A recent decision from the Supreme Court of Canada has altered the landscape of pension law in Canada at a time when the entire area is under review by both the private and public sectors.

The decision in Nolan v. Kerry (Canada) Inc. affirms the right of companies to deduct pension plan expenses from plan funds; it also gives plan sponsors the go-ahead to use plan surpluses to fund both contribution holidays and other sections of the same plan.

Pension experts generally praise the ruling for bringing greater clarity to issues that have become muddied by piecemeal reforms over the past decade. But experts were divided on whether the decision is good for the pension system in general.

Although the SCC expressly stated that it did not want to comment on various aspects of the growing public debate over pension reform, it delved into areas that, inevitably, are becoming part of that national discussion — the growth of defined-contribution plans at the expense of defined-benefit plans, the funding and solvency of plans, the use of surplus funds and the transfer of investment risks from plan sponsors to plan beneficiaries.

Specifically, the SCC affirmed the rights of plan sponsors to:

> use surpluses from the DB portion of a pension plan to fund a DC section of the same pension plan;

> take contribution holidays when a plan has an actuarial surplus;

> pay pension administration expenses out of plan funds in cases in which the plan’s founding documents do not expressly prohibit such payments.

The Nolan v. Kerry dispute arose in 2000, after Kerry created a DC plan for new employees and maintained its existing DB plan only for employees who were already members. That year, a group of employees who were DB plan members asked the Ontario Superintendent of Financial Services to investigate payment of plan expenses out of the pension fund, as well as contribution holidays taken by Kerry when the plan was in a surplus position. DB plan members also sought a partial winding up of the DB portion of the plan, with surpluses to be paid out to DB plan members. The SCC’s decision effectively dismisses these requests.

The ruling has been lauded by plan sponsors and administrators. Ronald Walker, senior partner in the commercial litigation section of law firm Fasken Martineau DuMoulin LLP in Toronto, acted for Kerry. He says the ruling on expenses reflects the view of the five-member SCC majority that such expenses are “really for the benefit of the members” and are essential for the “continued existence and integrity” of the pension plan.

Justice Marshall Rothstein, who wrote the judgment, stated that employers are, effectively, entitled to end DB contribution plans for new employees and replace them with DC plans without creating two plans; crucially, the pension plan remains one plan, thus allowing the transfer of surplus funds between the two sections of the plan.

Kerry’s plan administrators were “holding their breath” about the outcome on that point, Walker notes, as a lower court had concluded that such an arrangement created two separate plans and that a surplus could not be moved from one to the other.

However, the two dissenting SCC judges disagreed. After Kerry created its new DC plan, it essentially did have two separate plans, the dissent states. The shifting of surplus funds from one to the other amounted to the company exercising control over trust assets , which was contrary to basic trust law.

The dissenting judges also took the view that pension legislation does not support this use of surplus funds for contribution holidays; such holidays also violate provisions of the plan, which stipulate that pension funds are to be used for the “exclusive benefit” of plan members — in this case, only the DB plan members.

The relationship between the two types of plans is significant for the corporate sector, as many company pension plans have been converted from DB to DC over the past 10 to 20 years. If the SCC decision had gone in favour of the committee of DB plan members who initiated the dispute in 2000, plans configured in the new DC format would have had to be unwound and restructured to create two separate plans.

Says Walker: “It would have been a nightmare in many cases.”

@page_break@Critics of the SCC’s decision argue that the ruling will give carte blanche to employers to do as they wish with pension plans, to the detriment of plan members. However, Jeff Galway of Blake Cassels & Graydon LLP in Toronto, who acted for the intervener, the Association of Canadian Pension Management, notes that the issue is regulated by both pension benefits legislation and pension fund documents. He says there is “no basis” for the contention that employers will “suddenly start chipping away at members’ rights.”

It does seem clear, however, that this subject is a dispute that is not going to go away. Chris Fievoli, resident actuary for the Canadian Institute of Actuaries, says the institute, which is active in pension reform research and has made submissions to government on the issue, supports DB plans in general because they are usually of greater benefit to employees and can be funded without undue cost — if that funding is relatively conservative. Fievoli notes that uncertainty about the use of surplus funds has been an issue for employers in the past, especially those with DB plans.

The Nolan v. Kerry case brings some welcome clarity to that issue, Fievoli says: “To the extent that we have more rulings and decisions that put more clarity around how a surplus can be used, perhaps employers will become more comfortable with DB plans. That could, in the long run, lead to more of them being implemented.”

But others disagree, including Ari Kaplan, an expert in pensions and a litigator with Koskie Minsky LLP in Toronto who acted for the Kerry DB plan members: “This case is a green light for plan sponsors to accelerate conversions of their plans from DB to DC plans.

“This decision considerably weakens the Canadian pension system,” Kaplan adds. “It makes [pensions] less secure: if there are no more surplus cushions kept in the plan, then, when the employer faces financial difficulty and has to cough up some dough to start paying for the pension, it won’t have that dough.”

Kaplan predicts that using pension surpluses as is now allowed by the SCC could ultimately lead to companies going bankrupt, due to a lack of pension funding when corporate revenue declines.

IE