling on a number of points but most importantly found that where the proceedings are not merely aimed at the "due administration of the pension trust fund" and may be characterised as "adversarial", that cost awards should not be paid from the trust fund and should follow the normal rules of costs to the successful litigant. The court characterised the proceedings in Kerry as adversarial since not all beneficiaries would have a common interest or take the same position (e.g. here the DC members would not seem to benefit from the relief requested by the DB members).
Conclusions to be Drawn
With respect to DC contribution holiday issue, provided that (i) there is a single, ongoing pension plan with both a DB and a DC component, (ii) the members of both components are beneficiaries of the same pension trust fund, and (iii) the employer may lawfully take contributions holidays in respect of the DB component, it is not unlawful under the PBA or the common law to also apply the surplus in the trust fund to the employer’s contribution obligations under the DC component.
With respect to expenses, the absence of any reference to some or all expenses in the original plan and trust documentation allows the employer to ‘clarify’ its precise payment obligations. Whether plan documentation can be amended where there is no such gap is unclear. The payment of expenses by the pension fund does not amount to a revocation of trust even where such payment is made to the employer for in-house administrative services.
As for the ability to amend a plan to change responsibility for payment of plan expenses, it is difficult to say how this decision may apply. The OCA’s statement that an employer that has undertaken to pay expenses must do so "unless that undertaking was validly amended" suggests that it may be possible to provide for the payment of plan expenses by the pension fund even where the plan documentation was not originally silent on the point. The general power of amendment typically reserved in the plan documentation may be sufficient to allow this if, as in some of the cases reviewed by the SCC in Schmidt, the power of amendment is broad and subject only to the proviso that no amendment may reduce members’ entitlement to accrued benefits.
The way that the SCC distinguishes Markle5 suggests that it may be possible to use a broad power of amendment to have future "employer" costs paid from the fund, particularly if actual payment of each expense remains "subject to the approval, of the trustee". However, this issue remains far from settled and the answers will turn on the facts of each case.