Pitfalls of DB-DC cross-subsidization
Theroux said that any pitfalls for plan sponsors in DB-DC cross-subsidization lay in what was not said in the decision. He pointed out three examples:
“The Ontario Court of Appeal noted that making DC members participants in the same trust as DB members would mean that the DC members would participate in any eventual surplus distribution,” he said. “By symmetry, DC members should also participate in any reduction of benefits as a result of a deficit on plan windup. So the issue of a precise entitlement of DC members…is one that I would suggest is still outstanding.”
In Kerry, the majority found that the intention, as evidenced by the plan text, was that there be only one plan, he said. However, the dissent found the opposite. “The issue of whether there was one or more plans—which appears to be crucial to the Kerry decision—will require a careful parsing and analysis of words used in the current version of the documents and all predecessors.
Lastly, the SCC did not give any guidance with respect to plan mergers. “Corporate restructuring that involves the use of plan surplus, after Kerry, may be as problematic as before,” he said.
Administration fees and expenses
The SCC provided guidance to sponsors looking to amend plans to provide for payment of plan expenses by finding that the payment of expenses out of the fund is to the exclusive benefit of the employees, explained Bush. However, language in the Kerry amendment clause may not be in all pension trusts—therefore, the amendment right must be considered carefully.
What it means for plan sponsors
Plan sponsors that elected not to charge expenses to a plan fund in the past before the Kerry appeal may wish to revisit those decisions. Also,
• plan sponsors should consider having prior plan documents and trust agreements reviewed to ensure that payment of expenses is not inconsistent with historical plan documents;
• if historical plan language is silent on the payment of plan expenses, sponsors should have legal advisors consider if relevant amendment power in plan documentation permits the addition of the right to charge expenses against the fund; and
• if it contains a positive obligation for the employer to pay plan expenses, the employer must decide if amendment power is broad enough to allow an amendment permitting payment of plan expenses from the plan going forward.
Documentation
An improvident stroke of the pen may preclude an amendment or contribution holiday, said Theroux. As such, plan sponsors may wish to consider making amendments to achieve the same positive result as Kerry.
“Plan documentation is the key consideration in determining whether a retroactive amendment may be made or a DC contribution holiday may be taken,” he said. “Plan sponsors should review current and historical documentation to ensure plan and funding media language permits charging all relevant expenses.”
Implications of the decision
Recognition by the SCC that employers have the right to benefit from the pension plan should be helpful for employers in many disputes, explained Bush. DB conversions and freezes will be allowed, in the majority of cases, to continue without undue fear of legal attack. Also, the issue of the right of DC members to participate in plan surpluses, and suffer when a plan is wound up in a deficit position, will need to be answered.
“Hopefully, ordering of costs against the employee committee will affect the willingness of employee groups to take on pension litigation,” she said. “Deference afforded to the Financial Services Tribunal will make hearings before the Tribunal of greater importance.”
Governance and administration
“Employers should be careful about what they consider to be expenses,” warned Bush. “Generally, only expenses incurred by the company as administrator—as opposed to plan sponsor—can be charged to the fund.”
From a governance perspective, the development of a clear expense policy is a good idea, she said. Legal counsel should be involved, and where plan sponsors had obtained expense opinions that were qualified because of the Kerry appeal, they may want to revisit those opinions.
Some questions for plan sponsors to ask themselves: Are DC participants clear that their only entitlement is to their account balances? Do the plan terms and the governing law so provide? Have past contribution holidays been authorized by plan terms? If not, can those contribution holidays be validated by retroactive amendments?
Theroux explained that employers need to carefully define the rights of DC and DB participants in a single plan and must factor in potential claims concerning expenses when making strategic decisions regarding surplus.
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