The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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December 2007

Leading Court Decisions of 2007

By: Greg Winfield

As 2007 drew to a close, it was evident that the maturation of the case law was continuing, particularly in the application of trust law principles. There was a trend to a deeper judicial appreciation and understanding of the complex amalgam of principles from the areas of employment law, basic contract law, and trust law that underpins ‘benefits law’ and the need to balance them appropriately to produce fair and predictable results.

One case that clearly shows this is the Kerry case. In Kerry (Canada) Inc. v. DCA Employees Pension Committee (Kerry), the Ontario Court of Appeal was asked to decide two primary issues. Was the employer entitled to:

Defined Contribution provision that had been added to a Defined Benefit plan

The court undertook a detailed review of plan expenses because the terms of the pension plan (the plan text and the trust agreement as amended) originally were silent on the issue, but had later been amended. The court found that silence does not automatically mean the employer is bound to pay expenses and, in this case, that the employer was permitted to amend the plan terms since doing so did not constitute a partial revocation of trust as none of the pension fund assets were actually returned to the employer.

This is one of only a handful of decisions on plan expenses and it would be imprudent to assume that all plan terms can readily be amended just because the court ruled in this case that the amendments were lawful. The second key element of Kerry was the decision on the ability of an employer to take contribution holidays in respect of the DC element of a plan. In short, the court found that:

The court found that because both DB and DC plan members were each beneficiaries of the single trust, there was nothing unlawful in applying surplus assets to meet the employer’s DC contribution obligation. The court observed that should there be a surplus in the pension fund on its wind-up, the members of the DC provision would be eligible to share in such surplus. This causes one to pause and wonder if there was a deficiency in the DB provision of the plan on its wind-up, would the DC plan members also be required to ‘share’ the deficiency?

‘Loser Pays’

The court also ordered, consistent with usual litigation practice of ‘loser pays,’ that the DCA group should pay the employer’s costs and that this group’s own expenses should not be paid from the pension fund. In making this decision, the court commented that, while other decisions have determined that there are real and novel issues at stake in pension litigation and ordered one or even all parties’ expenses paid from the pension fund, that was not appropriate in this case since not all plan members shared the same interests as the group at issue here.

Leave to appeal the Kerry decision has been sought from the Supreme Court of Canada.

Sutherland v. Hudson’s Bay Company (Ontario Superior Court) is a decision primarily relating to the issue of employer contribution holidays in respect of the DC provision of a combination plan and shows the importance of the issues addressed in Kerry as it involved a claim for an order requiring the employer to repay tens of millions of dollars in allegedly wrongful contribution holidays. Following the reasoning in the Kerry decision, the trial judge ultimately decided that there was no impediment to the employer adding new members to the plan and the pension trust (including a merger of two large DC plans with a historic DB plan in surplus) and then applying assets of the pension trust for their benefit. The court found that the new members were lawfully added as members of the plan as the trust did not have a closed class of beneficiaries and that amending the plan to add such individuals constituted no breach of fiduciary duty or bad faith by the employer.

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