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

Date of Decision: August 7, 2009

Supreme Court Panel: Justices Ian Binnie, Marie Deschamps, Rosalie Abella, Louise Charron and Marshall Rothstein (concurring); Justices Louis LeBel and Morris Fish (dissenting in part)

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. Since 1985, actuarial, investment management and audit services (amounting to approximately $850,000 between 1985 and 2002) had been paid from the pension fund, and not directly by the employer. Upon its purchase of the business and its assumption of the sponsorship of the employee pension plan, Kerry continued paying plan expenses out of the trust fund, as it was purportedly allowed to do under a 1958 trust agreement that replaced the original 1954 agreement, and under various subsequent amendments to the plan.

By 1985, the fund had been in a surplus position for a number of years, and the employer started taking contribution holidays from its funding obligations (for a total value by 2001 of about $1.5 million).

Kerry amended and revised the plan again in 2000 to provide, among other things, for the addition of a defined contribution (DC) 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 (DB) 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. Pursuant to these amendments, Kerry announced that it intended to take contribution holidays from its obligations to DC members of the plan, by applying the surplus accumulated in the fund from the DB component to satisfy the premiums payable in respect of the DC component.

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. ... 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." [emphasis added]

The employer contribution provision of the plan 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." [emphasis added]

After Kerry introduced the 2000 amendments, the Employees Pension Committee 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 windup of the plan. In April 2002, the Superintendent gave notice that he intended to refuse to take any of these requested actions. However, the Superintendent agreed with the Committee's objection to the practice of paying plan expenses out of the trust fund, and proposed to make an order requiring Kerry to reimburse the fund for all administrative expenses. The Committee and Kerry both appealed the Superintendent's decision to the Financial Services Tribunal.

Case History:

Tribunal approves paying some administrative expenses from plan fund, upholds company's right to take contribution holidays

In a March 4, 2004 decision regarding the issue of plan expenses, 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.

In a subsequent September 1, 2004 decision, Ontario's Financial Services Tribunal rejected the Committee's appeal of the Superintendent's proposal allowing the company to take a contribution holiday. The Tribunal found 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 DC component of the plan. Since only 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. Nevertheless, declining to refuse registration of the 2000 plan, the Tribunal ruled that the problem could be remedied in one of two ways: either the 2000 plan could be amended to eliminate the company's authority to apply the surplus in the fund to Part 2 contributions, in which event the company should fully reimburse to the fund the money withdrawn for this purpose; or the Part 2 members could be made beneficiaries of the fund.

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, but that company cannot cross-subsidize

Stating 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," the Ontario Divisional Court ruled that the company was not entitled to pay any plan expenses out of the pension fund. Turning to the contribution holiday issue, the Court 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, the Court agreed with the Tribunal in finding a violation of trust. However, it ruled, "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."

For a review of the Ontario Divisional Court’s decision, see Lancaster's Pension & Benefit Law E-Bulletin, August 31, 2006, Issue No. 42.

Company can pay plan expenses out of pension fund, designate Part 2 members as beneficiaries, and take contribution holidays, appeal court declares

Writing for a unanimous three-member panel of the Ontario Court of Appeal, Justice Eileen Gillese allowed Kerry's appeal from the decision of the Divisional Court, dismissed the Committee's cross-appeal, and affirmed the Tribunal's rulings: see Lancaster's Pension & Benefit Law E-Bulletin, August 21, 2008, Issue No. 70. Pointing out that "[t]he Plan text is silent in respect of payment of the Plan Expenses," Gillese held that "[s]ilence does not create a legal obligation on the company to pay." Moreover, Gillese held that nothing in the original plan and trust documents prohibited the taking of contribution holidays; that the company was at liberty to amend the plan to introduce a new category of member; and that if the company introduced a new category of plan member, it would be entitled to take contribution holidays in respect of that new category. 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." Finally, Gillese rejected 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.

The Committee appealed to the Supreme Court of Canada.

Issue(s): The following issues were considered by the Supreme Court of Canada: (1) whether the employer was responsible for paying plan expenses or whether such expenses were properly payable from the pension trust fund; (2) whether the employer could use actuarially determined surplus pension funds from the defined benefit component of the pension plan to satisfy its contribution obligations in respect of both defined benefit and defined contribution components of the pension plan; (3) whether the Financial Services Tribunal had the authority to award costs out of the pension trust fund; and (4) when on judicial review of a pension decision a court should exercise its discretion to award costs out of the pension trust fund.

Supreme Court's Decision (5-2): The appeal was dismissed.

Reasons:

Majority Ruling

Writing for a 5-2 majority of the Supreme Court, Justice Marshall Rothstein denied the Committee's appeal, ruling that the Tribunal's reasons "clearly satisfy review on a reasonableness standard." In Rothstein's view, the decision of Justice Gillese in the Ontario Court of Appeal was "cogent," and he expressly adopted "large portions of her analysis."

Absent prohibition in plan documents, payment of expenses from fund permissible

Dealing first with the issue of liability for plan expenses, Rothstein noted that "the obligations of the employer will be determined by the text and context of the Plan documents." The 1958 trust agreement obligated the employer to pay "trustee fees" and "trustee expenses," but did not refer to any other costs arising from the plan's administration, such as those incurred for actuarial, accounting and legal services. Furthermore, Rothstein held, the prohibition in the original trust agreement against use of trust funds for any purpose other than the "exclusive benefit" of employees could not be construed as imposing an obligation on the company to pay plan expenses. Because payment of those expenses was "necessary to ensure the plan's continued integrity and existence," he reasoned, it was in fact for the employees' "exclusive benefit." In addition, Rothstein rejected the submission that payment of plan expenses from the trust fund constituted a partial revocation of the trust. "In the absence of an obligation on the employer to pay the plan expenses," he declared, "to the extent that the funds are paying legitimate expenses … the employer is not purporting to control the use of funds in the trust."

Contribution holidays allowed, where company contribution to be determined through actuarial calculations

Rothstein then considered whether Kerry was entitled to take contribution holidays in respect of funding obligations on behalf of Part 1 DB members. In general, he observed, contribution holidays are permitted where "plan documents provide that funding requirements will be determined by actuarial practice." In light of the wording of plan amendments adopted in 1965, which stipulated that the company was to contribute such amounts as were "not less than those certified by the Actuary as necessary to provide the retirement income accruing to members during the current year," Rothstein held that contribution holidays were allowed under this plan, because the employer's contributions were determined by actuarial calculations.

No breach of trust, majority holds, because both DB and DC components were part of a single plan

On the issue of whether Kerry was entitled to take contribution holidays from its obligations to DC members, by using the DB component's surplus to cover the DC component's premium costs, Rothstein again held in favour of the employer. In this regard, he rejected the Committee's contention that the company was precluded from introducing a new DC component that was part of the same pension plan as the existing DB component, and whose members were beneficiaries of the same trust fund. There was no violation of the "exclusive benefit" provisions of the trust, he ruled, because after the 2000 amendments there remained one plan and one trust, not two. "Having regard to the Plan documentation," Rothstein ruled, "it was reasonable for the Tribunal to find that there was one plan and that, with a retroactive amendment, there could be one trust, and that contribution holidays with respect to either or both of the DB and DC components of the Plan did not violate the exclusive benefit provision or constitute a partial revocation of the Trust."

Moreover, it was not unreasonable to hold that DC members could be designated as beneficiaries under the trust. In Rothstein's words: "The Plan was always meant to apply to all employees. It continues to do so with this retroactive amendment. It is therefore not inconsistent with the Plan to designate DC members as beneficiaries of the original Trust." As there was no legislative or contractual impediment to structuring a pension plan in the way proposed by the employer, the Committee's arguments failed, and its appeal was dismissed.

Responding to dissenting Justice LeBel's concern that the use of a DB surplus for DC purposes disrupts the balance between providing incentives for employers to establish pension schemes and the need to protect pensioners' rights, Justice Rothstein stated for the majority that this is a matter for legislatures to address:

[P]ension plans are private arrangements subject to government regulation. Absent regulation prohibiting the combining of DB and DC components in a single plan or prohibiting the taking of contribution holidays in respect of either component of the plan, whether such actions are permitted will be determined with reference to the plan documentation and contract and trust law. In this case, there is no government regulation that prevents the retroactive amendment, a single plan and trust and the DC contribution holidays.

LeBel J. expresses concern that the use of a DB surplus for DC purposes disrupts the careful balance between providing incentives for employers to provide pension schemes and the need to protect pensioners' rights. In my respectful view, it is not the role of the courts to find the appropriate balance between the interests of employers and employees. That is a task for the legislature.

Two judges dissent on issue of allowing employer to pay DC plan premiums out of DB plan surplus

Dissenting in part, Justices Louis LeBel and Morris Fish disagreed strongly with the majority's opinion that the employer could use surplus funds from the DB component of the plan to fund its contribution obligations to the DC component of the plan. Writing the dissenting opinion, Justice LeBel held that "Kerry's use of the DB surplus to eliminate its contribution obligations to the DC plan resulted in a violation of the provisions in the Plan and Trust Agreement that prohibit the use of trust funds for other than the exclusive benefit of fund beneficiaries." LeBel continued: "This is a clear example of the employer's controlling and encroaching on funds that are irrevocably held in trust for the benefit of DB members. This action violates the general trust principle against revocation as well as the provisions in the Plan's documentation that expressly prohibit the employer's revocation of trust funds."

Referring to the tension between providing incentives for employers to establish pension schemes and the need to protect pensioners' rights, LeBel stated: "I believe that the use of surplus from a DB plan to fund an employer's obligations with respect to a separate DC plan disrupts this careful balance, to the detriment of plan members." To this, LeBel added: "As I will explain in these reasons, no support for this type of contribution holiday can be found in the legislative framework or in the provisions of the Plan and Trust Agreement. Rather, the Plan documentation and the principles of trust law effectively forbid the taking of a contribution holiday in the DC plan that is funded from the surplus in the DB plan."

In LeBel's view, "the exclusive benefit provisions serve to protect DB members from any use of trust assets that is not for their exclusive benefit, such as cross-subsidization between separate plans." Rejecting a retroactive amendment to the pension plan, designating the DC members as beneficiaries of the DB trust fund in order to legitimize the DC contribution holidays, LeBel stated: "I believe that this remedy is unreasonable and cannot be adopted as it would breach the terms of the Trust Agreement, and would not solve the problem of the DC contribution holidays constituting a violation of the exclusive benefit provisions. ... It would make a mockery of the significant protections afforded to trust funds if such entitlement could be granted by the mere stroke of a pen."

Justice LeBel further stated:

Indeed, because the company started taking contribution holidays from the DB plan in 1985, everything that has been contributed to the fund since that time has been amassed penny by penny by the DB members alone. The Tribunal's remedy would permit the company to remove assets from the fund and to place those assets in the accounts held by DC members, simply to relieve itself of the obligation to contribute toward the DC plan. As a result, the DB members would see the same amount of money going into the fund as before 2000, but a greater amount coming out of it. The intuitive unfairness of this arrangement should be apparent to even the greatest cynic. More importantly, the arrangement is not only unfair on a principled basis but is also unlawful, as it would result in the use of trust funds for other than the exclusive benefit of the current DB members.

Justice LeBel concluded that "[t]he employer's attempt to use the DB surplus to fund its contribution obligations toward the DC plan not only breaches the 'exclusive benefit' provisions, but also violates one of the hallmarks of trust law: the prohibition against the revocation of trust assets. … The law of trusts forbids the employer's attempts to control or withdraw irrevocable assets within the fund in order to take contribution holidays with respect to its obligations toward a different group of plan members."

Lancaster Reference: For analysis of the Supreme Court of Canada's decision, see Lancaster's Pension & Benefit Law E-Bulletin, August 26, 2009, Issue No. 81.

Full text of the decision: http://onlinedb.lancasterhouse.com/images/up-SCC_Nolan.pdf