Nolan v. Kerry And Its Place In Pension Deliberation
The Court recently upheld the judgement of the Court of Appeal for Ontario in Nolan v. Kerry (Canada) Inc., 2009 SCC 39. The case involved the treatment of surplus in a pension plan. A usually obscure area of labour and administrative law, pension plans and pensions generally were weekly news during 2008 and 2009, and are shaping up to be a future election issue. This is because most (about two-thirds) Canadians do not have private, employer-sponsored pension plans, and those plans that do exist have had a very difficult few years.
The Kerry decision actually belongs to a previous era – the era of pension plan surpluses that broadly speaking began in the late 1980s and lasted until about 2001, when we saw the emergence of plan deficits. The issues in Kerry emerged during the era of surplus, and revolve around the role of trust law in pension plans.
In a nutshell, the question during this era was: to what extent can “exclusive benefits” language in a pension trust document preclude the use of trust assets for any other use? Several cases since 1987 have sketched out answers; Kerry is the most recent in this line of cases. The specific issues in Kerry were whether assets in the trust fund could be used to pay for expenses of the administration of the trust, whether they could be used to pay for employer contributions to a related pension plan, and whether the costs of bringing claims on both these issues should be paid out of the fund.
The Court upheld Gillese J.A. (a well-known pension expert prior to joining the Court) in concluding that expenses of pension plan administration may be paid out of the pension fund itself, even where employers have previously paid such expenses as a matter of practice, unless there is an express provision requiring expenses be paid by the company. The Court found that this was consistent with using trust fund assets for the exclusive use of beneficiaries — as the administration was for their benefit.
This is an eminently reasonable position on the of trust fund moneys. However, as always, the context throws a different light on the issue. Service providers to pension funds are commonly service providers to sponsors. There arises the potential for conflict of interest in these two roles – it is an extension of the conflict that sponsors face in the “two hat” problem. Unions often encounter a pension fund’s service provider acting for sponsors qua employers in collective bargaining.
One solution to this problem would be to prohibit service providers working for both sponsors and administrators – as some accounting practices require – or, as in the U.K., to require that pension administration be fully arms’ length from the sponsoring employers.
The Court also held that in a hybrid plan providing both defined benefit (DB)_and defined contribution (DC) benefits, surplus arising in the DB portion of the plan may be used to pay employer contributions under the DC portion of the plan, even where the DB portion is subject to a trust requiring the exclusive use of pension fund property for members. The majority of the Court agreed with Rothstein J. that this is consistent with exclusive benefits language.
There is something very convenient about this result. It is based in the characterization of the pension plan itself – that a single plan has two (albeit very different) components, and that a single plan is providing pensions to the same group of employees. From this perspective, the surplus in the DB component is used for the benefit of employees in the DC component by making contributions to their accounts.
There are two consequences of this decision worth considering: the effect of this decision in “incentivizing” sponsors to retain or convert a DB plan, and a re-examination of contribution holidays themselves.
Some commentators have suggested cross-subsidization will facilitate and encourage the development of DB plans by helping reduce sponsor costs through access to surplus. Others argue that cross-subsidization will further encourage hybrid plans or full conversions to DC.
The evidence does not seem to support the first hypothesis – even in jurisdictions where sponsors control 100% of surplus, there are few new plans and membership in DB plans has been declining. The second hypothesis slightly more plausible, but again there is little evidence that access to surplus drives a decision to convert a DB plan. If this decision does facilitate hybrid plans or conversions, it raises the useful question of whether DC plans are an adequate substitute for DB plans. That same question is also embedded in pension law reform efforts across Canada. There are sharply divided opinions on this question, and relatively few good longitudinal studies comparing the two.
The second issue worth a (re)consideration is the use of contribution holidays. Kerry is entirely consistent with prior law on contribution holidays, firmly established by the Court itself in Schmidt v. Air Products Canada,  2 S.C.R. 611. Schmidt found reduced cash contributions by employers consistent with using trust property for the exclusive use of beneficiaries. Although it takes a stretch of the imagination to reconcile, it is nevertheless long-standing industry practice and confirmed by several subsequent court decisions.
Again, looking behind the rule, there is an underlying problem that continues to give rise to the issue. This use of surplus permits sponsors to run DB plans as “profit centres”, using investment income to reduce cash contributions to the plan (or to a DC plan). One 2005 study of federal plans found that, but for contribution holidays, that sample of plans surveyed would have been fully-funded.
As a result, there is also bipartisan support for reforming the income tax regulations that govern surplus in favour of permitting a greater amount of surplus to accumulate in a DB pension plan, in particular as a hedge against cyclical movement of asset prices. Law reform bodies across the country have examined and (usually) endorsed this proposal. Most recently, Manitoba has proposed regulations prohibiting the use of surplus until pension plans are 105% funded.
Costs of claims
The Court held that the costs of claims brought against the fund need not be paid from the fund. Claims that aid in the clarification of administration of the fund may be paid from the fund, but — especially for adversarial claims — the fund need not pay the costs of the claims. Lawyers for the employees, who took the case on contingency, argued that an adverse cost ruling could deter meritous claims being brought by employees, particularly non-union and retiree claims, who face significant financial limits in their ability to bring claims at all.
It is always difficult to find hard direct evidence for “incentive effect” arguments, and it is not clear that such claims would be discouraged as a result of the Kerry decision. While it is true that access to justice is costly, there may be more efficient ways to promote it without indirectly distributing those costs across other beneficiaries of a trust or sponsors of pension plans themselves. For example, the Arthurs Report suggested that there be adequate retiree access to a dispute resolution process that would at least facilitate legitimate retiree claims.
Impact on other cases
Because Kerry comes in a line of related cases, there is some speculation that the Court is rolling back some earlier decisions that were thought to have expanded the ambit of employee rights or the province of trust law. Kerry does follow in spirit the most recent pension rulings of the Court (Buschau v. Rogers Communications, 2006 SCC 28, and Marine Atlantic). Employee claims to surplus in lower courts must now contend with another adverse precedent. However, the Court did not expressly over-rule (and distinguished) other case law that supports employee and retiree claims based on exclusive use language in trust documents, including Markle v. Toronto, (2003) 63 O.R. (3d) 321 and Aegon v. ING, (2003) 179 O.A.C. 196.
The better view is that there was not an “expansion” of trust law to begin with, as much as a long-overdue articulation of the inherent tensions in employer-centric pension plans. Once an obscure area of HR policy, pension plans became more important on corporate balance sheets and in collective bargaining over the past 10 or 20 years. Other factors intensified this focus on pension funds, including a movement to mark-to-market accounting, more rapid boom-bust cycles since 2000 and maturing plan demographics. As a result, positions were often expressed using trust law, and these are complicated through the process of juridification. These inherent tensions – some of which are explored in Kerry – will require negotiated solutions rather than an adjustment to trust doctrine, or, as some have argued, eliminating it altogether.
Implications for labour unions
Although Kerry (and others in the line of cases) will not create or erode pension plan provision in Canada, they do perhaps have the effect of putting employees and retirees on notice about the governance of pension plans and funds. These cases draw attention to the standards that will be used in managing these (very large) financial assets. In particular, they place an emphasis on unions to bargain greater voice in monitoring and managing pension plans and funds. Pension plans, especially DB plans, are now effectively only provided in unionized workplaces: non-union workers are far less likely to have a plan. Traditionally, most unionized workers and all non-union workers did not actively participate in pension fund governance. That must change.