Court Of Appeal Decision In Kerry Not A Panacea
By: Ian McSweeney & Louise Greig
On June 5, 2007, the Ontario Court of Appeal released its decision in Kerry (Canada) Inc. v. DCA Employees Pension Committee (Kerry). A key issue addressed by the Court of Appeal is what, if any, expenses can properly be charged to a registered pension plan. The Kerry decision, therefore, potentially impacts every employer, plan administrator, or trustee who, right now, is authorizing the payment of an invoice for a pension plan-related expense.
While the Court of Appeal decision was initially hailed as a big ‘win’ for plan sponsors, a sober second look discloses that a number of trouble spots remain. Contrary to some of the headlines, the Kerry decision does not give employers carte blanche to charge expenses to a pension fund. In addition, the case imposes a very high standard on administrators when communicating plan design changes to members.
What The Court Of Appeal Held
The Court of Appeal’s decision, in part, focused on the proper standard of legal review to be applied to the initial decision of the Ontario Financial Services Tribunal (FST) and the ability of the FST to award costs.
However, of particular interest to employers are the Court of Appeal’s findings on the substantive issues of the case. When is it acceptable for pension plan expenses to be paid from the pension fund? Is it permissible to use surplus assets in the Defined Benefit part of the pension plan to pay current service costs of the Defined Contribution part of the plan? What constitutes proper notice of an amendment that will, or could, adversely impact plan members on a going forward basis?
On these issues, the Court of Appeal held that:
- The extent to which expenses can be charged to a pension fund will depend upon the wording of the historic plan documents. Based on such documents in Kerry, plan administration expenses generally could be paid from the plan fund, except for trustee expenses which the employer had originally committed to pay.
- The employer could take contribution holidays with respect to the DB component of the plan as there was nothing in the original plan text and trust which prohibited contribution holidays. For similar reasons, the surplus in the DB portion of the plan could be used to meet the employer’s contribution obligations under the DC component of the plan, provided the plan was properly structured so as to make the members of the DC component beneficiaries of the plan’s DB fund.
- The conversion of a pension plan from a DB plan to a DC plan creates uncertainty and risk for the plan members. As such, it is an “adverse amendment” within the meaning of Ontario’s Pension Benefits Act and prior notice of the amendment must be given to affected members in accordance with Ontario’s pension legislation before registration. The notice provided in this case was not sufficient as it was misleading and incorrect in that it did not properly describe the legal effect of the election to convert.
The Kerry pension plan has a similar history to many plans in Canada. It involved a DB pension plan that was established in the 1950s and funded through a trust. The plan was amended in the 1970s to permit plan expenses to be paid from the plan fund and was amended again in 2000 to introduce a DC component. In 1985, the employer began taking contribution holidays from plan surplus and charging expenses to the plan. After the DC component was implemented, the surplus in the DB component was also used to take employer contribution holidays under the DC component.
A group of former plan members (including executives who had made some of the decisions being challenged) complained to the Ontario Superintendent of Financial Services about the payment of plan expenses from the plan fund and the taking of DB and DC contribution holidays, alleging that these activities constituted a breach of trust. The superintendent investigated the matter and took action on only some of the member complaints. A series of appeals followed. The FST rendered a decision that was generally favourable to the employer. However, the Ontario Divisional Court largely overturned that decision in favour of the plan members. The matter was then appealed to the Ontario Court of Appeal.
Historical Plan Documents Still Determinative
The Court of Appeal made it clear that the historic wording of plan and trust documents continues to be the key determinant when considering the ability of employers to pay plan administration expenses from the plan fund and to take contribution holidays. The requirement to undertake an analysis to determine whether contribution holidays are permissible is well-established in Canadian pension law. What was not clear before Kerry is what legal principles apply to such analysis in the determination of what plan expenses can validly be charged to a pension fund.
The Court of Appeal held that that there is nothing in trust law which prevents a trustee from charging properly incurred expenses to a trust fund. In fact, that is the norm, subject to the provisions of the particular trust agreement. In Kerry, the original trust agreement required the employer to pay trustee expenses, but was silent on the subject of other types of expenses – investment, accounting plan administration, and actuarial fees. All of the parties accepted that the employer was on the hook for the trustee expenses. The only issue was whether a 1975 amendment authorizing the charging other types of expenses to the pension fund was invalid because of “exclusivity” language in the original trust agreement.
The Court of Appeal held that the 1975 amendment was valid. In reaching this conclusion, the Court of Appeal held that the restrictive “exclusive benefit” language in the original trust agreement was directed at what the Court of Appeal referred to as “true amendments,” that is, amendments which changed a party’s rights or obligations. The court stated that the amendment authorizing the payment of other types of expenses from the fund did not affect existing rights or obligations as the employer had not expressly or impliedly assumed the obligation to pay the expenses other than trustee expenses from the fund when the plan was established.
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