The Ontario Court of Appeal answered some key questions for pension plan sponsors in June’s decision regarding the Kerry(Canada) Inc. v. DCA Employees Pension Committee case. It dealt with a lot of different issues, but there are two that are of reasonable importance, says Paul Timmins, a senior consultant with Watson Wyatt Worldwide in Toronto.
The Kerry pension plan was amended to introduce a defined contribution(DC)component, and existing members had the option to continue in a defined benefit(DB)portion of the plan or convert to the DC component. The DB portion had a surplus, which the employer then used to fund its contributions to the DC portion. The Court ruled that the introduction of a DC component to the pension plan didn’t create a second plan and thus found that cross-subsidization is not prohibited by the trust agreement, overturning a decision by the Divisional Court.
“For the hybrid plans—anybody who’s got one of these things now—if there’s surplus on the DB side, they can be moving money across into DC accounts instead of having to reach into their pockets and come up with cash to deposit to DC accounts,” Timmins says.
The other major issue the Court of Appeal dealt with was the question of payment of expenses. “I think they’ve created some clarity around the issue of when a plan can be amended to provide for the payment of expenses,” explains Kathryn Bush, a partner at Blake, Cassels & Graydon in Toronto. “And that’s a tough area because pension plans are old, and when they were originally drafted, many of them were simply silent [on the issue of expenses].”
The Court stated that the original plan text did not contain a provision dealing with payment of plan or fund expenses and concluded that “the failure of the original plan documents to directly address the payment of expenses does not lead to the conclusion that the company is obliged to pay them. In accordance with general trust practice and principles, the trust fund would bear the expenses.”
The Court of Appeal concluded that unless a pension trust explicitly says the plan sponsor must pay administrative expenses, the plan sponsor has the right to charge administrative expenses to the plan fund. If the plan documents are silent on the issue of plan expenses or a sponsor’s practice of using corporate revenue to meet plan expenses, it does not create a legal obligation to use corporate revenue to pay expenses.
“I think plan sponsors will be looking at their payment of expenses language and feeling in many cases now that it’s much clearer, that they’re entitled to pay the expenses from the plan,” says Bush. The plaintiffs in the case have 60 days from the June 5 Court of Appeal decision date to decide whether or not they will appeal. —Craig Sebastiano
1954: Plan established as a defined benefit(DB)plan.
1965: Provisions of plan revised to permit use of plan assets to satisfy employer contribution requirements.
1975 and 1987: Plan amended to allow payment of expenses from plan.
1985-1994: DCA Canada Inc. paid administration expenses from the fund.
1994: After asset purchase, Kerry (Canada)Inc. assumes role of sponsor from DCA.
2000: Kerry amends DB plan to add a defined contribution(DC)component.
2004: The Financial Services Tribunal (FST)rejects employees’ claims to refuse to register the 2000 amendment, to order Kerry to reimburse the plan for contribution holidays taken since 1985, and to order Kerry to pay for certain expenses paid from the fund. Former employees appealed the decision to the Ontario Divisional Court.
2006: The Divisional Court reverses the FST decision saying Kerry could not use the DB surplus for contribution holidays in the DC component.
2007: The Court of Appeal overturns the Ontario Divisional Court’s decision.
For more about the Kerry Decision, click here.
American plan sponsors are aware of the need for Socially Responsible Investing(SRI), and the popularity of offering an SRI option in defined contribution(DC)plans is growing, according to a survey by Mercer Investment Consulting commissioned by the Social Investment Forum.
Currently, 19% of the DC plans surveyed offer one or more SRI mutual funds, and an additional 41% plan to do so within just the next three years. This means that 60% of DC plans in the U.S. will offer an SRI option to their participants by 2010. “The main forces behind this include the desire to align retirement plan offerings with the mission of the employer, typically a focus on social responsibility as well as internal staff recommendations and employee participant requests for SRI options,” says Craig Metrick, a consultant with Mercer Investment Consulting in New York.
It’s good to know that demand for SRI options in DC plans is growing, but it’s even more important to give plan administrators the information they need to add these options, cautions Paul Hilton, interim director of social investment strategy at asset manager Calvert in Bethesda, Md.
He believes that more needs to be done in terms of educating the retirement plan industry about SRI because the survey also showed that respondents have a general lack of knowledge of SRI fund options and the variety of products available.
One plan sponsor that has given employees an SRI choice in their retirement plan is Santa Clara, Calif.- based Intel, the world’s largest semiconductor manufacturer.
“I really think it comes down to providing choices and if you want to be a socially responsible company,” says Dave Stangis, the company’s director of corporate responsibility.
“You can see it every day on the front page of every paper, people worried about the environment, concerned about what they can do personally to make a difference, and this is a great solution.”—Craig Sebastiano
As employers look for ways to keep costs down, the burden of those costs will have to fall somewhere. According to an Aon Consulting survey, 55% of Canadian employers are considering eliminating postretirement benefits for future retirees. “Certainly Canadians more and more are going to have to look at individual products, making sure that they set aside for the future,” says Riza Sychangco, vicepresident, Aon Consulting in Toronto.
Eliminating postretirement benefits is one way to contain costs. Rethinking benefits programs for active employees is another. Just as the government has had to delist formerly covered services under provincial plans(for example, eye examinations in Ontario), employers are following suit and offering some of these services by way of health spending accounts(HSAs). So if an employee needs that eye exam, “it certainly is something that could be an eligible expense for reimbursement through the HSA,” says Sychangco. In fact, HSAs are gaining in popularity in Canada. According to the survey, 60% of salaried employees and almost 75% of executives will have HSAs by the end of 2007.
Flexible benefits plans—another cost container—also remain steady. Forty per cent of respondents offer flexible benefits to their executives, and one third to salaried employees. Even 25% of unionized workplaces provide flex programs, too. Although it’s difficult to negotiate benefit changes in unionized plans, Sychangco believes unionized employers recognize the immense advantage. “As we deal with the baby boomers who are exiting the workforce, amidst all that is Generation X and Generation Y,” she says. “There is that diversified mix of needs that employees have, and flexible benefits help deal with that.”—Brooke Smith
Will That Be Cash or Benefits?
Canadians love their health benefits and wouldn’t swap them—not even for cash. According to the 2007 sanofi-aventis Healthcare Survey, 61% of health benefit plan members surveyed said they’d choose their benefit plans over an extra $20,000 a year.
Although 95% realize these plans cost their employers a much smaller amount, of that 95%, 26% said their health costs may cost more than $20,000. And 18% said the plans gave them security and peace of mind.
There was variance across the country, however. Although Atlantic Canada (71%), B.C.(67%)and Ontario(66%)were more likely to choose their health benefits plan, this was not the case for Quebec and the Prairies. Forty-nine per cent in Quebec and 46% in Saskatchewan/Manitoba were more likely to choose cash than those in other provinces.
Still, more than three quarters of respondents are responsible employees. Seventy- eight per cent feel they have an obligation to help their employer control the costs of their employee health benefit plans. The survey indicated that those who don’t feel this obligation are less likely to say they understand their plan “extremely” or “very well.” Respondents are also less likely to say their employer does a “very good job” of communicating the plan.”—Brooke Smith
Re: “Getting It Right” June 2007
It is interesting to note that [Bank of Canada Governor David Dodge] has, in the course of questions, suggested that the CPP [Canada Pension Plan] be expanded to allow for additional voluntary contributions, something that Ken Georgetti at the Canadian Labour Congress also advocates, and that even Stéphane Dion advocated during his leadership race for the Liberal party. It seems that a consensus at a high level and across party lines is starting to emerge that we should use existing institutions to enhance access to retirement schemes, reduce costs and free employers from fiduciary obligations. —Jean-Pierre A. Laporte, Pension and Benefits Law Group, Hicks Morley Hamilton Stewart Storie LLP
For a PDF version of this article, click here.