The Supreme Court Of Canada Decision In The Kerry Canada Case - Payment Of Plan Expenses, DB And DC Contribution Holidays And Cost Issues

Copyright 2009, Blake, Cassels & Graydon

LLP

Originally published in Blakes Bulletin on Pension &

Employee Benefits, August 2009

In a welcome decision for pension plan sponsors, the Supreme

Court of Canada ("SCC") has dismissed the appeal in

Elaine Nolan et al. v. Kerry (Canada) Inc. A link to the

Supreme Court's decision and additional background information

can be found on the Blakes website at

http://www.blakes.com/english/TheKerryDecision.html .

Blakes acted for the Association of Canadian Pension Management

in its intervention in the SCC.

EXECUTIVE SUMMARY

In its decision, the SCC provided important guidance to plan

administrators, plan sponsors and their advisers on the use of

surplus to take contribution holidays and the payment of pension

plan expenses as follows:

DC Contributions out of DB Surplus –

The majority of the Supreme Court found that the employer could use

surplus in the defined benefit (DB) component of the plan to

satisfy its contribution obligations under the defined contribution

(DC) component, provided that the plan was properly structured so

as to make the members of the DC component beneficiaries of the

trust fund. In this regard, the majority of the Court found that

there was no legislative restriction prohibiting a single plan and

trust which provides both DB and DC components or the taking of DC

contribution holidays. Similarly, the majority of the Court found

that there was no legislative restriction prohibiting the

employer's retroactive amendment designating DC members as

beneficiaries of the DB trust fund.

Contribution Holidays – While it has

always been clear that an employer may take a contribution holiday

in circumstances where the plan documents provide that funding

requirements will be determined by actuarial practice and such

contribution holiday is not otherwise prohibited by other plan

wording or legislation, the SCC decision clarifies that an employer

may also take a contribution holiday in circumstances where the

plan text does not specifically reference an actuary but the use of

actuarial discretion is required to determine the contribution

obligation.

Plan Expenses –The Supreme Court held

that plan administration expenses could be paid from the pension

fund, as plan amendments enabling such payment were not

inconsistent with prior plan and trust documentation in this case.

Whether the plan expenses were incurred for services of third

parties or the employer itself was found to be immaterial by the

Supreme Court as long as the expenses charged are reasonable and

the services necessary.

Costs - The Tribunal's jurisdiction to

award costs is limited to a party before it. In terms of the

court's jurisdiction, while cost awards are discretionary,

costs will only be awarded from the pension trust fund where the

proceedings are necessary for the due administration of the Trust.

In adversarial proceedings, courts are more likely to approach

costs as in an ordinary lawsuit, i.e. payable by the unsuccessful

party to the successful party.

Background

The Kerry pension plan was established in 1954 (the

"Plan") as a defined benefit plan.

Starting in 1985, the employer began to take contribution

holidays in respect to its funding obligations and by 2001 had

taken contribution holidays of approximately $1.5 million. In

addition, beginning in 1985, the Company began having third party

plan expenses paid from the relevant pension fund (the

"Fund").

In 2000, the Plan was amended to provide an optional conversion

to defined contribution benefits and to provide that all new

members would receive defined contribution benefits. After the 2000

amendments were introduced, the DCA Employees Pension Committee

(the "Committee") asked the Superintendent of Financial

Services to investigate alleged irregularities in the

administration of the Plan including payments of expenses from the

Fund and the employer's contribution holidays. The

Superintendent issued a Notice of Proposal to make an order

requiring Kerry to reimburse the Fund for expenses paid from the

Fund after January 1, 1988 that had not been incurred for the

exclusive benefit of Plan members but proposed to refuse to order

Kerry to repay the amounts that had been taken by way of

contribution holidays. Kerry sought a hearing before the Financial

Services Tribunal on the Superintendent's proposed order in

respect of plan expenses and the Committee sought a hearing on the

Superintendent's proposed order in respect of contribution

holidays. Separate Tribunal hearings were conducted.

Kerry was largely successful at both Tribunal hearings. In a

decision rendered after the hearing with respect to plan expenses,

the Tribunal held that all but a very few of the plan expenses

could be paid from the Fund. In a second decision, the Tribunal

held that Kerry was entitled to take contribution holidays and

could do so with respect to its DC obligations as long as the DC

members were designated as Fund beneficiaries.

The Committee appealed both decisions to the Divisional Court.

The Divisional Court issued a judgment which largely overturned the

Tribunal decisions (but upheld the Tribunal's ruling that DB

contribution holidays were permitted under the Plan). Kerry

appealed the judgment of the Divisional Court and the Committee

cross-appealed. The Ontario Court of Appeal largely overturned the

Divisional Court decision clarifying when it is acceptable for

pension plan expenses to be paid from the pension fund and

determining that, after a plan conversion, it is permissible to use

surplus assets in the DB part of the pension plan to pay current

service costs in respect of the DC part of the plan. Leave to

appeal the Court of Appeal decision to the SCC was granted. The

Association of Canadian Pension Management intervened on the issues

of the payment of expenses from the pension plan fund and the use

of actuarial surplus in the plan to fund benefits for members who

participate in the Plan on a defined contribution basis. The

Canadian Labour Congress intervened on the issue of the utilization

of actuarial surplus to fund defined contribution benefits.

Important Findings in the SCC Decision

Standard of Review

Reasonableness

Having regard to the purpose of the Tribunal, the nature of the

questions raised and the expertise of the Tribunal, the SCC found

that the appropriate standard of review for the issues of plan

expenses, contribution holidays and cost was reasonableness. (This

was the same standard as found by the Ontario Court of Appeal

except that the Ontario Court of Appeal had required the higher

correctness standard with respect to the issue of costs.)

The granting of a deferential standard of review to the

Tribunal's decision may be seen by some as a change by the SCC

from its earlier decision in Monsanto [2004] 3 S.C.R. 152.

While distinctions can be made between the cases, e.g., statutory

analysis versus questions which involve not just question of law

but also the interpretation of pension plans and related texts, the

important point going forward is that given the deference accorded

to the Tribunal's decisions in this case, hearings before the

Tribunal will take on heightened importance.

Payment of Plan Expenses

The SCC found to the extent that expenses at issue are

bona fide expenses necessary for the administration of the pension

plan, it should not matter whether expenses are owed to a third

party or are an employer expense. There is no reason that expenses

should be prohibited from being paid from the Plan fund unless

prohibited by the Plan documents.

The Ontario Court of Appeal found nothing in the Pension

Benefits Act (the "PBA") or the common law that would

impose a requirement on an employer to pay plan expenses. That

Court then focussed on the Plan documents and found nothing in the

Kerry situation that would require the employer to pay the

Plan expenses. The SCC held that they were "in

substantial agreement with [the] analysis and conclusion" of

the Ontario Court of Appeal. Other than a requirement to pay

trustee fees and expenses1, the Plan documentation in

Kerry was silent on the payment of Plan expenses from the Fund.

The Committee argued that because the original Plan

documentation did not expressly permit Plan expenses to be paid

from...