Pension decision in SCC

The Supreme Court a moment ago released Nolan v. Kerry (Canada) Inc. 2009 SCC 39. A summary of the facts and the majority decision follows:
 
The respondent Company has administered a pension plan ("Plan") for its employees since 1954.  The Plan text required contributions from both the employees and the Company and a separate trust agreement provided that these contributions were to be paid into a trust ("Trust") created under the trust agreement and held in a trust fund ("Fund").  By 2001, the Fund had been in an actuarially determined surplus position for a number of years.  Until 1984, the Company paid the Plan expenses directly.  In 1985, following amendments to the Plan documents, third‑party Plan expenses for actuarial, investment management and audit services were paid from the Fund.  As of 1985, the Company also started taking contribution holidays from its funding obligations.

Prior to 2000, the Plan existed solely as a defined benefit ("DB") pension plan.  In 2000, the Plan text was amended again in order to introduce a defined contribution ("DC") component.  The DB pension component continued for existing employees, but was closed to new employees; thereafter, all newly hired employees would join the DC component.  Employees who were DB members had the option of converting to the DC component.  As a result of these amendments, employees were divided into Part 1 Members, who participated in the Plan's DB provisions and Part 2 Members who, after January 1, 2000, participated in the DC part of the Plan.  The Fund was constituted in two separate funding vehicles with two separate trustees.  The Company announced its intention to take contributions holidays from its obligations to DC members by using the surplus accumulated in the Fund from the DB component, which still covered DB members, to satisfy the premiums owing to the DC component.

After the Company introduced the amendments in 2000, certain former employees of the Company and members of the Plan (the "Committee") asked the Ontario Superintendent of Financial Services to investigate the Company's payment of Plan expenses from the Fund and its contribution holidays.  The Superintendent issued two Notices of Proposal.  Under the first, the Superintendent proposed to order that the Company reimburse the Fund for expenses that had not been incurred for the exclusive benefit of Plan members.  Under the second, the Superintendent proposed to refuse, among other things, to order the Company to reimburse the Fund for the contribution holidays it had taken.  Both the Company and the Committee requested a hearing before the Financial Services Tribunal to challenge the Notices of Proposal.  The Tribunal held that:  (1) all of the Plan expenses at issue could be paid from the Fund, except for $6,455 in consulting fees related to the introduction of the DC part of the Plan; and (2) the Company was entitled to take contribution holidays while the Fund was in a surplus position.  The Tribunal did recognize that the Plan documents as amended in 2000 did not permit DC contribution holidays.  However, it held the Company could retroactively amend the Plan provisions to designate the DC members as beneficiaries of the Fund, thereby allowing the Company to fund its DC contributions from the DB surplus.  The Tribunal also refused to award costs payable out of the Fund.

On appeal, the Divisional Court held that the expenses at issue could not be paid out of the Fund as they were not for the exclusive benefit of the employees and such payment would constitute a partial revocation of the Trust.  The court, although it upheld the Tribunal's decision that DB contribution holidays were permitted, ruled that the surplus in the Fund accumulated under the DB arrangement could not be used to fund the Company's contribution obligations to the DC arrangement.  It also held that, while the Tribunal was correct that it did not have jurisdiction to award costs out of the Fund, the court could do so.  On the relevant issues, the Court of Appeal, allowed the Company's appeal, dismissed the Committee's cross‑appeal and upheld the Tribunal's rulings.

Held (LeBel and Fish JJ. dissenting in part):  The appeal should be dismissed.

Per Binnie, Deschamps, Abella, Charron and  Rothstein, JJ.:  Having regard to the purpose of the Tribunal, the nature of the questions and the expertise of the Tribunal, the appropriate standard of review is reasonableness for the issues of Plan expenses and DB and DC contribution holidays.  While these issues are largely questions of law, in that they involve the interpretation of pension plans and related texts, the Tribunal does have expertise in the interpretation of such texts, as it is both close to the industry and more familiar with the administrative scheme of pension law.  The standard of reasonableness also applies to the issue of the Tribunal's authority to order costs from the Fund.  This issue involves the Tribunal's interpreting its constating statute to determine the parameters of the costs order it may make.  The question of costs is incidental to the Tribunal's broad power to review the Superintendent's decisions in the context of the regulation of pensions.  A court should adopt a deferential standard of review to the Tribunal's decision in this respect.

With the exception of the consulting fees relating to a study of the possibility of introducing a DC component to the Plan, the Company did not have the obligation to pay the Plan expenses at issue since the Plan documents did not require, expressly or implicitly, that it pay such expenses.  The provisions of the trust agreement, as amended in 1958,  provided that the Company undertake to pay trustee fees and trustee expenses.  As between the Company and trustee, these provisions only cover expenses incurred in the performance of the trustee's duties and in the execution of this Trust.  They do not refer to expenses otherwise incurred in the administration of the Plan.  Expenses associated with the employment of actuaries, accountants, counsel and other services required for the administration of the Plan are expenses of the Plan, but they are not fees and expenses incurred in the execution of the Trust.  Furthermore, the trust agreement's 1958 amendments, which provided that taxes, interest and penalties were to be paid from the Fund, could not impose any additional obligations on the Company because these amendments also included a provision expressly stating that the amendments do not increase the Company's original obligations with respect to the expenses for which it was responsible.  Nor could the language in the trust agreement forbidding the use of trust funds for any purpose other than the exclusive benefit of the employees impose an obligation on the Company to pay the Plan expenses.  The exclusive benefit language is also subject to the limitation that it will not enlarge the Company's obligations.  The payment of Plan expenses is necessary to ensure the Plan's continued integrity and existence, and the existence of the Plan is a benefit to the employees.  It is therefore to the exclusive benefit of the employees that expenses for the continued existence of the Plan are paid out of the Fund.  Lastly, allowing for the Plan expenses to be paid out of the Trust does not constitute a partial revocation of the Trust.  In the absence of an obligation requiring the Company to pay the Plan expenses, funds in the Trust can be used to pay reasonable and bona fide expenses and to the extent that the funds are paying legitimate expenses necessary to the Plan's integrity and existence, the Company is not purporting to control the use of funds in the Trust. 
 
The Company was entitled to take contribution holidays with respect to the DB benefit arrangement.  When plan documents provide that funding requirements will be determined by actuarial practice, the employer may take a contribution holiday unless other wording or legislation prohibits it.  The right to take a contribution holiday can be excluded either explicitly or implicitly in circumstances where a plan mandates a formula for calculating employer contributions which removes actuarial discretion.  Here, the Company's contributions are determined by actuarial calculations.  Clause 14(b) of the Plan, as amended in 1965, provides for contributions that will cover the members' future retirement benefits and requires the exercise of actuarial discretion as it does not fix annual contributions.  The clause therefore does not prevent the Company from taking a contribution holiday where the actuary certifies that no contributions are necessary to provide the required retirement income to members.  

The Tribunal's decision to allow contribution holidays in respect of the DC component of the Plan, once appropriate retroactive amendments are made, was not unreasonable.  There is no legislative restriction prohibiting the retroactive amendment designating DC members as beneficiaries of the Trust, the creation of a single plan and trust, and the DC contribution holidays.  The Plan documents do not preclude combining the two components in one plan and nothing in these documents or trust law prevents the use of the actuarial surplus for the DC contribution holidays.  Having regard to the Plan documents, 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.  Similarly, it was not unreasonable that DC members could be designated beneficiaries of the Trust.  The fact that DB and DC funds will be held by different custodians does not prevent them from belonging to the same trust.  The Plan, after the retroactive amendments, would consist of DB and DC components.  Members of both parts of the Plan therefore would be beneficiaries of the Trust and use of funds in the Trust to benefit either part would be allowed because the Trust explicitly provides that the funds can be used for the benefit of the beneficiaries.

Retroactively permitting the funding of the DC component from the DB surplus does not affect the exclusive benefit provisions of the Plan.  Because the amendment will be retroactive, there would be no re‑opening of a closed plan in law and no attempt to merge two independent trusts.  The Plan and Trust in this case have not been terminated.  Only a part of the Plan has been closed to new employees.  There is, therefore, no actual surplus that has vested with the employees.  The DB surplus remains actuarial and the DB members retain their right to the defined benefits provided for under the Plan.  Their interest in the surplus is only to the extent that it cannot be withdrawn or misused.  Retroactively amending the Plan takes no vested property right away from the DB members.  They have no right to require surplus funding of the Plan in order to increase their security.   

In light of s. 24 of the Financial Services Commission of Ontario Act, 1997, the Tribunal did not err in holding that it could not award costs from the Fund.  Since the Fund was not a party to the proceedings, the Tribunal could not order costs from the Fund.   

The Court of Appeal correctly declined to award costs to the Committee from the Fund.  The key question is whether the litigation is adversarial or whether it is aimed at the due administration of the pension trust fund.  Adversarial claims will not qualify for a costs award from the trust fund.  Here, the litigation was adversarial in nature because it was ultimately about the propriety of the Company's actions and because the Committee sought to have funds paid into the Fund to the benefit of the DB members only.  The Company was successful in this case and there is no reason to penalize it by diminishing the Fund surplus, thereby reducing its opportunity for contribution holidays. 

 

James Morton
1100-5255 Yonge Street
Toronto, Ontario
M2N 6P4

416 225 2777