October 01, 2009
The landmark Supreme Court of Canada decision in Nolan v. Kerry (Canada) Inc. was decried as a death knell for defined benefit (DB) pension plans. Once thought of as the gold standard, the ability for companies to use surpluses in DB plans to fund a defined contribution (DC) plan seemed to mean that companies would go running for the more consistent budgeting option.
With DC plans, companies faced with faltering markets would no longer be on the hook for the risk inherent to DB plans. DC plans would also mean companies could accurately predict monthly costs. The Kerry decision seemed to speed up the decline of DB plans.
Not so fast, says Mitch Frazer. Kerry may actually mean a reprieve for DB plans.
Previous court battles have been waged over control of plan surpluses and until recently, that control lay with employees. Kerry allows for companies to use plan surpluses for contribution holidays and other plan expenses not specifically prohibited in the plan language. Pension administrators can now use the extra money as a nest egg to fund plans in tough times.
"Kerry is a decision which is generally good for employers, but it is also in many ways good for the preservation of defined benefit pension plans. As a stand-alone, it is not going to save defined benefit pension plans, but it is certainly something in the right direction," says Mitch. "Now you actually have a use for this surplus money that employers could take and use for their benefit and the benefit of keeping the costs for administering the plan more controlled, where before you had a scenario of 'Why would I fully fund the plan?' Kerry helps plans that have surplus, period. If you have a surplus, why would you change? There is no point changing your plan because you are not contributing anything... If you've got a plan that is underfunded perpetually, then DC would be better."