Employers and Pension Plan Sponsors Rejoice: The SCC Decision in Nolan v. Kerry (Canada)

The Ontario Court of Appeal’s unanimous decision in Kerry (Canada) v. DCA Employees Pension Committee, 2007 ONCA 416, was welcome news for Canadian employers everywhere. Nevertheless, in light of the SCC’s decision to hear an appeal of the case, Canadian employers held their breath in preparation for possible changes to come. Many theorists had ruminated on the outcome of the appeal and the potential of additional costs to employers administering a pension plan. With such fatalistic prospects, employers can now breathe a huge sigh of relief at the SCC’s decision in Nolan v. Kerry (Canada), 2009 SCC 39, to dismiss the appeal and reaffirm the Ontario Court of Appeal’s finding.

The SCC supported three main conclusions. First, where the pension plan has an actuarial surplus, the company may use this surplus to pay “contributed holiday” obligations. Second, where the plan agreement is silent, reasonable pension plan expenses can be paid out from the pension fund. Finally, where the defined contributions portion was not part of a separate and distinct plan, the surplus from the defined benefit portion can be used to pay the defined contribution obligations. An analysis of this tripartite decision is detailed below.

The dispute began in 1954 in the form of a pension plan that the company, Kerry (Canada), dispensed to their employees. The pension plan began as a defined benefit (DB) plan and maintained a surplus status until 2001. Over the years, several amendments were made to the plan. Since plan members continued to receive their full pension benefits, no alarm was raised until 2000 when the interminable amendments began to make employees of the DB plan uncomfortable.

Three major amendments led to the upsurge of the DB employees journeying from negotiations to the courtroom. The first amendment took place in 1985 when the company began taking “contribution holidays.” Essentially, the company began to pay its annual contribution obligations out of the pension fund using the surplus available. This contribution amounted to a total of $1.5 million in 2001. Secondly, Kerry began to pay third party pension plan expenses for actuarial, investment management and audit services directly from the pension fund amounting to a total of $850,000. The final straw for the DB employees occurred in 2000 when Kerry amended the plan and incorporated a defined contribution (DC) component to the plan. All new employees were transferred into the DC component of the plan and the DB portion was discontinued. It was during this time that Kerry started to utilize the surplus from the DB portion of the plan to satisfy its contribution obligations to the DC part of the plan.

Prior Legal Proceedings
The members of the DB portion of the plan were discontented with these revisions to the agreement and asked the Superintendent of Financial Services – another respondent in this case – to investigate the administration of the fund. The Superintendent mandated that Kerry reimburse the expenses from the fund, but not the $1.5 million of “contributed holidays”. Both parties, dissatisfied with the decision, turned to the Ontario Financial Services Tribunal, Ontario Divisional Court, and finally, Ontario Court of Appeal for assistance.

The Ontario Court of Appeal’s decision trounced DB pension employees and favored Kerry and Canadian employers. The appellate court concluded that Kerry was allowed to use the fund surplus to pay any expenses related to the fund, unless the plan agreement states otherwise. Furthermore, it held that Kerry was entitled to use the surplus to pay “contribution holidays”, particularly in a situation where the plan retains an actuarial surplus. Finally, the Court of Appeal held that the addition of the DC portion to the plan did not constitute a second pension plan. Therefore, the surplus from the DB part of the plan could be utilized to pay the contribution for the DC part because they were not distinct and separate plans.

The SCC Decision
The long-awaited SCC decision concurred with the Court of Appeal’s decision and dismissed the appeal.

When analyzing the first issue of “contribution holidays” of $1.5 million, the SCC turned to Schmidt v. Air Products Canada Ltd., (1994) 2 S.C.R. 611, for assistance. That precedent led it to conclude that

[w]hen permission is not explicitly given in the plan, it may be implied from the wording of the employer’s contribution obligation… Contribution holidays may also be permitted by the terms of the plan. When the plan is silent on the issue, the right to take a contribution holiday is not objectionable so long as actuaries continue to accept the application of existing surplus to current service costs as standard practice.

With regard to the issue relating to payment of expenses, the SCC concluded that there was “no statutory or common law authority that would oblige an employer to pay the expenses of a pension plan. Rather, the obligations of the employer will be determined by the text and context of the Plan documents.” With no such text in the pension plan documents, it followed that Kerry was not obligated to pay the expenses themselves.

Finally, on the issue of the DC plan as a second pension plan, the SCC distinguished this case from Schmidt, stating that Schmidt involved the merger of pre-existing DB and DC plans. “In this case, the obligations have always been to the same set of employees — the Company’s employees — and, after the retroactive amendment, always from the same trust. Neither Schmidt nor Aegon blocks the retroactive amendment at issue here.”

The Repercussions Of This Decision
Both employers and sponsors of private pension plans in Canada have welcomed this decision. It has has brought clarity to a number of complicated issues surrounding pension law. However, this clarity comes at a price to employees. The decision provides them little resolution, while reducing the costs borne by employers to sponsor and administer a plan.

The Ontario Pensions Benefit Act, R.S.O. 1990, c.P.8, has not been modified in over 20 years, and changes are long overdue. Employers and employees alike have relied on the courts to define the parameters of the rights and obligations of pension plan sponsors and administrators. The decision in Kerry continues to guide the development of this emerging area of pension law. However, this development may be biased in favor of employers. Following this judicial determination, the next logical step in the evolution of pension law has commenced in the form of in-depth review of pension legislation by the Ontario government. This review may be a sign for employers and employees to be cautious of radical changes to come.

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