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On August 7, 2009, the Supreme Court of Canada (SCC) released its long-awaited decision in Nolan v. Kerry (Canada) Inc. (Kerry). This case, which had a long history of hearings before the Financial Services Tribunal of Ontario (FST) and the province’s divisional and appellate courts, raises numerous issues relating to an employer’s obligations to members of its pension plan. In a decision welcomed by sponsors of employee pension plans, the majority of the SCC ruled in favour of the employer on all counts.
The majority held that the employer could amend the pension plan (Plan) to pay expenses from the pension fund (Fund) despite the exclusive benefit language, was entitled to take contribution holidays and could fund its contributions to the defined contribution (DC) portion of the plan with the surplus in the defined benefit (DB) portion. In addition, the SCC found that this was not an appropriate case to order the payment of litigation costs from the Fund.
The Facts
In 1954, the Canada Doughnut Company (CDC) established the Plan as a contributory DB plan for its employees. Following a 1994 asset purchase agreement, Kerry assumed the Plan and became its sponsor and administrator. The original trust agreement stated that contributions were to be used for the exclusive benefit of Plan members, retirees and other beneficiaries. The employer paid all Plan expenses between 1954 and 1984. Amendments to the Plan in 1985 and 1987 provided that third party expenses, such as actuarial, investment management and audit services, would be paid from the Fund.
In 2000, the Plan was amended to introduce a DC component. All new employees were required to join the DC component, while existing plan members had the option of switching to DC or remaining in the DB portion of the Plan. The 2000 amendment also provided that the surplus in the DB component could be transferred to the DC component and used to satisfy employer contribution requirements to DC accounts. The employer had taken DB contribution holidays since 1985, and had used the Plan surplus to cover its DC contributions since 2000.
The Plan members objected to Kerry’s use of the Fund, arguing that it violated the term of the trust that stated that the Fund was for the exclusive benefit of Plan members. The FST upheld the employer’s use of the Fund, and the members appealed to the Divisional Court. The Divisional Court reversed many of the FST’s findings, and an appeal was brought to the Ontario Court of Appeal (OCA). In June, 2007 the OCA unanimously ruled in favour of the employer, restoring the FST decision. Specifically, it held that Kerry could amend the Plan to permit use of the pension fund to pay administrative expenses and that contribution holidays were permitted for both the DB and DC components of the Plan. The OCA found that the Plan could be amended to introduce a new category of members to the pension plan (i.e. a DC category) and extend the contribution holiday to that category. The members brought an application for leave to appeal to the SCC, which was granted in February 2008, and the case was heard in November 2008.
The Decision
The SCC’s ruling on the substantive issues is discussed below.
Plan Expenses
With the exception of the consulting fees relating to a study of the possibility of introducing a DC component to the Plan, the SCC found that Kerry could validly amend the Plan to permit the payment of expenses from the Fund. The SCC rejected the members’ argument that expenses could never be paid from the Fund because the Plan did not explicitly permit such payment from its inception.
The SCC also rejected the argument that the payment of plan expenses from the fund violated the terms of the pension trust because the payment was not for the “exclusive benefit” of members. The majority stated that, as the payment of Plan expenses is necessary to ensure the Plan’s continued integrity and existence, and as the existence of the Plan is a benefit to the members, it is therefore to their exclusive benefit that such expenses are paid out of the Fund. Similarly, using funds from the Trust to pay reasonable expenses did not constitute a partial revocation of the trust, as the payment did not constitute an attempt by Kerry to control trust funds, which would violate trust law principles.
As a result, the majority concluded that, in the absence of an obligation requiring Kerry to pay Plan expenses, it was possible to amend the Plan to state that funds in the Trust can be used to pay reasonable and bona fide expenses. The SCC noted that this conclusion would apply regardless of whether the expenses related to services provided by third parties, or by the employer itself. The majority’s statement permitting the reimbursement of a plan sponsor for services it provides to a pension plan is an expansion of the conclusion reached by the OCA in its decision.
DB Contribution Holidays
When a plan’s documents provide that funding requirements will be determined by actuarial practice, an employer may take a contribution holiday unless other plan wording or legislation prohibits it. This principle has been well established since the SCC’s 1994 decision in Schmidt v. Air Products Canada Ltd. (Schmidt). As no wording was found in the present case to prohibit the practice, the majority found that Kerry was entitled to take contribution holidays with respect to the DB portion of the Plan.
Funding DC Contributions with DB Surplus
Regarding the contribution holiday for the DC portion of the Plan, the majority concluded that the FST’s decision to allow it, once the appropriate retroactive Plan amendments were made, was not unreasonable. After reviewing the Plan documents, the majority found it was reasonable for the FST to conclude there was one plan for both DB and DC members, and (following the amendments) there was one trust, and therefore applying assets in the Fund towards DC contributions did not violate the exclusive benefit language of the pension trust or constitute a partial revocation of the trust. The majority noted that it is possible to have different classes of members within the Plan yet allow all classes to benefit from the assets in the Fund.
The majority found that permitting the funding of the DC portion of the Plan with surplus from the DB portion does not contravene the Plan’s exclusive benefit provisions. The Plan and trust were not terminated and, in the absence of such a termination, no actual surplus vested with the members of the DB portion, so their interest in the surplus was therefore only to ensure that the funds cannot be withdrawn or misused, which the majority found had not occurred.
In partially dissenting reasons, two justices concluded that Kerry’s use of DB surplus to fund its DC contribution obligations constituted a breach of the Plan’s provisions, largely because they viewed the DC portion as a separate and distinct plan, and therefore that the breach could not be corrected by retroactively amending the Plan’s terms. Accordingly, the dissent found that the OCA erred in upholding the FST’s decision on contribution holidays and the retroactive amendment remedy it proposed.
Payment of Costs
There are two components to the cost issue. The first is whether the FST was correct in stating it lacked the authority to order costs payable from the Fund, while the second is whether the OCA correctly determined that the present case was not one where it was appropriate to order the payment of litigation costs from the fund.
On the first matter, the SCC agreed with the FST that the Tribunal could not order costs payable from the Fund as the Fund was not a party to the litigation. On the second matter, while noting that the award of costs is ultimately discretionary, the SCC found that the OCA was correct in not awarding the members’ litigation costs payable from the Fund. It found that such an award would not have been appropriate as the litigation was adversarial in nature and was not advanced for the benefit of all Plan members. Finally, the SCC found that ordering the payment of costs from the Fund would penalize the employer by reducing the assets in the Fund – which would eventually lead to the need for more employer contributions.
Implications
While Kerry is based on the legal and regulatory system in Ontario, the conclusions in the SCC’s decision come as welcome news to plan sponsors across Canada (regardless of jurisdiction), as they provide considerable flexibility in the payment of expenses from a pension fund (even if the historical documents did not originally permit this) and satisfying DC contribution obligations using DB assets. It also provides comfort to plan sponsors who have taken, or were planning to take, steps similar to those taken by the plan sponsor in Kerry. Despite this decision, plan sponsors must still exercise caution when determining how to proceed regarding a plan conversion or dealing with the payment of expenses. For example, if a plan sponsor wishes to use DB assets to satisfy DC contributions, it is essential that the plan documentation is constructed properly to ensure that it is clear that the DC provisions are part of the same plan and that all plan members can be considered beneficiaries of the assets in the pension fund.
Similarly, this decision should not be taken as authority for paying all plan expenses from the pension fund. In order to be paid from the fund, the expenses must be reasonable and must relate to the proper administration of the plan – expenses relating to services performed solely for the benefit of the plan sponsor generally should not be charged to the fund. For example, it was found in Kerry that fees paid to a consulting firm to analyze the possibility of adding the DC provisions to the Plan were improperly paid from the Fund and the sponsor agreed to reimburse the Fund.
As always, what is possible in a given case will be determined based on its own facts and the terms of the relevant plan documents.
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