Recent Canadian court decisions may help preserve the DB plan system, says Mitch Frazer in Business Insurance

June 02, 2008

Recent Canadian court decisions have given greater weight to the rights of employers in pension disputes, but they may be too late to reverse the decline of defined benefit (DB) plans.

Between the mid-1980s and 2005, Canadian court decisions in pension cases fiercely guarded the rights of plan members. But more recent decisions from the Supreme Court of Canada (SCC) and the Ontario Court of Appeal have recognized the rights of plan sponsors. In Burke vs. Hudson's Bay Co., the Ontario Court of Appeal last month ruled that the employer does not have to share a portion of its pension surplus with employees of a unit it sold two decades ago, and was entitled to pay expenses from the pension fund. The Burke decision followed the Court of Appeal's July 2007 ruling in Kerry (Canada) Inc. vs. DCA Employees Pension Committee that the company was allowed to pay plan expenses from its pension fund after taking into account the fund's surplus. The Kerry decision is being appealed to the Supreme Court.

"This is the court's attempt to try to preserve the DB system," said Mitch Frazer, chair of the Association of Canadian Pension Management's strategic communications committee. Allowing employers to pay expenses from plans and take contribution holidays is a critical factor in encouraging plan sponsors to maintain and adequately fund defined benefit plans, he adds.

Meanwhile, in 2006, the SCC issued two rulings in pension cases seen as generally favorable to employers. In Rogers Communications Inc. vs. Buschau, it overturned an appeals court ruling that pension plan members could invoke a common law rule permitting members to force termination of the trust and access the pension plan's surplus. And in Bisaillon vs. Concordia University, the SCC decided that a unionized member of a pension plan could not institute a class action to challenge amendments to the pension plan.

Pension experts say that these decisions reflect a shifting mindset on the need to balance the rights of employers and plan members. What effect the legal trend will have on the decline of defined benefit plans in Canada is uncertain. Says Mitch: If the SCC upholds the Ontario Court of Appeal ruling in Kerry, that will be an important step in the preservation of the defined benefit plan system.

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