Ontario Court of Appeal ruling is a huge decision for pension plan sponsors, says Mitch Frazer in Business Insurance

June 11, 2007

In Kerry (Canada) Inc. vs. DCA Employees Pension Committee, the Ontario Court of Appeal overturned a ruling last week that had challenged several common practices in pension plan management.

"It's a huge decision for pension plan sponsors," said Mitch Frazer.

The ruling provides useful guidance to employers. In administering its defined benefit plan, Kerry (Canada) Inc., based in Woodstock, Ontario, 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.

In March 2006, the Ontario Divisional Court ruled 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.

Last week, the Court of Appeal ruled that the divisional court had 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.

However, employers will still 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.

Also important is that 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.

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, Mitch noted. "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. In its decision, the court 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.

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