The impact of pension fund surplus litigation has been well documented. The next big litigation catalysts involving pension plans could be plan expenses and plan mergers.

As a spate of recent legal cases highlight, the variety of legal outcomes make these areas potential minefields. Sponsors could be faced with limitations on how they can charge expenses to their funds or merge two different plans.

Though not every plan has a surplus, every plan has costs that need to be paid. This spring, the Ontario Divisional Court will be reviewing a decision of the Financial Services Tribunal of Ontario(FST)related to plan expenses involving Kerry(Canada) Inc.

Kerry sponsored a defined benefit plan that had been established by trust in 1954. Until 1985, the company paid all expenses related to the plan and the fund. It then began to charge certain expenses to the fund. A group of former employees challenged the treatment of expenses and sought reimbursement of the amounts paid plus income that would have been earned by the fund on those amounts.

The trust agreement provided that no part of the fund shall be used “other than for the exclusive benefit” of plan members and beneficiaries.

The FST interpreted “exclusive benefit” to mean that expenses had to be for the “primary benefit” of members since, strictly speaking, no expense could be for the exclusive benefit of members(e.g. the plan will benefit the employer by helping to attract and retain employees).

The FST concluded that consulting fees for advice about whether to add a defined contribution option to the pension plan were not for the primary benefit of members but that fees related to implementing the option would be.

The FST decision did not refer to any case law, including a 2003 decision of the Ontario Court of Appeal in the case of Markle v. City of Toronto that found that trust law principles prevented a plan amendment intended to pay past and future administrative expenses from the pension fund.

It will be interesting to see what the Kerry case ultimately adds to this area of the law and what other cases may follow.

The Financial Services Commission of Ontario(FSCO)has issued bulletins stating that merger applications must address the issues raised by the Ontario Court of Appeal decision in Aegon Canada Inc. and Transamerica v. ING Canada Inc. The Aegon decision prohibited the merger of two plans and the use of surplus to cross-subsidize the benefits in the other plan.

However a ruling of the Ontario Divisional Court in the case of Baxter v. Ontario(Superintendent of Financial Services) may help to clarify the application of the Aegon decision and thereby impact FSCO’s approach to merger applications.

In Baxter, the Divisional Court distinguished Aegon on its facts and found that there is no general restriction under trust law that necessarily prohibits the merger of two or more pension plans.

The Court went on to state that the reasoning of the Supreme Court of Canada in Schmidt v. Air Products should prevail over the reasoning of the Court of Appeal in Aegon. Members of the salaried plan, which was in surplus, had claimed the surplus fell under the category of “other benefits” to be protected by the Superintendent pursuant to subsection 81(5) of the Pension Benefits Act(Ontario)as a pre-requisite to approving a transfer of assets.

The Divisional Court rejected this argument and relied on the Schmidt decision to rule that the right of plan members to surplus was a contingent right which—can only crystallize on wind up or termination of the plan not on plan merger. As a result, the court ruled that surplus was not an “other benefit” which had to be protected from a plan merger.

Although the Baxter decision is not being appealed, industry stakeholders should watch to see how it is interpreted by the Superintendent. This should help clarify whether Aegon was a seminal case or one that is unique to its facts.

Industry stakeholders should observe the development of these cases in the coming months. Their outcomes will likely help to clarify how they should proceed in charging expenses to pension funds or engaging in plan mergers.

Paul Dempsey is a lawyer with Gowling Lafleur Henderson LLP in Toronto.