On August 7, the Supreme Court of Canada (SCC) released its
highly anticipated decision in the Kerry case.1
The decision provides certainty and direction on a number of issues
relevant to nearly every pension plan sponsor in Canada. The
decision sets out the following principles:
- Where the plan documents do not forbid it, defined benefit (DB)
surplus may be used to fund (i.e. to "cross-subsidize")
defined contribution (DC) contributions;
- Where the plan documents do not forbid it, reasonable and
appropriate plan expenses may be paid out of the pension
fund;
- Where expenses may be paid out of the pension fund, employers
that perform some of their pension plan administration in-house may
charge reasonable expenses associated with such administration to
the fund;
- Retroactive amendments to pension plans are valid if authorized
by statute;
- Costs associated with pension litigation will not be
automatically paid out of the pension fund; and
- The Ontario Financial Services Tribunal will receive considerable deference in its decisions concerning the interpretation of a pension plan text or the interplay between the Pension Benefits Act and a plan text.
More generally, Kerry sounds a retreat from the rote
application of trust-law principles to the resolution of pension
plan disputes, an approach that has held sway in the courts for
much of the past two decades in Canada.
Background
Before reaching the SCC, Kerry originated from two
decisions of Ontario's Superintendent of Financial Services
(the Superintendent), which were then appealed successively to the
Financial Services Tribunal (the Tribunal), the Divisional Court,
and the Ontario Court of Appeal.
Kerry (Canada) Inc. (the Company) sponsored a defined-benefit
pension plan (the Plan) established by a predecessor corporation in
1954. The original Plan trust provided that contributions to the
Plan were to be used for the "exclusive benefit" of Plan
members and, other than to specify that trustee fees must be paid
by the employer, was silent on the payment of plan expenses. In
1975, the Plan text was amended to allow for third-party plan
expenses to be paid from the pension fund, although it was not
until 1985 that the Company actually started paying such expenses
out of the fund. In 1985, the Company also began taking
contribution holidays as the Plan had accumulated a substantial
surplus.
In 2000, the Company amended the Plan, introducing a DC provision.
When the DC provision was introduced, existing members were given
the option of converting their defined benefits to the DC provision
or remaining in the DB provision of the Plan. The DB component was
closed off to new members, all of whom were steered into the DC
component. The 2000 amendment to the Plan creating the DC provision
established a new funding vehicle for the latter, which was
seemingly separate from the DB trust.
Following the amendment in 2000, a group of former employees and
current plan members asked the Superintendent to invalidate the
contribution holidays that the Company had taken since 1985, the
Company's use of pension fund assets to pay plan expenses, and
its use of the surplus from the DB provision to fund the DC
provision.
The case then went to the Tribunal, which delivered decisions on
the expenses and cross-subsidization issues, and also addressed
whether the members' litigation costs were payable out of the
Plan's assets. On the expenses issue, the Tribunal essentially
said that the "exclusive benefit" language in the
Plan's original 1954 trust permitted expenses incurred for the
primary benefit of members to be payable from the Plan's assets
and that a pension plan's administrative expenses are incurred
for the primary benefit of its members. On the cross-subsidization
issue, the Tribunal blessed the practice of using DB surplus to
fund DC contributions in principle, but required the Company either
to retroactively amend the Plan to make DC members beneficiaries of
the DB trust or to repay the contribution holiday it had enjoyed
through cross-subsidization. The Company chose the
retroactive-amendment approach. On costs, the Tribunal ruled that
it did not have the authority to order costs be paid from the Plan
fund.
At the Divisional Court, where the hearing took place immediately
following the SCC's 2004 decision in the Monsanto
case,2 the Court determined that the Tribunal's
decisions were to be reviewed on a correctness standard (i.e. the
Tribunal had to be correct in law in its analysis and not just
reasonable as to its decisions) and that the Tribunal was wrong on
the cross-subsidization and expenses issues. The Company was
ordered to repay an amount equal to all the expenses it had paid
out of the fund since 1985, and the 2000 amendment adding the DC
provision was held to be invalid. The Divisional Court did hold,
however, that the parties' legal costs were not payable from
the Plan.
In 2007, at the Ontario Court of Appeal, the Company won on all
material points. In what was heralded as an employer-friendly
decision by Justice Eileen Gillese, the Court distinguished
Monsanto and determined that the Tribunal's original
decisions needed only to be reasonable and not, as the SCC had
suggested only three years prior, correct. It endorsed the
Tribunal's decisions on the payment of expenses and
cross-subsidization. Laying down very broad principles that could
be made applicable to many pension plans, Justice Gillese
determined that there is nothing inherently wrong with using DB
surplus to fund DC contributions where the plan text and trust
agreement in question do not prohibit it. On the expenses issue,
she also concluded that unless explicitly prohibited by a pension
plan text, expenses that are reasonable and appropriate in the
administration of a plan may be paid out of the Plan fund to
third-party service providers, though not to the
employer/administrator itself.
The SCC granted the members leave to appeal.
Supreme Court of Canada decision
Cross-subsidization
The most contentious issue in Kerry, as evidenced by
the dissent on this issue of Justices LeBel and Fish,3
was whether surplus accumulated in the DB provision of the Plan
could be used to satisfy employer contributions to the DC provision
of the Plan; that is, to cross-subsidize. The majority decision of
the Court authored by Justice Rothstein held confidently and
succinctly that it could be so used, provided that DC members were
also beneficiaries of the original DB trust.
On this latter requirement, the initial 2000 Plan amendment that
added the DC provision was, to be kind, unclear. Not to be deterred
on its path, however, the majority of the Court upheld the
Tribunal's decision that a retroactive amendment to the Plan
clarifying that DC members were beneficiaries of the DB trust, thus
enabling the cross-subsidization, was not prohibited by the
Pension Benefits Act.
The SCC's endorsement of this aspect of the Tribunal's
decision may signal a new willingness to hold employers to a less
rigorous standard with respect to plan drafting and to allow the
employer's intent to rule the day in pension disputes. Although
it is certainly preferable to have all plan documents precisely
reflect the employer's intent, if some scope for stylistic
flexibility is henceforth to be afforded employers and their
professional advisers, that would be most welcome.
Ultimately, the majority found that, with the retroactive
amendments, there was one plan and one trust fund and that the use
of the trust funds for the benefit of the DC members did not
infringe the exclusive benefit provisions. The majority did not
examine the hypothetical question of whether treating DC members as
beneficiaries of the same trust might potentially expose any of the
assets in their DC plan accounts to a deficit that could
subsequently arise in the DB portion of the pension fund.
Plan expenses
On the issue of whether administrative expenses are properly
payable from the Plan fund, the SCC agreed with the Court of Appeal
and the Tribunal that reasonable plan expenses are payable out of a
pension plan's assets unless the plan documents explicitly
prohibit the practice. The SCC reasoned that the legitimacy and
reasonableness of the costs incurred are the key issues when
determining whether plan expenses can be paid from a pension fund
and thus, where plan expenses are bona fide expenses necessary for
the administration of the pension plan, such expenses can be paid
out of the fund.
The SCC, however, went further than the Tribunal or Court of
Appeal, and was more generous to employers. At paragraphs 60 and
65, Justice Rothstein delivered the following "gift" to
plan sponsors:
"...in my view whether services are provided by third parties
or the employer itself is immaterial as long as the expenses
charged are reasonable and the services necessary."
"Where trust funds may be used for the payment of plan
expenses for services required by the plan, the distinction between
whether the services are provided by the settler or a third party
is artificial. The only consideration is whether funds can be used
to pay expenses and the legitimacy and reasonableness of the costs
incurred. To the extent that the expenses at issue are bona fide
expenses necessary to the administration of the pension plan, it
should not matter whether the expenses are owed to a third party or
to the employer itself. There is no reason in principle why the
employer should be obliged to contract out such
services."
The significance of the above passages will not be lost on any plan
sponsor that devotes HR employees and long hours towards the
administration of its plan and may be looking for some pecuniary
reimbursement for such devotion.
Costs in pension litigation
While often referenced merely as a footnote or not at all in
discussions on Kerry, the decision reached by all levels
of court is also significant on the question of whether the pension
plan at issue should fund the legal battles it spawns. The SCC laid
down some broad principles as to when legal costs might be payable
from a pension fund and, in the end, determined that the
members' costs in relation to the present litigation were not
payable from the Plan. The SCC agreed with the Court of Appeal in
finding that where litigation is not solely about determining how
to properly administer a pension fund, but is adversarial in
nature, no costs are payable from the fund.
Further, it was recognized that consideration must be given to the
significant economic fact that when an employer settles a pension
trust it will often continue to have contribution obligations to
the trust fund. In that case, awarding costs out of the pension
fund could detrimentally impact the employer, as such a cost award
would reduce the surplus and thereby accelerate the recommencement
of employer contributions. Time will tell, but it would not be a
surprising result if fewer pension cases make it to court when
members face the prospect of paying their own expensive legal
bill.
Standard of review
In what was effectively a bit of an about-face on the issue of
the deference to be afforded the Tribunal, the SCC distinguished
Monsanto and ruled that the Tribunal's decision on the
issue of plan interpretation needed only be reasonable and not
correct. This should be welcome news to the true experts who sit on
and devote countless hours to the Tribunal, and whose decisions may
therefore turn out to prove more frequently the last word on the
pension cases they hear.
Conclusion
While this final chapter of the Kerry saga will,
undoubtedly, be fiercely debated in the coming weeks and months, if
not years, employers can finally breathe a collective sigh of
relief on certain issues. Essentially, so long as plan
documentation permits it, plan sponsors no longer have to question
the permissibility of cross-subsidization or the payment of plan
expenses from the plan's assets. In fact, if expenses may be
paid from the plan, plan sponsors should henceforth be able to
recoup from the pension fund the cost of reasonable and necessary
administrative services provided to administer the pension plan
in-house. Finally, plan sponsors may even be able to breathe a bit
easier now, knowing that less-than-perfect drafting of plan
documents will not always be catastrophic.
Some commentators will no doubt argue that Kerry will
further erode the security net for employees participating in
pension plans with both DB and DC components. But in the end, the
Kerry case may actually prove to encourage the
continuation of more DB and/or DC pension plans since, with this
decision, they may have just become more feasible for many plan
sponsors.
Footnotes
1 Nolan v. Kerry (Canada) Inc. 2009 SCC
39.
2 Among other things, the Monsanto decision determined
that the Tribunal was not endowed with any particular expertise in
the interpretation of the Pension Benefits Act. As such,
the SCC held in Monsanto that as a matter of
administrative law, the Tribunal's decisions were to be
reviewed on the higher "correctness" standard as opposed
to a more deferential "reasonableness" standard.
3 The Supreme Court's decision in Kerry was unanimous
on all other issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.