The Kerry Appeal: More Uncertainty for Pension Plan Sponsors

With the Supreme Court decision to hear the Kerry appeal and an appeal of Sutherland pending, employers sponsoring hybrid pension plans are now back in a state of uncertainty. Can surpluses be used to pay employer DC contributions, or not?

The Kerry Timeline

It usually takes years for a dispute to reach the Supreme Court, and Kerry is no exception. Here’s a brief history of the case:

January/March 2004: In two decisions, the Ontario Financial Services Tribunal (FST) ruled that Kerry (Canada) Inc. (Kerry Canada) could not be reimbursed from the fund of its pension plan for expenses related to the addition of a DC provision to the plan, nor could it use the actuarial surplus to pay employer DC contributions without amending the plan to make DC members beneficiaries of the trust holding DB assets.

March 2006: The Ontario Superior Court ruled that historical plan documentation prohibited Kerry Canada from amending the plan to permit expenses to be paid from the plan fund. It also ruled that amendments to add a DC provision were invalid because advance notice had not been given to members, and that Kerry Canada could not use the actuarial surplus to pay employer DC contributions.

June 2007: The Ontario Court of Appeal overturns most of the Superior Court’s ruling, holding that amendments adding a DC provision to the plan were valid. It also ruled that Kerry Canada was entitled to pay plan expenses from the plan fund, to designate DC members as beneficiaries of the trust that held DB assets and to use the actuarial surplus to pay employer DC contributions.

Moving Forward—One Fund or Two?

The key issue in Kerry and Sutherland is the same—whether actuarial surplus can be used for employer DC contributions—but the fact scenarios are not. In Kerry, DB and DC assets were held in separate funding vehicles. The Superior Court’s 2006 ruling that employer DC contribution holidays amounted to a breach of trust made much of this separation, stating “Here, there are in law, two (2) pension plans, two (2) pension funds and two (2) classes of members”—a curious finding given that there was only one registered pension plan. In Sutherland, DB and DC assets were held in a single trust and in that case, the Superior Court held that the DC contribution holidays were acceptable because they were “consistent with the purposes of the plan” and did not “remove assets from the Trust fund.” This echoes the Financial Services Tribunal’s suggestion that for Kerry Canada to use the actuarial surplus for DC contributions, “the insurance policy that is the funding vehicle for Part 2 [the DC component] should be held by the trustee” holding DB assets.

Rulings in the Kerry and Sutherland disputes suggest that the courts may be more amenable to the use of actuarial surplus to fund DC contributions where there is no transfer of assets between separate funding vehicles. As a result, employers sponsoring hybrid pension plans may wish to consider taking action to ensure that DB and DC assets are held within a single funding vehicle. This approach comes with no guarantees because the Supreme Court could rule that “cross-subsidization” is prohibited no matter what funding structure is used. But it would distinguish a hybrid plan from the Kerry scenario in a way that seems to have mattered in court and tribunal decisions to date.

Click here to visit our online-only special section, The Kerry Case.

James Pierlot is a lawyer with Towers Perrin in Toronto.