Canada ruling favors employers

TORONTO--Canadian plan sponsors received a favorable ruling from the Ontario Court of Appeal, which last week overturned a ruling that challenged several common practices in pension plan management.

Although plan sponsors will still have to carefully analyze their pension trust and plan documentation to see if they may take certain actions with regard to their plans, the Court of Appeal's decision provides useful guidance to employers.

"It's a huge decision for pension plan sponsors," said Mitch Frazer, chair of the strategic communications committee of the Toronto-based Assn. of Canadian Pension Management, which represents plan sponsors in Canada.

In administering its defined benefit plan, Woodstock, Ontario-based Kerry (Canada) Inc., paid administrative expenses from the pension fund and also took contribution holidays after taking into account the actuarial surplus of the plan. In 2000, the plan was amended to add a defined contribution component for new hires and existing members who opted to convert their past service entitlements to the defined contribution plan, with the company intending to use defined benefit plan funds for its contributions to the new plan.

Former employees who were members of the plan objected and asked the Ontario Superintendent of Financial Services to order the company to reimburse the plan for the administrative expenses and contribution holidays and to deny registration of the amendment.

These issues were debated by regulatory officials and eventually by the Ontario Divisional Court, which ruled in March 2006 that Kerry (Canada) was not allowed to pay administrative expenses out of the fund because the historical plan documents and trust agreement did not feature language allowing the company to do so.

The divisional court also ruled that Kerry (Canada) could not use the surplus in the defined benefit plan to fund its defined contribution plan contributions because the amendment created two pension funds and the defined contribution members had no connection to the defined benefit plan and could not be legitimately given a beneficial interest in the funds from the defined benefit side.

In Kerry (Canada) Inc. vs. DCA Employees Pension Committee, the Ontario Court of Appeal ruled that the divisional court erred in finding that the company was not allowed to pay expenses from the fund. The court found that there was no statutory requirement that the employer pay the expenses and that the language of the plan documentation did not prohibit the payment of expenses from the fund, except those paid to trustees. "Silence does not create a legal obligation on the company to pay," the Court of Appeal said in its decision.

Ronald Walker, a senior partner in the litigation group of Fasken Martineau in Toronto, who represented Kerry (Canada), said he and his client were pleased with the decision, because it provided clarity for plan administrators managing day-to-day issues related to expense payment. "I'm delighted that they said what many, many companies were doing was reasonable and also correct," he said.

The Court of Appeal decision, though, did not give blanket approval over employers' actions with respect to payment of expenses from the fund, pension experts say. Employers will have to carefully analyze their historical trust and plan documentation to see if the language permits them to seek reimbursement of expenses from the plan, because some plans have prohibitions against the return of plan assets to the sponsor, they say.

"It's still going to be driven by the actual relevant documentation," said Stephen Pibworth, legal consultant for Hewitt Associates Canada in Toronto. "Having said that, this is still a very good decision for plan administrators."

In addition, the Court of Appeal said only certain types of expenses could be paid from the fund, said Ian McSweeney, co-chair of the pensions and benefits practice of Osler Hoskin & Harcourt L.L.P. in Toronto. For example, the Court of Appeal said expenses related to the consulting fees Kerry (Canada) incurred while looking at a possible conversion could not be charged to the plan.

Plan sponsors will have to consider carefully what types of fees they can legally charge the pension fund, which would likely be management and administrative fees, Mr. McSweeney said.

"It's not a complete answer and like any court decision the more you look at it, the more questions you find," he said.

The other critical issue for employers was the Court of Appeal's finding that amending the Kerry (Canada) pension plan to introduce a defined contribution component did not create two separate pension plans, overturning the divisional court's ruling that the amendments created two plans and that cross-subsidization--the use of surplus funds in the defined benefit plan to fund contributions on the defined contribution side--was impermissible. The divisional court's ruling was problematic because a number of plan sponsors have converted from defined benefit to defined contribution plans in recent years and have used defined benefit surplus to fund defined contribution plan contributions, pension experts say.

One of the benefits of making greater contributions to a pension plan than required is that an employer can take a contribution holiday and use surpluses to pay for the administration of the plan, said Mr. Frazer, a senior associate at Torys L.L.P. in Toronto. "The clients I've advised already are all happy, especially those who have converted or plan to convert because they were counting on being able to use the surplus."

If the plan is properly structured, defined contribution members continue to be members of the fund, which allows fund assets to be used to pay for their benefits, according to the Court of Appeal. "The message for employers is cross-subsidization will be permitted if you've structured your DC conversion properly," Mr. McSweeney said.

In its decision, the Court of Appeal also reiterated that plan sponsors are allowed to use surplus to fund their contributions for ongoing pension plans, as dictated by a 1994 Supreme Court of Canada decision in Schmidt vs. Air Products of Canada Ltd.

"I think contribution holidays were always the part of the case I felt comfortable with because the law was very clear," Mr. Walker said.

Kerry (Canada) Inc. vs. DCA Employees Pension Committee, Ontario Court of Appeal, 2007 ONCA 416, Docket number, C45720.

Suit facts

In Kerry (Canada) Inc. vs. DCA Employees Pension Committee, the Ontario Court of Appeal ruled on several critical issues: