On August 7, the Supreme Court of Canada released its long-awaited decision in the Elaine Nolan et al. v. Kerry (Canada) Inc., better known as the Kerry case. By a 5-2 majority, the Court held in favour of the employer on the issue of whether surplus assets accumulated in the original defined benefit (DB) component of a pension plan could be used to take contribution holidays in (i.e. “cross-subsidize”) a new defined contribution (DC) component of the plan.
The seven judges on the panel ruled unanimously in favour of the employer on all other issues in the case, including, most notably, the employer’s ability to earmark pension fund assets for the payment of various categories of plan expenses and when plaintiffs’ costs in pension litigation need not be paid out of the pension fund.
It goes perhaps without saying that the Kerry decision represents a very positive development for DB plan sponsors, albeit there is now far less DB surplus available for contribution holidays of any kind than was previously the case.
No doubt the DB-DC “cross-subsidization”, plan expenses, and litigation costs ramifications of the Supreme Court decision will be dissected in great detail by many leading commentators in the days and weeks ahead. I do not have the space in this column to examine all of these ramifications. Rather, I intend to focus only on a small number of interesting aspects of the majority decision.
A first aspect worthy of comment is Kerry’s unmistakable signalling of the receding role of trust law in the resolution of pension plan disputes. The Supreme Court’s first pronouncement on pension law in the modern era, its 1994 decision in the Air Products case, ascribed great importance to principles of trust law, notwithstanding that those principles generally harkened back many centuries and arose in the very different context of family trusts or estates. The near-automatic application of trust law to pension cases gathered force over the following decade, reaching perhaps its unfortunate apogee in the 2003 Ontario Court of Appeal decision in the Transamerica Life case on pension plan mergers.
In 2006, the Supreme Court began to establish limits on the applicability of trust principles to pension law, in the Buschau decision on pension plan terminations. In Kerry, the Court has now sounded a much broader retreat from the rote application of trust principles to pension plans, a development to be welcomed by all those who believe that pension plans are a unique and distinct form of legal arrangement.
Second is the question of how much deference ought to be paid by the courts to administrative law decisions of Ontario’s Financial Services Tribunal. The Tribunal suffered a serious blow to its relevance just six years after its 1998 establishment, when the Supreme Court overturned the Tribunal decision on partial wind-up surplus in the infamous 2004 Monsanto case and questioned none-too-subtly the degree of the Tribunal’s expertise in pension matters.
Now, a short five years later, the same Court has, in the Kerry decision, credited the once-maligned Tribunal with much more expertise in the pension area than it was previously prepared to acknowledge and has in large measure circumscribed the scope of the Monsanto decision insofar as deference to the Tribunal is concerned. This newfound judicial respect for the Tribunal should compel a reconsideration of the post-Monsanto conventional wisdom that the Tribunal would never merit the last word in a pension dispute. The result may be to reduce the number of applications to the courts to review Tribunal decisions.
A third interesting facet of the Kerry decision is the majority’s implicit willingness to give the sponsoring employer a pass with regard to some sloppy drafting in the documentation which initially created the DC component of the pension plan. Rather, the Court seemed prepared to focus on the intent of the employer and to allow any defects to be “fixed” by way of retroactive plan amendment. While plan sponsors and their advisors should obviously still take due care in the preparation of pension documentation, the upshot may be that employers will henceforth be held to a standard lower than near-perfection with regard to the wording of the plan documents they generate.
A fourth and final point worthy of note in this brief analysis has to do with the plan expenses issue. At the Ontario Court of Appeal, a distinction was drawn in Kerry for such purposes between fees payable to third party service providers (generally permissible) and monies payable to the employer itself (generally impermissible). The Supreme Court has all but erased this distinction, while clarifying to a great degree the nature (i.e. administrative, as opposed non-administrative) of the expenses which may henceforth properly be paid out of the pension fund.
From a longer-term historical perspective, Kerry may be seen as the third in a trilogy of 21st Century Supreme Court decisions (the others being Monsanto and Buschau) which have now resolved many of the fundamental legal issues relating to pension surplus, at least in the common law provinces.
Of course, most of those surpluses have now vanished. So query whether the Court will next be turning its attention to legal issues arising out of the much more topical subject of pension deficits.
(08/11/09)