by Bill Duvall
At the best of times, employer-sponsored pension plans bring with them thorny administrative and legal problems.
These issues multiply in an economic environment in which many such pension plans face funding problems while employers seek to reduce their costs. Many employers have attempted pension plan amendments to reduce funding pressures. One such example is the creation of a defined contribution (DC) component out of an existing defined benefit (DB) plan. Similarly, employers have sought to reduce their pension plan administrative expenses wherever possible. Such employer actions are almost universally met by suspicion from plan members and are followed on occasion by litigation.
Employers must be cautious in how they amend their pension plan documents. But an important recent decision of the Supreme Court of Canada shows that innovative pension amendments can be implemented. This case also highlights that in certain cases pension administrative costs can be paid out of trust funds. Fasken Martineau represented the successful employer in this case.
The decision of Nolan v. Kerry (Canada) Inc., 2009 SCC 39, (Kerry (Canada)) is an important win for employers grappling with pension plan administration issues. It clarifies how employers are to conduct themselves in relation to pension plan amendments and provides guidelines on pension plan expenses issues.
Kerry had administered a pension plan for its employees since 1954. Until 1984, the company paid the pension plan expenses directly. In 1985, following plan amendments, third-party expenses for actuarial, investment management, and audit services were paid from the pension fund. At that time, the employer also started taking contribution holidays from its funding obligations.
In 2000, the plan was further amended to introduce a DC pension component. The DB pension component continued for existing employees but was closed to new employees. Thereafter all newly hired employees would join the DC component. Employees who were DB members had the option of converting to the DC component.
The employer announced its intention to take a contribution holiday for both the DB and the DC components. The surplus that had accumulated in the trust fund from the DB component, which still covered DB members, would be used to also satisfy the premiums owing for the DC component.
This resulted in litigation. The Superintendent of Financial Services was asked to investigate the employer’s contribution holidays as well as the payment of pension plan expenses out of plan assets.
This investigation led to a hearing before the Ontario Financial Services Tribunal. The employer was successful on most issues. The matter was ultimately appealed to the Supreme Court of Canada.
The Court’s findings included:
- There is no automatic responsibility for the employer to pay pension plan expenses. Rather, the obligations on the employer will be determined by the “text and context” of the pension plan documents.
- Where the pension plan documents are silent on the issue, trust funds may be used for the payment of plan expenses necessary to the administration of the pension plan.
- When plan documents provide that funding requirements will be determined by actuarial practice, the employer may take a contribution holiday unless other wording or legislation prohibits it.
- Employers may take contribution holidays not only in respect of DB components of their pension plans, but also in respect of DC components. In this case, where there was a single pension plan with a single trust, the employer was permitted to use the actuarial surplus that existed in the DB component of the plan to fund its contributions to the DC component of the plan.
- In certain circumstances, employers who have in the past or wish in the future to use DB surpluses to fund their DC contributions can retroactively amend their pension plan documents to clarify the DC contribution holiday issue.
This decision will have a significant impact on the actions of employers in handling pension plan contribution holidays and pension plan expenses.
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