Ontario Court of Appeal determines key pension issues in Kerry Case

One of the key issues determined in the Kerry case is the ability of the employer to amend the pension documents to expressly provide that plan expenses may be paid from the pension fund despite the fact that historic pension documents were silent on who should pay the plan expenses. As the administrative expenses associated with large pension plans can be significant, this determination may result in cost savings for employers.

The lower court ruled that plan amendments expressly permitting the payment of plan expenses from the pension fund were improper; the appellate court set this aside. The Court of Appeal held that such payments could be made from the pension fund because:

• The Pension Benefits Act(Ontario)did not govern the payment of pension plan expenses;
• There are no principles of law or trust that require the employer to pay the plan expenses;
• The pension plan documents did not address the payment of fees aside from trustee’s fees and expenses, which the employer acknowledged it was required to pay; and
• The proper administration of a trust fund necessitates incurring expenses.

There were no legal obligations under the governing statutes or applicable plan documents for the employer to pay the expenses. Proper administration of a trust would require the payment of expenses. In this case, the plan and trust documents were silent at the outset with respect to the payment of plan expenses(other than trustee fees). Thus, when the plan was amended to specify that these expenses could be paid from the fund, there was no change to the rights or obligations of any person.

The determination of whether plan expenses may properly be paid from the pension fund generally will require an analysis of the historical plan and funding documents. However, the Kerry decision clarifies that where the historical documents are silent with respect to the payment of plan expenses, an amendment to provide that expenses can be paid from the pension fund is reasonable and acceptable.

Contribution Holidays

Pension plan surplus is a hot button issue among both employer and employee groups; not unexpectedly, where a surplus exists, both sides claim entitlement to the surplus. It is clear that one of the ways in which employers can access surplus is through contribution holidays; that is where the surplus in the plan is used to fund the employer’s contributions.

In Kerry, the Ontario Court of Appeal upheld the lower court’s decision that the employer was entitled to take contribution holidays with respect to its funding obligations under the defined benefit(DB)portion of the pension plan. The Court, following an earlier Supreme Court of Canada case on the matter, held that an employer may take contribution holidays when a DB pension plan is in a surplus position and the plan documentation does not explicitly prohibit such contribution holidays. The Court then reviewed the language in the plan that required the employer to make contributions and concluded that as the funding obligation language did not include a formula by which the employer’s contributions are determined(which would amount to a prohibition on taking contribution holidays), contribution holidays were permitted.

Cross-Subsidization Issue

In the Kerry case, the pension plan had been amended to introduce a defined contribution(DC)component. At that time, members were given the option of continuing to accrue benefits in the DB portion of the plan or converting to the DC component. The DB portion of the plan was in a surplus position and, following the amendment to the plan, the employer used this surplus to fund its contribution obligations under the DC portion of the plan(“cross-subsidization”).

The lower court held that this was not permissible on the basis that the amended plan was, in effect, two pension plans(a DB and DC plan), each with its own pension fund and members.

The Ontario Court of Appeal overturned this decision. The Court of Appeal characterized the DB plan and the DC plan as one plan with two components—an “open” pension plan that had ever-changing classes of employees. The Court found that though the pension plan had “exclusive benefit” language that required that the fund be used exclusively for the benefit of plan members, there was no reason the members of the DC portion of the plan could not become beneficiaries of the pension fund. If the plan was amended to include the members of the plan who were also entitled to DC benefits, then such cross-subsidization would be permissible.

The decision by the Court on this issue clarifies that where a plan is amended to include a DC option, this does not create two separate pension plans. To the extent that there is surplus in the DB portion of the plan, it may be used for contribution holidays in respect of the DC portion of the plan so long as both the DB and DC members are beneficiaries of the same pension fund(assuming that there is nothing in the applicable plan documents prohibiting the taking of contribution holidays).

Notice of Plan Amendment

The Ontario Court of Appeal determined that the amendment that created the conversion option was an adverse amendment under the applicable statute and therefore the employer was required to transmit notice in compliance with the statute. Under the Pension Benefits Act(Ontario), amendments that would result in a reduction of pension benefits or that would otherwise adversely affect the rights or obligations of a member or former member require written notice from the plan administrator explaining the amendment and inviting comments.

The conversion was considered to be “adverse” because of the inherent uncertainty and risks. The Court noted that where a pension plan changes from DB to DC, there is uncertainty for the plan member as to what his or her pension will be until the time of retirement. In addition, where the benefits are DC, the investment risks are borne by the plan member. Even though members in this case were given the option to convert, this was still considered to be an adverse amendment for which notice was required.

The Court determined that the notice that had been given by Kerry was inadequate. However, the Court concluded that the Superintendent has discretion to register an adverse amendment even where the notice provided is inadequate.

Overall, the Kerry case provides some useful guidance for plan sponsors with respect to the administration of pension plans.