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The Supreme Court of Canada Sides with Employers Regarding the Use of Pension Surplus for Certain Purposes

Date

March 26, 2010

AUTHOR(s)

Lorraine Allard
Cheryl L. James
Gregory Winfield


The Supreme Court of Canada recently rendered a landmark decision for employers and pension plans in Canada. Its decision in Kerry (Canada) Inc. v. DCA Employees Pension Committee lessens the uncertainty that had reigned with respect to using pension trust assets to take defined contribution holidays and to pay pension plan expenses, which the employers in this case had done.

Defined Contribution Holidays

On the subject of defined contribution holidays, five of the seven justices who heard the matter agreed with the Ontario Court of Appeal that it is not unlawful, under either the Pension Benefits Act (Ontario) or the common law, for the employer to also apply the surplus in the trust fund to take contribution holidays in respect of the defined contribution members of a pension plan, where the plan has both a defined benefit part and a defined contribution part. They also agreed that the members of both parts are beneficiaries of the pension trust fund, and that the employer may lawfully take contribution holidays in respect of the defined benefit part.

Pension Plans Expenses

On the subject of pension plans expenses, the court held that unless an employer has clearly committed to paying plan expenses, it is not obliged to pay such expenses. In this case, the employer had committed to paying trust expenses and had continued doing so. However, the employer had neither committed nor paid plan expenses such as actuarial, legal and accounting in the administration of the disputed plans, and the employer may charge reasonable and bona fide plan expenses to the pension trust fund. Unlike the Ontario Court of Appeal, the Supreme Court saw no differences between expenses paid to third-party service providers and payment for in-house administration provided by the employer, provided that in each case the expense was reasonable and bona fide.

Amending Plan to Charge Expenses to Trust Fund

The Supreme Court also held that the amendment of a pension plan to allow the employer to charge pension plan expenses to the trust fund is not prohibited merely because the trust agreement governing the terms of the trust or the pension plan (or both) contains an "exclusive benefit" clause. However, expenses incurred to review the plan terms in support of a decision to add a defined contribution provision was for the sole benefit of the employer, and should not be charged to the pension plan.

Tribunal Lacks Jurisdiction to Award Costs

Finally, with respect to cost awards in litigation of this type, the Supreme Court upheld the Financial Services Tribunal’s ruling that the latter has no jurisdiction to order litigation costs payable from a pension fund where the fund is not a party to the proceeding (as in this case). While a court has authority to order litigation costs be paid from a pension trust fund, in cases where the litigation is not for the advantage of all of the pension plan’s beneficiaries, the matter is "adversarial" and such costs should not be awarded from the pension trust fund.

Tips for Employers

Kerry addresses previous uncertainty regarding the payment of pension plan administrative expenses from pension plan funds and the use of pension plan surplus to take contribution holidays in respect of payment of defined contribution benefits where a pension plan has both defined benefit and defined contribution provisions.

What should employers bear in mind?

In each instance, a thorough review should be conducted of the plan provisions, trust agreements, previous plan documents and other materials (such as employee communications regarding benefits) to ensure that the pension plan does not prohibit the contribution holiday or oblige the employer to pay administrative expenses. Review of plan documents may also determine if it is possible to amend the plan to permit these provisions.

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