Name of Case: Nolan v. Kerry (Canada) Inc.

Judgment under Appeal: Judgment of the Ontario Court of Appeal dated June 5, 2007

Facts: Kerry (Canada) Inc. became the sponsor of a 40-year-old defined benefit pension plan in 1994 upon its purchase of the business from another company. Kerry amended and revised the plan in 2000 to provide, among other things, for the addition of a defined contribution component. The participants in this "Part 2" component, which was funded by an insurance policy, were employees who converted to it under a one-time option offered by the company, as well as new employees hired after January 1, 2000. Employees who did not exercise the conversion option remained in the "Part 1" defined benefit component of the 2000 Plan, and their pension entitlements continued to be provided from the trusteed fund. Provisions of the 2000 Plan authorized the company to take a holiday from its contribution obligation in respect of the Part 2 members by using the surplus in the original trusteed fund established in 1954.

The 1954 trust agreement described the fund and the trust limitations associated with it as follows: "The Company hereby establishes with the Trustee a Fund consisting of such money and such property acceptable to the Trustee as shall from time to time be paid or delivered to the Trustee and the earnings and profits thereon. All such money and property, all investments made therewith and proceeds thereof and all earnings and profits thereon ... shall constitute the Fund hereby created and established. ... No part of the corpus or income of the Fund shall ever revert to the Company or be used for or diverted to purposes other than for the exclusive benefit of such persons or their beneficiaries or personal representatives as from time to time may be designated in the Plan except as therein provided."

The employer contribution provision of the plan, as established under the 1965 Plan Amendments, stated: "The Company shall contribute from time to time but not less frequently than annually such amounts as are not less than those certified by the Actuary as necessary to provide the retirement income accruing to members during the current year pursuant to the Plan and to make provision for the proper amortization of any initial unfunded liability or experience deficiency with respect to benefits previously accrued as required by the Pension Benefits Act, after taking into account the assets of the Trust Fund, the contribution of Members during the year and such other factors as may be deemed appropriate."

The Employees Pension Committee subsequently requested the Ontario Superintendent of Financial Services to order the company to reimburse the plan for all the additional contributions, and the income that would have been earned from them, that would have been in the fund were it not for the contribution holidays that the company and its predecessor had taken since 1985. The Committee also asked the Superintendent to deny registration of the 2000 Plan, and to order the wind-up of the plan as at December 31, 1994 under s.69 of the Ontario Pension Benefits Act.
In April 2002, the Deputy Superintendent on behalf of the Superintendent gave notice that he intended to refuse to take any of the three requested actions. The Committee appealed to the Ontario Financial Services Tribunal.

Upon its purchase of the business in 1994 and its assumption of the sponsorship of the employee pension plan, Kerry also began paying plan expenses out of the trust fund, as it was purportedly allowed to do under a 1958 trust agreement that replaced the 1954 agreement and continued the trust, and under various subsequent amendments to the plan. The Employees Pension Committee objected to the Superintendent regarding this practice by Kerry as well. The Superintendent agreed with the Committee and proposed to make an order requiring Kerry to reimburse the fund for all administrative expenses. Kerry appealed the Superintendent's decision to the Financial Services Tribunal.

Case History:

Tribunal approves paying some administrative expenses from plan fund

In a March 4, 2004 decision, the Tribunal ordered the Superintendent to carry out his proposal to order Kerry to reimburse the fund for "expenses that were not incurred for the exclusive benefit of the members of the Plan, together with all income that would have been earned by the Fund if those expenses had not been paid from the Fund." However, the Tribunal greatly reduced the scope of the Superintendent's proposed order by limiting the amounts to be reimbursed to some consulting and legal fees. The effect was to approve the actions of the company with respect to the vast majority of the plan expenses paid out of the pension fund.

Even though the Tribunal acknowledged that paying plan expenses out of the fund would divert assets from the fund, it held that this did not adversely affect vested rights because the fund was in a surplus position. In the Tribunal's view, it was "implicit in the nature of the usual funding arrangements for a pension plan that the pension fund bear the expenses," and accordingly pension plan documents need not "contain specific provisions authorizing the charging to a pension fund of expenses relating to the plan or the fund before such an allocation can be made."

The Tribunal also held that the provisions in the plan and in the agreement authorizing payment only of expenses that were for the "exclusive benefit" of the members should not be interpreted strictly; rather, the term "exclusive benefit" of the members "must logically mean expenses that are for the primary benefit of the members."

Tribunal upholds company's right to take contribution holidays

In a subsequent September 1, 2004 decision (reviewed in Lancaster's Pension & Benefit Law E-Bulletin, March 24, 2005, Issue No. 12), the Financial Services Tribunal rejected the Committee's appeal of the Superintendent's proposal allowing the company to take a contribution holiday, except with respect to the contribution obligation relating to Part 2 members.

The Tribunal began by finding that the employer contribution provision in this case was virtually identical to the provision that was found by the Supreme Court of Canada in Schmidt v. Air Products Canada, [1994] 2 S.C.R. 611, to allow for contribution holidays.

Turning next to the terms of the trust agreement, the Tribunal determined that they contained no provision "inconsistent with the authority of the Company to take contribution holidays since a contribution holiday does not amount to a use or diversion of the Fund assets, for purposes other than the exclusive benefit of employees and other beneficiaries." Such a contribution holiday, it held, "is not a diversion of assets from the Fund to the prejudice of the beneficiaries because no payment is made from the Fund and the beneficiaries' entitlement is simply to receive the defined benefits provided in the plan from the Fund."

Moreover, the Tribunal held that a contribution holiday could not be a breach of the trust, because the obligation to pay contributions was not created by the trust agreement: "In fact, that obligation is one that has its source in the Plan rather than any trust agreement." Since the Plan was not part of the trust agreement, the Plan terms were not governed by the provisions of the Trust. As a result, the Tribunal ruled that the company's contribution obligation could not be part of the trust where "neither the Plan nor ... [the Trust Agreement] says that the Plan, which contains the Company's contribution obligation, is part of the Trust Agreement." The Tribunal therefore upheld the Superintendent's position that the company should not be required to compensate the fund for compensation holidays over the years.

The Tribunal did find fault, however, with provisions in the 2000 Plan permitting the company to use surplus trust funds to take a holiday from its contribution obligation in respect of members of the new Part 2 component of the plan. Since only the Part 1 members were beneficiaries of the trust fund, such use of the money constituted a diversion "to purposes other than for the exclusive benefit of" the beneficiaries, contrary to the trust agreement, the Tribunal held. Unlike the other contribution holidays taken over past years, "[a]ny holiday taken by the Company in respect of Part 2 contributions in this fashion can only be realized by actually moving money out of the Fund."

Nevertheless, the Tribunal found the Committee's call for refusal to register the 2000 Plan to be too extreme a remedy. It ruled instead that the problem should be remedied in one of two ways: Either the 2000 Plan should be amended to eliminate the company's authority to apply the surplus in the fund to Part 2 contributions, and the company should fully reimburse to the fund the money withdrawn for this purpose, or the Part 2 members should be made beneficiaries of the fund, presumably by having the insurance policy that was the funding vehicle for Part 2 held by the trustee.

In reaching this conclusion, the Tribunal distinguished the situation in this case from that presented in Aegon Canada Inc. v. ING Canada Inc., [2003] O.J. No. 4755 (QL), leave to the Supreme Court of Canada denied July 8, 2004 (reviewed in Lancaster's Pension & Benefit Law E-Bulletin, September 9, 2004, Issue No. 1). In that case, the Ontario Court of Appeal upheld a ruling by the Ontario Superior Court that an employer could not use the surplus assets of one pension fund to cross-subsidize its contribution obligations to the employees of another fund, where the two plans had been merged. The Court of Appeal confirmed that the surplus assets of the one fund could not be applied to meet the liabilities of the other without breaching the trust in favour of the beneficiaries of the fund surplus.

In the present case, the Tribunal ruled, the situation before it was different, and the principle set out in the Aegon decision did not apply, because "[i]n the present case, we [do not] have two funds in relation to a single pension plan. Rather, we have one pension fund which was formerly held in trust for the benefit of all employees, that, after the effective date of the 2000 Plan is to be held in trust for Part I members by virtue of a change in the designation of the class of beneficiaries." In these circumstances, the Tribunal concluded, it would not violate the terms of the trust agreement to make the Part 2 members beneficiaries of the trust, as they had been prior to the introduction of the 2000 Plan.

The Employees Pension Committee appealed the "administrative expenses" and "contribution holiday" decisions of the Tribunal to the Ontario Divisional Court.

Divisional Court rules that company cannot pay administrative expenses out of pension fund, that Part 1 contribution holidays are lawful, and that Tribunal erred on cross-subsidization remedy

The Ontario Divisional Court held that "the Tribunal erred in law by failing to conclude that the Plan expenses amendments and the payment of the Plan expenses from the Trust Fund constitute a partial revocation of the trusts declared in 1954," and ruled that the company was not entitled to pay any plan expenses out of the pension fund.

Writing the unanimous decision of a three-member panel of the Court, Justice John O'Driscoll held that "[t]he purported amendments to the Plan in 1975, 1987 and 2000 ... cannot be valid because each amendment purports to revoke the Trust Agreement in whole or in part. The power to amend the Trust is always subject to the proviso that the proposed amendment cannot divert money from the Trust Fund 'other than for the exclusive benefit of such employees' ... Investment advice, actuaries etc. provide a benefit to the members. However, that is not the issue. It cannot be for the 'exclusive benefit' of the employees to have administration fees paid out of the Fund when the employer is obliged to pay those administration costs under the terms of the Trust Agreement. In this case, the payment of the administration fees out of the Trust Fund provides the primary benefit to the employer by relieving it of a financial burden. It follows that on the wording of the Plan and the Trust Agreement, any purported amendment permitting payment of administration expenses from the Trust Fund is invalid."

Turning to the contribution holiday issue, O'Driscoll ruled that "the Tribunal was correct when it followed the decision of the Supreme Court of Canada in Schmidt v. Air Products of Canada where the employer's contribution obligation was virtually the same as the 1954 Plan text." On behalf of the Court, he upheld the Tribunal's decision that the contribution holidays taken by the company with respect to the original defined benefit plan since 1985 did not violate the trust.

As for the issue of cross-subsidization of employer contributions under the 2000 Plan, he held that "the Tribunal was correct in deciding that the proposed 2000 Plan would violate the 1954 Trust Agreement because it would partially revoke the Trust declared in 1954, that is, the Fund would be used for purposes other than for the exclusive benefit of Part 1 members." However, allowing an aspect of the employee committee's appeal, he also ruled that "the Tribunal erred in respect of its proposed 'remedy' involving designating the Plan 2 Members as beneficiaries of Plan 1. To be correct in law, the Tribunal should have refused to register the 2000 Plan text and to do so without conditions."

O'Driscoll reasoned that "[t]he 2000 Plan text, no matter what language is employed, clearly creates two (2) funds. The Appellants, who elected to stay in Plan 1, as they were entitled to do, are or have contributed to the DBP and have a beneficial interest in all of the funds in the Plan. The DCP, Part 2, fund is completely separate and funded separately. The Part 2 DCP employees have no connection to the Part 1 DBP plan and cannot legitimately be given a beneficial interest in the fund on the DBP side. … The remedy proposed by the Tribunal would merge, co-mingle and expose the liabilities and assets of Part 2 members to and with the trust assets of Part 1 members, who are the exclusive beneficiaries of the Trust Fund." Justice O'Driscoll on behalf of the Court allowed this aspect of the appeal, set aside the Tribunal's order and directed the Superintendent to refuse registration of the 2000 Plan text.

Kerry appealed the decisions with regard to plan expenses and cross-subsidization to the Ontario Court of Appeal, and the Committee cross-appealed seeking an order requiring the company to remit to the Plan fund the amounts that it took by way of contribution holidays in respect of the defined benefit component of the Plan.

Company can pay plan expenses out of pension fund, Court of Appeal rules

Overturning the decision of the Divisional Court and upholding the position taken earlier by the Tribunal, the Ontario Court of Appeal held that the company was entitled to pay plan expenses out of the pension fund.
Writing the unanimous decision of a three-member panel of the Court, Justice Eileen Gillese ruled that the Divisional Court erred in finding the applicable standard of review to be correctness rather than reasonableness, but that in any event the Tribunal's 's view was both reasonable and correct and should not have been overturned.

Noting that there were no provisions in the Pension Benefits Act that governed the payment of plan expenses and that she knew of no principles of law that would require the company to pay the plan expenses, Justice Gillese observed that "I understand trusts to operate on the basis that expenses of the trust are paid from the corpus of the trust unless the trust agreement provides otherwise." She held that "[t]he Plan text is silent in respect of payment of the Plan Expenses. Silence does not create a legal obligation on the company to pay. … Neither the Trust agreement nor the Plan text placed an obligation on the company to pay the Plan Expenses. Based on those documents, the company is obliged to pay only the trustee fees and its expenses incurred in the execution of the trust. As it did not undertake to pay the Plan Expenses, it had no legal obligation to pay for them. The fact that the company voluntarily chose to pay the Plan Expenses for a period of time does not create a legal obligation on it to continue to pay such expenses."

She ruled that "I disagree with the Divisional Court's view that because the 1958 Trust agreement specified that taxes, interest and penalties were to be paid by the Fund but did not specify that the Plan Expenses were to be paid also from the Fund, it was reasonable to infer that the expenses were not payable from the Fund and to place the obligation to pay such expenses on the company. The company is responsible for the obligations that it undertook; the failure of the original Plan documentation to directly address payment of the Plan Expenses does not lead to the conclusion that the company is obliged to pay for them. In accordance with general trust practice and principles, the trust fund would bear such expenses."

As for the argument that any amendment permitting payment of plan expenses from the fund was precluded by the limitation that no amendment could be made that would permit the fund to be used other than for the exclusive benefit of the plan members, Gillese considered, first, that "the limitation is directed at 'true' amendments – that is, amendments which change a party's rights or obligations. As I have explained, the company was under no obligation to pay the Plan Expenses – they could have been paid from the Fund from the outset. Amending the Plan text to reflect this made no change to the rights or obligations of any person so the limitation was not engaged." Second, she reasoned that "s.11 expressly provides that it 'is not to be construed to enlarge the obligations of the Company beyond those assumed by it under the Plan.' The company was under no obligation to pay for the Plan Expenses. If the limitation in s.11 is held to preclude an amendment that permits the Fund to be used to pay the Plan Expenses, the company will be forced to pay such expenses in order to ensure that the Plan continues. That means that s.11 will have been used to enlarge the company's obligations beyond those that it had assumed under the Plan. Such a result is directly prohibited by that part of s.11 which provides that it is not to be construed so as to enlarge the company's obligations."

Company can designate Part 2 members as beneficiaries of fund and take contribution holidays, Court rules

Overturning the Divisional Court's ruling that the cross-subsidization issue could not be remedied by designating Part 2 members as beneficiaries of the fund, Gillese held that nothing in the original Plan and trust documents prohibited the taking of contribution holidays; the company was at liberty to amend the Plan to introduce a new category of member; if the company introduced a new category of Plan member, it would be entitled to take contribution holidays in respect of that new category; moreover, cross-subsidization was not prohibited by the trust agreement; what was prohibited was the use of the fund other than for the exclusive benefit of fund beneficiaries. Therefore, she concluded, "[o]nce the Part 2 members are designated Fund beneficiaries … use of the Fund's surplus by way of contribution holidays in respect of them meets the requirement that the Fund be used exclusively for the benefit of Fund beneficiaries."

Gillese reversed the decision of the Divisional Court and restored that of the Tribunal, ruling that "a single plan remained after the introduction of the defined contribution component. The fact that the Plan consisted of two components does not mean that a new plan was created for Part 2 members. Control, management and administration of the Plan remained with the Retirement Committee and the company, as Plan administrator. The fact that pension benefits were payable from the Fund in the case of Part 1 members and from annuities in the case of Part 2 members does not lead to the conclusion that there were two different plans, particularly as both Part 1 and Part 2 members have a claim to any Fund surplus remaining on Plan termination.

Ruling on defined benefit contribution holidays upheld

Finally, rejecting the Committee's cross-appeal of the Divisional Court's decision that Kerry was entitled to take contribution holidays in respect of the defined benefit component of the Plan, Gillese ruled on behalf of the Court of Appeal that "there is no question but that Kerry's contribution holidays in respect of the defined benefit component of the Plan were permissible. Schmidt establishes that an employer may take contribution holidays when a defined benefit pension plan enjoys an actuarial surplus, unless the plan documentation explicitly provides otherwise. A specific formula for calculating the employer's annual contribution is an example of such a provision. However, if an employer's contribution is to be determined by an actuarial calculation of the amount necessary to fund promised benefits, a contribution holiday is permissible."

Issue(s): (i) Whether the Court of Appeal erred in finding the employer could use pension plan surplus to fund its contribution obligations; (ii) Whether the Court of Appeal erred in finding the employer could pay plan expenses from the pension fund; (iii) Whether the Court of Appeal erred in interfering with the Divisional Court costs order.

Status: The Supreme Court of Canada granted leave to appeal on January 31, 2008.

Lancaster Reference: For analysis of the Divisional Court’s decision, see Lancaster’s Pension & Benefit Law E-Bulletin, August 31, 2006, Issue No. 42.  

Court of Appeal decision: http://www.lancasterhouse.com/decisions/2007/june/OCA-Nolan.pdf