The pension plans for institutions of higher learning are typically Defined Benefit Plans, which is to say that the employer institution’s contributions to the Plan must be sufficient to support defined pension benefits for its retired employees. This is in distinction to Defined Contribution Plans, which are much more common in the private sector. In Defined Contribution Plans, the contributions of the employer are fixed, and the ultimate benefits payable to retired employees is dependent on the success of the Plan in investing the contributions made to it.

On August 7th the Supreme Court of Canada released its decision in Nolan v Kerry (Canada) Inc. 2009 SCC 39. This decision is an important case for all employers who sponsor defined benefit pension plans not only because it contains a number of ground breaking rulings, but because it provides some clear guidance on a complex area of the law.

Facts

Kerry (Canada) Inc. (“Kerry”) established a defined benefit (“DB”) pension plan for its employees in 1954 (the “Plan”). In 1985 Kerry started to take contribution holidays with the result that by 2001, Kerry had taken contribution holidays of approximately $1.5 million. Also, starting in 1985, Kerry allowed third party Plan expenses to be paid out of the fund; the Plan documentation provided that the employer would be responsible to pay for trustee and expenses but was silent on all other expenses. In 2000 the Plan was further amended to provide existing employees with an option to convert to defined contribution (“DC”) benefits, and all new employees with DC benefits only. Finally, Kerry also used surplus assets from the DB part of the Plan, to fund obligations for the DC part of the Plan. After these latest amendments were made, an employees’ pension committee launched a complaint that would lead to a series of rulings over 9 years from the Ontario Superintendent of Financial Services, the Financial Services Tribunal, the Ontario Divisional Court, the Ontario Court of Appeal and the Supreme Court of Canada (“SCC”).

Issues and Decision

1. When is it lawful for employers to use fund surpluses to offset required employer contributions (i.e. “contribution holidays”)?

The SCC ruled that if the contribution formula in the plan language did not fix annual contributions, but rather was based on actuarial calculations (even if there was no actual reference to an actuary document), then an employer was entitled to take contribution holidays.¹

2. Is it lawful to combine DB and DC components in a single pension plan and trust? Can an employer retroactively amend the plan documents to add DC members as beneficiaries of the same trust as DB members?

As long as the provincial pension legislation and the plan documents did not specifically prohibit having DB and DC components in a single trust, then there were no common law reasons to prohibit this as long as all DB and DC members were beneficiaries of the same trust. Further, an employer can retroactively add DC members as beneficiaries of the same trust which had DB members because DC members would not take vested property rights from DB members.

3. Is it lawful for an employer to use accrued surpluses in a DB plan to fund contributions required in a DC plan?

Provided the plan was properly structured so that there was a single pension plan with both DB and DC components (i.e. per the criteria referred to in #2 above), and provided that the legislation was silent on the right to use a DB surplus to fund DC contributions, then it was lawful for an employer to use accrued surpluses in a DB plan to ‘fund’ contributions required by the DC components of the plan.

4. If the Plan documentation did not expressly permit the employer from deducting expenses from the fund, could the employer deduct Plan expenses?

The answer to this was yes. The SCC ruled that:

1. there was nothing in the common law that required Kerry to pay for Plan expenses,
2. the requirement of the employer to pay for trustee expenses (as provided in the Plan documents) related to the trust fund, which was different than the Plan which was the broader document dealing with issues of eligibility requirements, the form of benefits etc., and
3. in this case, the employer had the right to amend the Plan to allow for the deduction of Plan administration expenses from the Fund.

Of particular interest was the finding by the court that not only was the employer free to deduct third party expenses from the fund, but it could also deduct employer expenses provided that such expenses were bona fide expenses incurred in the administration of the Plan. The court concluded that the payment of expenses from the fund fell within the requirement that the fund be used for the “exclusive benefit of the trust beneficiaries” because the existence of the Plan was for the benefit of the beneficiaries and the expenses were necessary to ensure the Plan’s continued existence.

Note: Employers wondering if their DB plans would allow such expense deductions will have to review their existing plan documentation to see if plan expenses are specifically dealt with (Kerry’s Plan was silent on this point), and also have to consider whether, given the language of their plan, the plan can be lawfully amended to permit the right to charge expenses to the fund.

5. When will court ordered costs of the litigation involving the pension plan/fund be ordered payable from the trust, and when will such costs be payable by the litigants?

The court held that unless the costs were necessary for the true administration of the trust, then the normal principles for award of costs (i.e. to the successful litigant) would normally apply. In this case, the court decided that the challenge by the DCA Pension Committee was largely ‘adversarial’ in nature because the Committee ultimately wanted to have the contributions paid into the fund for the benefit of the DB members only, rather than all beneficiaries. Accordingly, the court ordered that the litigation was not aimed at the ‘due administration’ of the trust, and so the committee should bear the costs of their (ultimately) unsuccessful action.

While employers will consider this decision as ‘good news’, recent financial performance on pension fund investments likely means that not only are there no accrued surpluses in DB funds to allow for contribution holidays or to fund DC plan obligations, but many if not most employers are now facing significant unfunded liabilities in their DB plans. It will be interesting to see if our provincial legislatures will step in with new restrictions on the use of fund surpluses in the future.

¹ The SCC held that the following (original 1954 wording of the Plan) impliedly required actuarial calculations: “In addition to contributing the full cost of providing the Past Service retirement incomes referred to in Section 13(a) of the Plan, the Company shall also contribute, in respect of Future Service benefits, such amounts as will provide, when added to the Member’s own required contributions, the Future Service retirement incomes referred to in Section 13(b) of the Plan.”

* This article originally appeared in the August 20, 2009 edition of Clark Wilson’s Work Place Post newsletter